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Raser Technologies (RZ-$2.30), focused on the construction of geothermal power plants, demonstrated once again that it is better at raising money than actually delivering megawatts of geothermal power. CEO Brent Cook said the company received net proceeds of $23.8 million from its most recent offering of common stock and warrants. As constructions costs per megawatt of capacity can run upwards of $6.0 million, it is unlikely that this latest capital raising will be the company’s last.
The 10Q Detective has followed the alleged progress of the Company for more than three years. As we said back in December 2005, Raser is a stock-promoter's dream--hyped PR with no content.
Since re-inventing itself as a builder of geothermal power plants almost five years ago, Raser has accumulated deficits of about $96.2 million—on cumulative revenues of approximately $1.0 million! In addition, at March 31, 2009, negative working capital totaling $58.7 million.
“There are some people so addicted to exaggeration that they can’t tell the truth without lying.” ~ American humorist Josh Billings (1818 – 1885)
Listening to the promulgations of chief executive Cook, one might think that Raser would single-handedly reduce the country’s dependence on OPEC crude. To date, the company has opened one facility, the Hatch Geothermal Power Plant, located in Beaver County, Utah, commonly referred to as the Thermo No. 1 project. In April 2009, Raser began selling electricity generated by the Thermo No. 1 geothermal power plant to the City of Anaheim, pursuant to a power purchase agreement previously entered into with Anaheim. Management expects the Thermo No. 1 Plant to be fully operational in the third quarter of this year [doubtful]. At full capacity, the plant is expected to produce up to 12 megawatts of geothermal power (enough to light up about 9,000 homes in Anaheim).
Despite the new financing, existing shareholders have about as much chance of seeing a return on their common shares as a Paleolithic Era caveman had of stumbling onto a copper cooking pot! The balance sheet is a mindless mess. In addition to owing $9.3 million in long-term debt obligations due in November 2009, the balance sheet is riddled with millions in warrants (most with reset pricing features). The company has also guaranteed cost overruns in construction-in- progress agreements with a plethora of sub-contractors—from drillers to vendors of transmission and cooling tower equipment. No sense even asking what the contingent exposure is, as the company has historically settled outstanding invoices and overdue promissory note obligations through the issuance of additional stock and warrants.
In additions, rumors are surfacing that service providers, tiring of late payments—if received at all—are walking away from some of the eight geothermal projects currently under development.
Raser’s business outlook is ambitious, including expectations to finish construction on additional geothermal power plants that will add an additional 50 megawatts, 40 megawatts, and 125 megawatts of electricity sold to utilities during 2010, 2011, and 2012. By 2013, Raser expects to have geothermal capacity totaling 377 megawatts of electricity for sale.
“An exaggeration is a truth that has lost its temper.” ~ Lebanese American poet Khalil Gibran (1883 – 1931)
Given its relentless struggle to improve its liquidity situation, a more likely scenario is that Raser curtails operations or liquidates assets. In any case, existing shareholders have a right to lose their tempers, for exaggeration is a bitter pill to swallow.
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
Kimberly-Clark's (KMB-$53.79) plans to layoff three percent of its salaried employees, or 1,600 positions, will lead to an estimated savings of about $150 million annually. Chairman and chief executive Tom Falk said the move was necessary—and in step with other cost-reduction plans—if the personal care products company was to stay competitive against an increasing threat from private-label brands. If the company's latest recovery plan falters, however, union workers could be next up to fall by the roadside.
Huggies diapers, Kotex feminine products, Kleenex tissues, and Scott paper towels—sales volumes of these key products declined in the first-quarter, losing customers to the lower-cost store brands sold by retailers, such as Wal-Mart, and other consumer products companies, like Procter & Gamble (Bounty paper towels, Charmin toilet paper, and Luvs diapers). Nonetheless, the company still achieved three percent sales growth in the quarter, driven by selective price hikes.
Given the weak economy and growing threat from competitors, there is little wiggle room for the company to raise prices in coming months. Ergo, sequential margin improvements must spring from improvements in manufacturing efficiencies (such as transportation cost-savings resulting from moving diaper-making facilities to high-growth regions) and inventory control (March-ending quarter saw a seven-day sequential decline in inventory levels compared to year-end 2008).
Improved working capital performance, however, is being partially offset by poor returns on its defined contribution pension plan assets. …Continue Reading….
