Greg,
Thank you for posting the information about the $115 million Reg S convertible
debenture. I was wondering how TLZ was planning to raise money, now that it had
burned through almost all of the money raised prior to the start of Spa
operations in 1995. Below is a table showing key balance sheet data, compiled
from SEC filings (expressed in thousands):
Current Assets Current Accum. Shlder Working Curr.
FY Q Ending C&E AFSI Total Liabil Deficit Equity Capital Ratio
-- - --------- ------ ------ ------ ------ ------- ------ ------ -----
95 4 30-Sep-95 13,146 52,294 75,936 7,245 -2,130 82,218 68,691 10.48
96 1 30-Dec-95 82,246 68,019
96 2 30-Mar-96 17,899 46,959 75,294 9,226 -2,289 81,992 66,068 8.16
96 3 29-Jun-96 8,675 51,973 69,721 14,050 -2,311 80,023 55,671 4.96
96 4 28-Sep-96 7,923 44,132 63,186 15,989 -3,516 79,037 47,197 3.95
97 1 28-Dec-96 22,230 17,173 52,044 16,586 -4,905 72,985 35,458 3.14
97 2 29-Mar-97 11,715 14,250 39,928 16,162 -8,604 68,907 23,766 2.47
97 3 28-Jun-97 6,084 1,989 17,576 15,843 -12,337 18,769 1,733 1.11
Considering the rapidly accelerating "burn rate" of the past few quarters, I
believe it is fair to say that TLZ was just about out of money by the end of
June. The latest 10Q reports that on 31 July 1997, Thermo Electron agreed to
loan TLZ up to $25 million, for its working capital needs and liquidity, to be
evidenced by a promissory note due October 5, 1998, with interest.
Clearly, at the present rate of burn, that money would not last until Oct'98,
and where would the money come from to repay it? So I expected that some kind
of a convertible debenture was in the offing, as you have confirmed. From my
reading, I have the impression that a Reg S deal can be interpreted as a sign
of desperation - that domestic sources were not willing to invest on favourable
terms.
A couple of other tid-bits from the latest 10Q:
TLZ plans to freeze the number of U.S. Spa Thira's at fifteen:
"The Company has signed leases to open three additional Spa Thiras, which it
expects to open in the fourth quarter of fiscal 1997 or early in fiscal 1998.
Depending on its size, each spa will require approximately $1,500,000 to
$2,500,000 for such items as leasehold improvements and laser systems. After
completing these three spas, the Company expects to concentrate its resources
on increasing the capacity utilization of the fifteen U.S. spas that will then
be open and expanding its physicians' licensing program and international
licensing arrangements. Construction will begin on new spas at such time as the
existing spas produce improved results from operations."
Regarding SoftLight 2.0:
"The Company is currently testing a modification to its procedure, called
SoftLight 2.0, that has had positive laboratory results. Although the laboratory
results are encouraging, the results are preliminary and there can be no
assurance that SoftLight 2.0 will be successful in improving the hair-removal
process. If the initial laboratory results relating to SoftLight 2.0 are
confirmed, the Company anticipates implementing the procedure in early fiscal
1998. The Company believes that improvements in the hair-removal procedure,
including the successful implementation of SoftLight 2.0, are critical elements
in its ability to improve the profitability of its business."
The freeze in number of Spas, and importance placed on the possible
SoftLight 2.0 modification, clearly indicate that the business is failing.
Further evidence can be found in this estimate of operating profit for the
hair removal business, which I derived from SEC filings (in thousands):
Revenue Expenses
---------------------- ----------------- J. V. Oper.
FY Q Ending Spas J.V. Phys Total C.O.R SG&A R&D Equity Profit
-- - --------- ---- ----- ---- ----- ----- ----- ---- ------ ------
96 1 30-Dec-95 58 0 0 58 439 559 525 0 -1465
96 2 30-Mar-96 413 667 0 1080 731 499 1061 0 -1211
96 3 29-Jun-96 826 667 0 1493 1189 500 823 0 -1019
96 4 28-Sep-96 1413 666 0 2079 2300 535 1061 0 -1817
97 1 28-Dec-96 1485 308 771 2564 2812 2214 909 0 -3371
97 2 29-Mar-97 2817 1338 1000 5155 5252 4052 1393 0 -5542
97 3 28-Jun-97 4460 1052 1500 7012 5892 4608 1856 -350 -5694
This table is based upon a number of assumptions:
- SG&A is estimated from the total reported, gernerally assuming that
CBI lotions accounts fo $2 million per quarter.
- R&D is estimated from the total reported, assuming that CBI lotions
does not engage in any R&D.
- the split between Spa and physician revenue in the two most recent
quarters is a guesstimate.
The only glimmer of hope I see in the above results, is that in the latest
quarter, Cost of Revenue did not grow as rapidly as revenue. However, TLZ
is still a long way from profitability. One problem is that the installed
base of lasers is extremely under-utilized. I estimate that in the latest
quarter, TLZ had about 200 lasers installed in Spas and doctor's offices.
Given their combined revenue of $6 million, and assuming 78 working days per
quarter, I estimate about $385 revenue per laser per day. (The actual figure
may be a little higher, given that the doctor's revenued are shared, but TLZ
has not provided sufficient details to make an accurate allowance.) In any
case, it seems clear that most lasers are idle most of the time, performing
an average of about one small procedure per laser per day.
As I have stated in earlier posts, the SoftLight treatments are priced at
10 to 20 times that of waxing, without commensurate benefits. It remains to
be seen whether or not TLZ can improve efficacy sufficiently to bring results
in line with consumer expectations.
Ted Molczan |
