Before you read on, please be aware that the analysis below is my opinion only and may include flawed assumptions and inaccuracy of logic; therefore, caveat emptor applies here. Furthermore, all emphasis (color-coded, boldness, and underlined) on the excerpts are my own.
This week, we have a bit of an anomaly between the SP500 and the DJIA; I’ll let the weekly charts below tell the story.
Below is the SP500 weekly chart:
Below is the DJ-30 weekly chart:
While one made an all-time time by a hair, the other is still struggling with the possibility of a potential head & shoulders formation. So, who is leading who? However, although the SP500 eliminated the possibility of a head & shoulders, it is still subjected to the possibility of a double-top. Therefore, if the market doesn’t continue to soar higher for both indexes to remove the last remnant of their potential “yet to be confirmed” bearish patterns, the odd of “Sell in May and go away” is still in the back of traders who rely on technical patterns.
This week, I changed my mind and sold $TEUM. There is a feverish debate at Stocktwits regarding Pareteum’s cash situation. I’m beginning to understand why the short interest of this stock is so high. Before this week, the quality of the backlog dominated the debate. The argument this week is that the cash balance of $6 million reflected on the book @ December 2018 is sorely insufficient to carry the company forward without a secondary offering. The bullish side rebutted that the $50 million credit line the company obtained in February should be enough to take the company forward. At first blush, the $50 million credit line seemed to be sufficient which was my original outlook. However, the severity of the debate prompted me to read the SEC 8K filing regarding the credit line.
.Whoa! Upon studying the 8K filing, I found that only $25 million was accessible immediately while the other $25 million is subjected to restrictions. Below is an excerpt explaining the restrictions:
An outline from above:
- additional loans in increments of $5,000,000
- no additional loan shall be funded until the later of delivery of certain third party consents
- the filing of Pareteum’s Quarterly Report on Form 10-Q for the first quarter, or June 1, 2019
In other words, the other $25 million credit line is not that easily accessible.
Now, one might think they still have $25 million. Unfortunately, that is not the case.
An outline from above:
- $11,000,000 for payment in full of outstanding secured debt owed to Fortress Credit Corp.
- Remaining amounts for permitted acquisitions and investments
- general working capital purposes
- to pay approximately $885,000 in transaction fees
Basically, of the initial $25 million credit line, only about $13 million is available.
But that is not all; more restrictions are reflected below:
An outline from above:
- requirements to maintain:
- a minimum of $2,000,000 of unrestricted cash
- certain maximum total leverage ratios
- debt to asset ratio
- maximum churn rate
- minimum adjusted EBITDA
So, the $13 million calculated above dropped to $11 million from item 1 above.
In summary, the company had about $17 million of cash after the credit line before subtracting any usage during the first quarter of 2019.
Ok, the risk I see here is that if the majority of the revenues generated so far (and the backlog) turn out to be from unestablished customers, that means the Account Receivables (A/R) of $15 million reflected in December 2018 book could be flaky. When the $15 million A/R represented close to 50% of their 2018 $32 million revenues, bad debt from these customers could be a death knell. If that is the case, the company may run the risk of cash shortage. Don’t forget that the recent acquisitions by the company also increases payroll expenses. Hence, I fear that the moment Pareteum shows a small crack on its cash situation, the shares price can drop like a rock giving its tremendous short-interests weighing on it. Of course, on the other hand, the moment that their cash situation reflects healthy paying customers, the short squeeze is going to burn a lot of shorts.
My conclusion is that until I know more about the numbers in the May 7th earnings update, $TEUM is a day trading vehicle. I may or may not daytrade $TEUM next week. But I certainly will sleep better by not holding it overnight.
I apologize for the long discourse on $TEUM even though I no longer have a position, but I must document why I sold it for future reference. This blog, after all, is my trading journal.
I also bought and sold $MCLDF (aka MCLD.V a Canadian company called Universal mCloud) which is in the parallel business segment of Pareteum but more involved in smart buildings, etc.. Upon reading the fine prints on their recent acquisition which looks promising, the additional dilution and $18 million in new debt did not sit well with me. So I sold it with small losses. My big issue with $TEUM and $MCLDF is that promising future is touchy when the companies picked up debt load to finance their future. I like to see more confirmation of uptakes on their revenues growth and healthy cash receipts before biting again.
