Palomar's 10Q for the quarter ending 30 Sep 97 appeared on SEC's EDGAR site
early yesterday:
sec.gov
Here are a few of the highlights.
Dilution Continues
------------------
As of 31 Oct, outstanding shares had grown to 40,276,310. referring to the
following table, there has been a 42 percent increase in a little more than one
year; 22 percent in the past three months.
7 Oct 96 28,409,007
31 Dec 96 30,596,812
30 Jul 97 33,149,170
30 Sep 97 39,750,574
31 Oct 97 40,276,310
The 10Q also reveals that on 13 Nov, the Swiss Franc Debenture was converted
into common shares:
"As of November 13, 1997, acting under appropriate provisions of the
indentures, the Company notified the holders of the Swiss Franc Debentures
that is is causing the conversion of all of the Debentures into an aggregate
of 914,024 shares of the Company's Common Stock."
So it appears that the total outstanding shares have grown since 31 Oct, to at
least 41,190,334.
There is a legal dispute between Palomar and the Swiss Franc Debenture holders,
which is discussed in the 10Q, under Legal Proceedings.
The 6,601,404 increase in shares between 30 Jun and 30 Sep was due mainly to
conversions of debentures and preferred stock, totalling 6,043,450, or 91
percent. However, at 30 Sep there remained 28,240,490 reserved shares, as
tabulated below. Of those, 13.7 million were due to convertible debentures and
preferred stock, much of it likely to be converted within the next year.
Many More Shares in Reserve
---------------------------
30 June 11 July 30 Sep
---------- ---------- ----------
Convertible debentures 4,498,407 7,073,958 7,353,599
Stock option plans 3,897,500 3,872,500 3,709,504
Warrants 9,577,940 9,577,940 9,577,940
Employee 401(k) plan 212,690 212,600 212,690
Employee stock purchase plan 997,586 997,586 991,606
Convertible preferred stock 7,755,358 9,937,176 6,395,151
---------- ---------- ----------
Total Reserved 26,939,481 31,671,850 28,240,490
Total Outstanding 33,083,190 33,123,190 39,750,574
The number of reserved shares of convertible debentures and preferred stock vary
over time, because they are dependent upon the share price at the time of
conversion. The huge increase in reserved shares from 30 Jun to 11 Jul was due
to Palomar having revised its share registrations upward to reflect a possible
decline in share price to about $2, which eventually did occur, around the end
of August.
Note that between 11 Jul and 30 Sep, reserved shares declined by 3.4 million,
despite an increase of 6.6 million in outstanding shares, of which 6 million was
due to conversions. Some of this discrepancy may have been due to allowances for
possible further declines in the share price, which would increase the number of
shares issued due to conversions. However, the main dfifference appears to have
been the sale of a $7 million convertible debenture on 30 Sep 97 (see next
section).
New Convertible Debenture - $7 million
--------------------------------------
The following is from the 10Q:
"On September 30, 1997 the Company issued $7,000,000 of convertible
debentures. The debentures bear interest at varying rates of 6% to 8%, as
defined. The debentureholders were also issued 413,109 shares of common stock
related to this financing. The fair market value of the common stock was
$1,050,000 and this amount is being treated as debt discount and being amortized
to interest expense over the next ninety days. The convertible debentures have a
conversion price of 100% of the Company's average stock price, as defined. In
addition, the debentureholder may convert no more than 33% in any 30 day period
( or 34% of the debentures in the last 30 day period). The Company may be
required to repay these debentures if, among other things, the Company's common
stock is suspended from trading on the NASDAQ Small Cap Market, the required
registration statement is not declared effective by March 30, 1998 or the
Company disposes of substantially all of its assets or merges with another
entity in which the holders of the Company's voting stock do not own at least
50% of the surviving entity."
Note that the 413,109 shares referred to above, was included in the 30 Sep
outstanding share total.
Potential Management Buyout of Tissue Technologies
--------------------------------------------------
The 10 Q states:
"Subsequent to quarter end, the Company entered into two non-binding
letters of intent with the management of TTI and the management of Dynaco
setting forth terms of a potential management buy-out of TTI and of Dynaco and
its subsidiaries, respectively. The divestiture of TTI is not anticipated to
have a material impact on the Company's financial statements; the divestiture of
Dynaco and its subsidiaries may have a material impact on the Company's results
of operations."
As recently as February, Palomar was still touting the importance of Tissue's
Tru-Pulse in its future plans. However, sales never came even close to public
forecasts at the time of the merger in Spring'96. In the latest quarter, Tissue
revenued only about $600,000, equivalent to the sale of about one Tru-Pulse per
week.
Here is another Tissue-related matter from the 10Q:
"During the nine months ended September 30, 1997, the Company granted
options to certain Tissue Technologies, Inc. ("TTI") employees to purchase an
aggregate of 60,845 shares of common stock at an exercise price of $.01 per
share in settlement of a stock option dispute. The employees simultaneously
exercised these options. The fair market value of the common stock issued totals
$152,113 and has been reflected as a charge in the accompanying consolidated
statement of operations for the three and nine months ended September 30, 1997."
Realistic Price Forecasts?
--------------------------
With Palomar eliminating Tissue Technologies and the electronics businesses,
investors are left with trailing 12 month revenue of about $16.9 million. Even
the best quarter annualizes to only $24.2 million. I estimate that the segment's
operating losses have been about 100 percent.
Keep in mind that to-date, revenue has been almost entirely from laser sales.
Revenue per laser will drop considerably now that PMTI is COHR's OEM, so COHR
will have to grow unit sales considerably for Palomar to show a net revenue
growth. And so far, laser centres have failed to produce significant revenue -
show me where it is in the 10Q!
A price to sales ratio of 1.0 is often taken as a fair valuation, assuming a
profitable company, with operating profits of, say, about 10 percent. With at
least 41 million shares outstanding, trading at $1.50, the company is priced at
3.6 times trailing sales, or 2.5 times leading sales, assuming the above $24.2
million, and huge losses. So the price can hardly be considered a bargain.
With outstanding shares likely growing to 50 million over the next year, how can
anyone justify rosy share price forecasts, like this one posted on AOL's Motley
Fool:
Subj: Re:UP UP AND AWAY
Date: 97-09-22 18:40:23 EDT
From: PPale93911
Ted obiviously can not see the light. The light is bright and will mcu brighter.
Watch the stock begin to jump in early October before they announce their
earnings. I honestly believe that the price will be between 5-6 by the third
week in October and 12-14 by January when they continue to announce ever bigger
decreases in their losses.
Well, PPale93911, the earnings are out, and October is over, so let's look at
the prospects for January at $12 to $14.
Let's take 41 million shares at $12. Asumming OP = 10%, P/S = 1.0, and P/E = 10,
Palomar would require annual revenue of $492 million, and operating profit of
$49.2 million. They would have to have one hell of a turn-around in this
quarter, to be able to demonstrate even the momentum in growth to justify a
substantial increase in share price in January.
PPale93911, they are going to have demonstrate more than "ever bigger decreases
in their losses" - they must show huge increases in revenues, especially from
the laser centres.
Returning to the present stock price of $1.50, making the same assumptions as
above, revenue would have to grow to $62 million, with operating profit of $6.2
million. Even that seems ambitious, given my earlier coments about the effect of
the COHR deal, and the lack of any indentifiable laser treatment revenues.
I have no pretention of expertise in valuing stocks, but I can't see anything
short of major hype moving the price significantly in the near future.
Ted Molczan
molczan@fox.nstn.ca |
