The crisis is deeper than what the news, including the DJ story below, indicate.
None of the stories mention a cash crisis explicitly. But it is clear to me that they have a very serious problem that they waited much too long to fix.
On March 31 they had $8.5 M cash, and they were burning cash at $6.9 M per quarter. So they were set to run out of cash in mid July. Which is consistent with what they said in the 10Q ... that they had enough cash to make it through the June quarter and they were working on a financing deal, which could only be a discounted convertible.
I've followed a lot of these situations, and aside from PNDA, it is very rare for a development stage co. to wait until the very last month to try to get more cash with a discounted convertible. Usually they will do this several quarters before they run out of cash, and then they raise enough cash to get by for about a year. Not OCOM, though.
So what happened? A few days before they are set to be out of cash, they close a deal for a measly $2.5 M cash. Forget the fact that waiting this late leaves all the negotiating power in the hands of the funds. Here's what's most important: It was far too little money. It's not even half a quarter's worth of cash burn at current rates. So they lay off a bunch of people to make it nurse out a little longer. Even so, I would expect they can't make it to the end of Sept. with this amount of cash.
The turmoil you see with the CEO in today's news is also a very big deal. This in combination with a financing catastrophe puts this co. very close to the deathbed. Who's going to give them another $2.5 M? The offshore funds want to know the co. will last long enough to file a registration statement and flip their convertibles, and a headless corp with a few weeks of cash in the till and a disappointing product that isn't selling, that won't instill much confidence.
Yet another thing that will make it hard for them to raise enough cash hereafter is the market cap is now too small. At around $25 M, they will have a hard time raising more than $2.5 M at a time, as most deals are done around 10% of market cap. This won't give them enough cash to do very much, considering their burn. That's the ugly thing about development stage companies that must rely on equity financing ... there is nothing standing between them and oblivion except their market cap. Once that market cap breaks down, the co. is toast.
I haven't seen a situation this grim for a stock over $5 since I was following PNCL (Pinnacle Micro) a couple of years ago. It fell off the face of the world, and OCOM is acting like it will too.
I shorted today for the first time.
Here's the DJ News, where both the analysts interviewed miss the points about mgmt turmoil and a cash crisis:
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NEW YORK -(Dow Jones)- <snip>
Analysts who follow the company expressed mixed reactions to the
news.
NationsBanc Montgomery Securities Inc. analyst Bruce Carlsmith said
he suspended his rating on Objective on Thursday. "We're sitting here
not knowing what really constitutes a finished product, and therefore
not knowing what level of development is ahead," he said.
"I'm uncomfortable with the level of additional comment out of the
company on the issue of customer acceptance," he added.
But Barrington Capital Group analyst Scott L. Greiper said Thursday's
news represented "pain in the short term for gain in the long term.
"There are challenges to working with companies as young as this
company related to products as leading-edge as this product," he said,
"and you're looking at the challenges as they happen
<snip>
As for the company's prospects, the two analysts differ.
The financing "is going to be tough for them, and it's going to be
dilutive, would be my guess," said NationsBanc analyst Carlsmith.
"We think that this is sort of a normal process to go through," said
Barrington's Greiper. "We are extremely optimistic on the product and on
the company's ability to get the product out there." |