Finally, when $CARA bounced back this week, I reduced my call options position back to my original size. Yeah, the previous two weeks drop made me think twice for being too aggressive.
$IBIO – Last week I opinionated that the CC-Pharming deal with iBio is under-rated by the current market. This week, I like to make another opinion (at the very bottom in blue color) based on what I posted on March 18th. Below is a cut/paste of what I posted:
Thanks to due diligence from contributors at Stocktwits, news articles from China showed iBio’s team was on-site in China to discuss building the plant-based facility. Below is the translated excerpt from the part of the article: <- click here to read the original article in Chinese.
Below is another translated excerpt from another follow-up article. <- click here to read the original article in Chinese.
Below is my outline summary of the key points from the translated excerpts:
- At present, the production capacity of bioreactors in China is less than 10% of that in South Korea, and it is even less compared to that in Europe and the United States.
- The use of plant transient expression technology to produce pharmaceutical proteins is still in its infancy in the world,
- China has the opportunity to develop and take the lead
- Speed up the construction of a national science and technology innovation center with global influence in Beijing.
- Beijing Ruicheng Haihui and U.S. iBio will establish a GMP production workshop in line with the standards of the China Food and Drug Administration.
- The plant protein workshop is fully automatic, 24 hours uninterrupted treatment from sowing, soilless cultivation, to protein purification, to the integration of finished medicine, and finally the finished product meets the standards of the State FDA
OK, let me try to summarize the above in a paragraph. Since China is behind South Korea, Europe, and the United States in the production capacity of bioreactors, it intends to take the lead in the use of plant transient expression technology from iBio. The facility will be part of the National Science and Technology innovation center in Beijing with global influence. The plant-based facility is designed to be fully automatic, 24 hours uninterrupted treatment from sowing, soilless cultivation all the way to finished products that meet the standard of the FDA.
Here is what I like the most from the translated articles, China wants to build a high-tech plant-based facility similar to what iBio has done. Not some standard plant-based facility where more people are involved in the process which can create problems such as human error and contamination. This is a SERIOUS commitment.
Just from reading the translated Chinese articles, I can hardly contain my excitement. If China put the urgent effort in pushing for the plant-based technology offered by iBio the way they pushed hard for the development of the electric vehicles, iBio stands to profit tremendously with the sharing of the revenues streams. If you want to try to imagine the size of revenue streams, just think about the HUGE China population!
Why now and not earlier you may ask?
I believe it has to do with the biologic drugs going off-patent, this opens the door wide-open for the development of biosimilars using plant-based technology to speed up production and to reduce cost significantly. In other words, China is going to take the lead, and the rest of the world may follow. I am holding my $IBIO shares I’ve accumulated for the last several years for maximum gain. In my opinion, this is indeed a buy, hold, and WAIT
End of March 18th post.
Here is what I want to add to the above. Since it is my opinion based on the excerpts from the Chinese publications translated above that China wants to take the lead in the production capacity of bioreactors using plant-based technology licensed from iBio, there is a possibility that the automated facility CC-Pharming is building right now is going to be X-times bigger than the one iBio has in Texas. In order to have the ability to provide affordable biologic drugs to the vast population of China as well as to the global customers, my common sense tells me that the facility has to be massive.
When we find out later about the size of the facility (with production capacity) and the completion date later on, just imagine what this information can do to the stock price.
Yes, in my humble opinion, this is a definite buy, hold, and wait. This is NOT a trading stock. Based on the trading pattern the past few weeks, I’m seeing many hidden bids looking to accumulate. If you sell, you may not be able to buy back at or below what you sold for.
$LRAD – This company announced plans to release financial results for its fiscal second quarter ended March 31, 2019, after the market close on Tuesday, May 7, 2019. I look forward to hearing earnings and revenues beat as well as guidance for the future prospect of its mass notification systems.
There is also an article from SA that argued for the bull side. Click -> here to read.
Due to small dips from $IBIO, $TRXC, loss on $TEUM, and $MCLDF, my port gave back gain made last this week.
Current positions (in alphabet order):
Stocks = IBIO LRAD
Call options = CARA TRXC
Up 24.2% YTD
My 2 cents
From my camera: