Oh boy! Here I go again…
What? What happened?
Again, I activated my safety protocol and raised cash to 72%.
You’ve got to be kidding? What happened to that sound bite about nationwide optimism you made last week?
Actually, my safety protocol was activated mostly from the individual stocks I speculated in last week and have less to do with the general optimism. There is no doubt that the optimism is still intact since stock market made another new historical high this week. It is just that a few stocks I bought last week did not participate in this optimism- namely $AKER and $DMRC.
Let’s start with $AKER.
There seemed to be a big question mark regarding whether Akers Biosciences is getting close to cash positive so that they won’t need to dilute. To make that determination, we need to know where Akers is now in term of their cash flow situation using their 3rd quarter earnings release as a baseline.
I went over the 10-Q and analyzed the cash flow situation. While the Condensed Consolidated Statements of Cash Flows provided a decent picture of the where the cashes had gone for the last nine months, it was difficult to comprehend for those who are not fluent in accounting. Therefore I created an alternative perspective of Akers cash flow using the YTD income statement as a reference point and then made some modifications so that it would come close to the change in cash balance b/w Dec 2015 and Sep 2016.
Per the balance sheet, Akers Biosciences used up $3,631,361.00 of cash for the nine-months in 2016. See below for the calculation:
Now, let’s go over the modified YTD income statement below:
|Net increase in inventory||(60,862.00)|
|Net cash contribution||2,246,846.00|
|Sales and Marketing Expenses||(1,647,003.00)|
|Sales and Marketing Expenses – Related party||(117,949.00)|
|Research and Development Expenses||(932,858.00)|
|Total overhead expenses||(4,995,909.00)|
|Estimated cash used from operation assuming 100% cash in -and-out||(2,749,063.00)|
The only thing I changed to the income statement above was to replace the Product Cost of Sales (COGS) with Net Increase in inventory. The reason is the COGS was taken from inventory already paid for in the past and did not use cash. On the other hand, an increase in inventory ($60,962 worth) used up cash. I also excluded the reversal of bad debt ’cause it was mostly non-cash.
BTW, before you start to holler that the income statement is not based on cash basis, let me make the assumption that it is cash basis for now. We will factor the “timing difference” b/w cash and accrual basis below:
Per the Statements of Cash Flows; increase and decrease of Trade receivables and payables are listed below:
|Increase in Trade Receivable||(275,541.00)|
|Decrease in payables||(418,998.00)|
|Increase in related party payables||59,673.00|
|Net decrease in cash||(634,866.00)|
Basically, the increase in Trade receivable means that out of the $2,307,708 in revenues, $275,541 has yet to be collected. So, this $275K reduced the revenues and increased cash usage.
The decrease in payables means more cash outlay was made that probably included payment of 2015 payables.
So far, we have the estimated cash used from operation of negative $2,749,063 and adjustment to this cash flow of another negative $634,866 that give the total of $3,383,929.
This new balance is $247,432 short of the cash change of (3,631,361.00) calculated at the very top:
|Estimated Summary of Major Cash Used (not including misc. items)||(3,383,929.00)|
|Misc. items of cash used||(247,432.00)|
|Decrease in Cash balance calculated from cash balances above||(3,631,361.00)|
There you have it. While the modified cash flow I presented above is far from perfect, it does provided a general idea of how this $3.6 million was calculated in relating to the income statement. Disclaimer- the above may contain some calculation flaws, so take it with a grain of salt and refer to the Statement of Cash Flows for more accurate presentation.
So here is my 2 cents- with $3.6 million cash usage and cash balance shrunk to $796K as of Sep 2016, I wouldn’t call it “close to cash positive” for all intent and purpose.
When you look at the cash situation mentioned above, you now know why so many investors were putting all their hope on this 3rd quarter income statement to turn this ship around and “fixed” the cash shortfall above. The focus on the shipment to China and the exponential grow in sales to the IDN network on the 3rd quarter would definitely reduce the cash usage of $3.6 million significantly. But this was not the case; there were neither shipment to China nor sales to IDN network. With the ensuing frustration level from investors; the falling stock price was inevitable.
Sidebar: The very reason I invested in $AKER originally was because I expected this 3rd quarter earning would include sales from the China shipment, large sales to the new IDN network, and a large sales of OxiChek. If you reread the 2nd quarter earnings conference call, it sure sounded plausible.
I made the mistake of buying back the stock after I sold it. There was no question that Akers presented a glowing picture of what is to come in the conference call update. But after reviewing the numbers above, I realized that Aker is dangerously close to running out of cash if they are to “wait” for the China order to come in or an IDN to sign up. Thus, it is my opinion that the dilution is imminent and it has to happen soon for the company to remain healthy cashwise.
Hence, I bite the bullet and liquidated my $AKER position to cut my losses (again).
This whole $AKER venture costed me close to 6% of my port (3% unrealized gain and 3% actual losses). But hey, in the world of speculation, taking losses is very much a normal trading process.
Now, let’s talk about $DMRC.
Why did I sell after I went in with an over-weighted position size and price rallied up almost $4 buck early in the week?
Well, this one is much easier to explain with the chart:
Price shot up close to $4 buck on Tuesday and I couldn’t be more happier. But then price could not sustain the gain and began to fall back. On top of that, the rally on Tuesday actually landed the price directly onto the 79 & 89 resistance. Without a sustained rally to push price over these powerful resistances, the odd of price falling back down to $30 and below is high. Thus, for the need to protect the remaining gain, I chose to sell and then watch on the sideline.
$AMRN actually did well this week. It was able to maintain altitude above the Cup & Handle breakout area without falling back down below.
However, I decided to lower my exposure by reducing my position size to core size only. This is now a standard size position and is not over-weighted. This will allow me to weather the volatility better. However, if price is to close below the $3.33 support level, I may opt to liquidate my position and look to buy back cheaper.
IBIO corrected a bit this week.
My full position is still intact and I’m not worried at all. If I do, all I’ve to do is to review the video below:
In summary, I’m a bit leery of this new historical high because not all stocks follow this new high phenomenon. I expected $DMRC to keep on rallying after the big move on Tuesday. It did not. Also, I believe coming Monday price action will depend on how well the Black Friday retail sales are doing. A poor turnout and we are looking at potential market reversal. And this is the risk I’m trying to avoid by raising cash to 72%.
Thanks to gain from DMRC, my drawdown from IBIO and having to cut $AKER out of my portfolio was reduced a bit.
Main port (no margin): IBIO AMRN and 72% cash. (up 42% YTD)
Trading port (with margin): IBIO down 12% & MENXF down 16% on positions only and up YTD on port. I’m still up YTD ’cause I did not load up IBIO and MENXF the way I loaded up $ARTH before which I doubled on the gain.
My 2 cents
From my camera: