Real Time Analysis using Previous TwitLonger - Auspex's Almost RT Process
Doing this super fast in real time for educational purposes only.
What is today's soup du jour?
Why is it running? (Read news)
"MINNEAPOLIS, Nov. 22, 2016 (GLOBE NEWSWIRE) -- Skyline Medical Inc. (NASDAQ:SKLN) (“Skyline” or “the Company”), producer of the FDA-approved STREAMWAY® System for automated, direct-to-drain medical fluid disposal, announces that it has received a Medical Device Establishment License to sell the STREAMWAY System and related disposables in Canada.
A number of distributors have expressed interest in selling STREAMWAY into Canada’s healthcare system. Skyline has now begun talks with several of them and expects within the next few weeks to come to terms with one or more distributors, covering approximately 1,500 hospitals in all 13 provinces of Canada."
Back to analysis.
They are EXPECTING to COME TO TERMS with ONE distributor WITHIN the NEXT FEW weeks.
First question: "Does this sound like meaningful news to you?"
Answer should be: "Not really"
Go directly to the chart and see the market response (volume): Most ever volume pace. This is enormous relativity. This is your signal.
What's the price doing? Is there enough volatility to care?
Next question: Why the sudden volatility to the upside? (your brain should be immediately thinking "has the share structure changed"?
Look for the reverse split.
"Capital Change=shs decreased by 1 for 25 split. Ex-date=10/28/2016"
There you go. Recent reverse split = check.
Next, go directly to the filings to see what kind of target you have on your hands. I always go to the most recent financial statement which will usually be in the most recent 10-Q, but sometimes its the most recent 10-K, depending on the time of year as it relates to the company's end of fiscal.
In this case, the most recent financial data can be found in the 10-Q:
I immediately look for the shares O/S:
"Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of October 30 2016, the registrant had 3,804,860 shares of common stock, par value $.01 per share, outstanding, adjusted for a 1-for-25 reverse stock split effective October 27, 2016 as described in Note 1 to the Condensed Financial Statements under “Subsequent Events.” In this report all numbers of shares and per share amounts, as appropriate, have been restated to reflect the reverse stock split."
Now you know the market cap and have an idea of float size, etc. This will help you determine its ability to run. It also lets me know the Market Value of Listed Securities (MVLS) for any possible Rule 5550(b) violations I put into my head as this process plays out.
From there, I go immediately to the Balance Sheet - page 4:
We are looking for company lifeblood, aka Working Capital. (Working Capital = Current Assets - Current Liabilities)
As you do this, your eyes should be catching the amount of CASH and CASH EQUIVALENTS (as well as other current assets ... but I dont care too much about inventory in most cases).
Since I do not care as much about inventories, I kinda incorporate a Quick Ratio calculation method for most of these microcaps. Quick Ratio is basically taking the Current Assets and subtracting the value of the inventories and then using that figure against the Current Liabilities.
Taking a quick break to review what should be on the White Board at this point (all rounded for ease):
Cash = $635k
(Notice they have marketable securities in there. This doesnt always happen, but I will address it real fast. Go to Note 11 (as it says) and see that they hold some mutual fund shares. You can write that down, too)
Marketable Securities = $575k
Inventory = $300k
TCA (Total Current Assets) = $1.7M
TCA - Inventory = $1.4M
TCL (Total Current Liabilities) = $1.5M
Total Liabilities = $1.9M
Now, you quickly know that they might have about $1.2M in available cash. They have a Quick Ratio that is under 1, meaning they dont have the current assets to pay off current debt. (Kind of a functional bankruptcy - not great news)
Their Working Capital situation sucks. (1.7 - 1.5) AKA, they need money. (If they need money, then the probability of financing on the horizon is high.
From there, a quick scan of the Stockholder Equity situation.
Notice they have Series B Convertible Preferred Stock outstanding (just make a mental note for now of that).
Next, we are looking for the Shareholder Equity, itself, and you should understand why from the previous TwitLonger (https://t.co/QfnsWmnngc).
Shareholder Equity goes on the White Board = $11k (Remember, the minimum requirement is $2.5 million)
From there, directly to the Statement of Operations - page 5:
I am looking for Revenue vs Cost of Goods Sold (COGS). Why? A lot of these microcap companies are selling product below cost, and that is not a viable business model. I am also looking to see how sales in the most recent Q compare to the most recent 3 Qs ("Three Months Ended vs Nine Months Ended) and how this Qs numbers compare to the same Q last year ... and the same for the 9 months)
White Board Update:
Revenue = $135k (3 month 2016) and $316k (9 month 2016) vs $86k (3 month 2015) and $471k (9 month 2015)
COGS = 26k and 149k vs 20k and 200k.
Is there a Gross Profit? Yes. Good for them. Is it enough to survive? Next step.
I'm looking at the rest of the expenses, especially Selling, General, and Administrative. If SG&A expenses are super high in relation to the revenue that is brought in, then it makes me think the company is not efficient and is focusing on spending money on themselves as opposed to generating positive cash flow.
Total Expense = $1.16M vs the Gross Margin = $108k
Expenses are 10 times Gross Margins on sales. Bad news.
I now have a picture in my head of the company. (You should work on this until you can perform all of this in less than 1 minute)
Now, what do I know about this company so far? Time to put the pieces together:
1. Unusual volume on crappy news
2. Reverse Split
3. Crappy Financials - low on cash, no net income, and under $2.5M minimum Shareholder Equity requirement.
What does this tell me?
1. Someone is promoting the stock
2. The reverse split was done to cure an NASD deficiency
3. They need to raise money to regain compliance
How long do they have to raise money? (Remember, financing will be done at crappy terms because they have crappy financials. When the financing is announced, the stock will get hammered).
Go back to Statement of Operations and fund the operational Burn Rate:
In this case, since I don't have a lot of time and I'm writing this on the fly to get it out there for you before lunch, I will just use the Net Loss Available to Common Shareholders, which equals about $1M.
Since that figure is for the most recent Quarter and a Quarter is made of up 3 months, I need to divide that figure by 3 to get the burn per month. 1M / 3 = $333k per month (roughly to save time here).
Take that number and start subtracting it from the Cash and Cash Equivalents. Be sure to check the date on your calendar. That figure was for the period ended Sept 31, 2016. It is now mid-November. How much time has passed? About 1.5 months.
Multiply 333k by 1.5 = about $500k burned since then.
Cash and Equivalents was about $635k (assuming no mutual fund liquidation):
How much is left?
635k - 500k = $135k = Not much.
Next question is "Have the raised money since the last reporting period (Sept 31, 2016)? Quick scan of all 8-Ks since Sept 31, 2016 = NO.
Conclusion: They need to raise money soon. Put that on the White Board.
Check for the delisting notices from the NASD since I just saw they did a reverse split -most likely to regain compliance with 5550(a)2
If you do not know how to do this quickly, I will show you. Type this into Google:
"Skyline Medical delisting" (without the quotes)
Quick scan of the headlines tells you almost everything inside 10 seconds. I see they got a delisting notice in April 2016. I don't even have to read it. They had 180 days to regain compliance from then. Thats why they rev split last month (April = 4th month, October = 10th month. 6 month difference = 180 days). No need to dwell on that any longer. Should take you about 2 seconds of brain processing time to understand that.
Next, I am still scanning the headlines and I am looking for something with the most recent date on it. I see one with October 2016. Click it.
At this point, I am looking for a reference to Rule 5550(b) since I already know that they were not compliant with Rule 5550(a) and thats why the rev split came. I also know that they are short on MVLS and Net Income requirements (No, I did not check the 10-K for the Net Income requirement as I should have, but I am certain based on the check of the previous 9 months data from above that they have zero chance. Time save whenever you can.)
Scanning the doc, I see 5550(b) mentioned:
"In that regard, as previously disclosed in the Company’s Current Report on Form 8-K filed on August 19, 2016, on August 18, 2016, the Staff notified the Company that it no longer complies with Nasdaq Listing Rule 5550(b)(1) due to the Company’s failure to maintain a minimum of $2,500,000 in stockholders’ equity (or meet alternative tests for its market value of listed securities or net income from continuing operations)."
There we go. They need to raise money to meet 5550(b). (Again, reference the other TwitLonger if you do not understand why: http://www.twitlonger.com/show/n_1spa9l6
I also notice that they have a hearing scheduled with the NASD to go over this plan, since they are already out of compliance. So, this will all be happening soon.
Now, I go back and start looking at the most recent 8-Ks.
Lots of garbage info on the surface. But, in there (this is also a Press Release) is the meat of the matter. I am scanning the doc and I see the mention of the reverse split, so I know I am close ...
"We are working to cure our stockholders’ equity shortfall as well, and were pleased stockholders voted to increase our authorized share capital as this gives us additional flexibility to raise funds. We have a meeting on December 15, 2016, with the Nasdaq Hearing Panel to request an extension and present our plan for regaining compliance."
There we go.
"working to cure stockholder equity shortfall" is company code for "we are looking for someone desperate to finance us, and we are probably gonna have to bend over on the terms."
Notice the meeting is in a few weeks, December 15th. Again, this will all be happening fairly soon.
At this point, the Relative Volume we discussed earlier becomes the indicator for the timing in my mind. Liquidity means they can print and dump a bunch of stock soon.
So, just gotta figure out if Goldman Sachs is gonna be in on this round of financing ...
Now, you could go through all the old 424 filings, etc or scan through the 8-Ks. I have a better method that works sometimes. Google the terms most relevant:
Skyline Medical financing
Scanning the headlines that populate.
See anything that sticks out like a sore thumb? Should be entry #2:
"Skyline Medical Engages Dawson James Securities in Exclusive ..."
And I don't even need to click on that. Who was the company that most recently engaged Dawson James ... GBSN ... now I have something. (You can read the document if you like to see the similarity).
Next, let's see if this is a new relationship or an old one.
The quickest way is to erase "financing" and replace it with dawson james: Google search bar now looks like this: Skyline Medical Dawson James.
Scanning headlines. First one I have read. Second one ... joy!
"Dawson James Securities Announces the Completion of a $15.0 ..."
Again, I do not need to read any more. I just note the date = Aug 26, 2015.
Now, I go to the SEC filings around that date for the source material.
There is a 424B4 on August 27. That is what I want.
Dawson James is the underwriter.
Search this document for familiar terms:
CTRL + F
"Also, on July 23, 2014, the Company entered into a Securities Purchase Agreement with 31 Group, LLC (an affiliate of Aegis Capital Corp., the underwriter for the Company’s pending public offering) pursuant to which the Company agreed to issue and sell (i) a senior convertible note, in an original principal amount of $610,978 (subsequently reduced to $543,478) (the “31 Group Note”), which shall be convertible into a certain amount of shares of Common Stock, in accordance with the terms of the 31 Group Note, (ii) a warrant (the “31 Group Warrant”) to initially acquire up to 27,155 additional shares of Common Stock (subsequently reduced to 24,155 shares) (the “31 Group Conversion Shares,” and collectively with the 31 Group Note, the 31 Group Warrant and the 31 Conversion Shares, the “31 Group Securities”) for an aggregate purchase price of $500,000 (representing an approximately 8.7% original issue discount) (the “31 Group Convertible Notes Offering”).
The Notes are convertible at any time after issuance, in whole or in part, at the Investor’s or SOK’s option, as the case may be, into shares of Common Stock, at a conversion price equal to the lesser of (i) the product of (x) the arithmetic average of the lowest three volume weighted average prices of the Common Stock during the ten consecutive trading days ending and including the trading day immediately preceding the applicable conversion date and (y) 72.5%
Nice discount on that one, and it went to Aegis. I am familiar with them and how their financing targets perform.
"Series A Warrants
Each Series A Warrant is exercisable for one share of common stock at an initial cash exercise price of $4.95 per share. In lieu of paying the exercise price in cash, holders may elect a cashless exercise whereby the holder would receive a number of shares of common stock equal to the Black Scholes Value (as defined herein)."
You might also notice that they did financing with Magna (Josh Sason). You should know him, of you do not.
Anyway, you could go through that document and get all kinds of goodies, but you get the picture at this point.
Putting it all together:
1. Rev split = volatility
2. Promotion most likely being done by that whole ring of people who do the financing for these things.
3. Company is out of money and up against a delisting deadline
4. Previous deals with well-known financiers
Gotta get this out there before the tide gets my computer.
Watch this one play out and see if you could not have predicted everything that happens if you had followed this method.
Happy Tryptophan Day!
I hope you enjoyed this little bit of insight.