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
Chief executive Charley Brown of Flow International (FLOW-$2.39), a manufacturer of water-jet and routing machine tool systems for a variety of industrial applications, optimistically opined in a press release issued last week that although “the global economic slowdown continues to impact business, roughly two-thirds of its revenue stream has stabilized,” and the company is positioning itself for sustainable, long-term growth. Permit the 10Q Detective to proffer some skepticism, as red flags uncovered in Flow’s annual report for the year-ended April 30—combined with prior faulty predictions by Brown—suggest a successful turnaround is far from a certainty.
Fresh on the heels of a multi-million Airbus contract, Brown braved the recessionary headwinds blowing last summer and optimistically told analysts on the 2008 earnings call that Flow would deliver 20 percent compounded EBID growth on a 10 percent annual increase in annual sales for fiscal 2009. To the contrary, the company posted a loss of $23.8 million, down from a profit of $22.4 million a year earlier, primarily driven by a $29 million charge to settle patent litigation and an aborted merger with smaller rival Omax and $6.9 million in restructuring charges recorded to reduce global staffing levels.
“It always looks darkest just before it gets totally black.” ~ Charlie Brown, Peanuts comic strip
Sales fell 14 percent to $210.1 million, resulting from a significant decline in system orders as customers delayed capital spending and expansion plans. In addition, although backlog increased 30 percent to $45.7 million, customers in North America and Europe negotiated for longer lead-times (from quote to purchase).
In our opinion, Brown erred in his 2009 guidance by mistakenly believing that Flow’s diversified revenue profile—spread across geographies and end-users—would shield the company from isolated industry-specific slowdowns. Although no single customer makes up more than five-percent of total sales and roughly 58 percent of revenue comes from customers outside the U.S., management under-estimated the breadth and scale of the global economic slowdown. In addition, the usually strong recurring revenue stream from spare parts dried up in 2009, falling five-percent year-on-year due to lower capacity utilization in customers’ operations.
At April 30, Flow held $10.1 million in cash, of which approximately $6.1 million was held by non-U.S. subsidiaries; working capital of $27.9 million plummeted to a skeletal $2.1 million (after backing out the $8.7 million in deferred tax assets and $17.1 million in deferred acquisitions costs payable to Omax); and, cash used in operations was $6.5 million. Should operations continue to deteriorate in coming quarters, this anemic balance sheet could weigh-down Flow’s growth/expansion plans, forcing the company to raise additional capital through financing vehicles potentially dilutive to existing Flow shareholders, such as a recently proposed $35 million stock offering.
Irrespective of its operating performance, the company is responsible for covering more than $38 million in contractual obligations and commercial commitments coming due in 2010 – 2011, including operating leases - $5.5 million; current portion, long term debt, notes payable and capital leases - $5.0 million; and, purchase commitments - $23.3 million.
Just as worrisome, weak operating results in coming quarters would likely trip loan covenants under existing credit facilities, too, further limiting the company’s ability to obtain financing on reasonable terms.
“In the book of life, the answers aren't in the back.” ~ Charlie Brown
Decreasing liquidity, questionable credit worthiness, and confutative ramblings of a chief executive—Flow International’s ability to deliver 20 percent compounded EBID growth rests entirely on a global economic recovery. If all else fails, management could always think positively, and manage its future earnings by decreasing the $20 million valuation allowance on its deferred tax assets—like it did in 2008!
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
The share price of Computer Portfolio Services (CPSS-$0.69) has plummeted 89 percent in the last two years as its financial results continue to be hammered by credit losses in its managed portfolio of sub-prime auto loans. The specialty finance company is now alleging that the only way to motivate and retain key employees is to exchange and re-price outstanding stock options, according to its proxy statement. One might wonder how this exchange will create any long-term benefit—except dilution to the holdings of non-management shareholders.
Management insists that the best course of action for the company is to replace deeply ‘underwater’ stock option awards—with an exercise price greater than $2.50 a share—with new stock option grants. Options to purchase approximately 7.5 million shares are outstanding, of which options to purchase approximately 4.2 million shares would be eligible for surrender and exchange. Under the proposal, chief executive Charles Bradley has much to gain, owning 887,000 eligible options at an average weighted exercise price of $4.72 a share. Together, the top nine executives own almost 44 percent of eligible options (at an average, weighted price of about $5.00).
For fiscal 2008, the company posted total revenues of $368.4 million, a decrease of 6.6%, to $368.4 million. Net loss for the full year 2008 was $(26.1) million, compared to net income of $13.9 million in 2007, due to rising default rates and losses resulting from the sales of some packaged auto loans.
Management opines that the steep decline in Computer Portfolio Services’ stock price was mostly driven by factors external to how it operates the business:
Our management has taken actions to address the unprecedented economic environment. We undertook significant cost-reduction actions in late 2008 and early 2009. As of May 31, 2009, we have taken actions to eliminate a total of approximately $35 million of annual operating expenses for 2009. Among these actions are (i) a reduction in the number of employees from 873 at May 31, 2008 to 542 at May 31, 2009, (ii) a general freeze on salaries, suspending our long-established practice of annual adjustments, and (iii) as to officer-level employees, a 20% reduction in bonuses earned for achieving their personal performance goals in 2008. However, despite the actions we have taken to reinvigorate our business and improve our performance, our efforts have not had a significant effect on our stock price, which remains at a level significantly below that which prevailed in the years 2006 and 2007.Following this logic, the 10-Q Detective argues that Bradley should return his cash bonuses of $1.06 million and $1.5 million that the Board rewarded to him for alleged performance in 2008 and 2007. As any farmer knows, when you plant the lettuce and it fails to grow well, you don’t blame the lettuce. Bradley and his team had no problem taking the accolades and the lettuce during the boom years!
Look, ain't no use in cryin'
Your story I ain't buyin'
Forget about it, ain't no use in tryin' ~ R&B singer-songwrite Montell Jordanl
A swap price of $1.00 per share—44 percent above the current price—would result in an incremental 12 percent hit to compensation expenses, or $457,000 (excluding tax-gross up considerations). If options are to remain a key incentive tool, tell us again how non-management shareholders benefit if top executives know that they will also be rewarded with stock option swaps if they screw up?
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
The state of Massachusetts announced Monday that it has joined fourteen other states in a pricing suit against Wyeth (WYE-$44.62), alleging that the drug manufacturer “knowingly failed to give the government the same discounts it provided to private purchasers” for its blockbuster GI drug Protonix. This litigation is just one in a litany of “at risk” problems Pfizer (PFE-$14.63), the world’s largest drugmaker, will inherit with its $68 billion acquisition of Wyeth, pending approval by the stockholders of both companies.
The states’ action follows on the heels of two whistleblower lawsuits filed last month which allege that Wyeth avoided paying hundreds of millions in rebates due to state Medicaid programs for two versions—oral and intravenous—of Protonix.
Wyeth's sales performance to 2013 will be hampered by the patent expiry of four key products, including the $2.6 billion selling Enbrel (rheumatoid arthritis and psoriatic drug loses patent in 2012) and its hemophilia drug Refacto (with patent expiry in 2010).
Wyeth has patent protection on its $3.9 billion anti-depressant drug, Effexor, through 2010. The timing of generic launches, however, will likely impact the ability of the company’s sales representatives to “convince” prescribing physician that its follow-up compound Pristiq, a new antidepressant launched last year, is the “better” therapeutic agent.
Even drugs in the company’s portfolio with existing patent protection are no longer insulated from intrusion, as generic competitors are becoming more aggressive in their attempts to disrupt existing market exclusivity. For example, despite the existence of patent protection until 2010, Teva attempted in late 2007 to launch a generic version of Protonix tablets, with an intended goal of bullying Wyeth to essentially pay the Israeli-based generic firm as part of a standstill agreement. A similar legacy awaits Pfizer with Wyeth’s $1.3 billion antibiotic drug Zosyn/Tazocin. Although the Food and Drug Administration granted patent extension on this key hospital product until 2023, Wyeth management admitted back in April that generics would likely be launched in the third-quarter.
One of the most promising drugs that Pfizer will inherit in Wyeth’s pipeline is the experimental vaccine bapineuzumab, which the company is developing with Elan for the treatment of Alzheimer’s disease. To date, released data is showing mixed results—both with efficacy and side effects. Of concern, in July 2008, Phase 2 published results revealed that the drug worked no better in the patients with the gene that was a risk factor for Alzheimer’s disease as in those without the gene.
Pfizer will also inherit $5.6 billion and $1.9 billion in pension benefit and other post-retirement obligations (such as healthcare) owed to current and retired Wyeth employees. In addition, if the markets suffer more losses this year, the company could be forced to pony up more than the approximately $440 million Wyeth had planned to contribute to its qualified defined benefit pension plans (expected return on assets this year is 8.75 percent, according to the 2008 10-K). Of note, last year Wyeth contributed $664.6 million to its current pension plan to offset experienced investment losses (60 percent asset exposure to stocks).]
"Mama Mia! That's a spicy meat-a-ball!"
Lost profits to generics, pipeline setbacks, and rising pension obligations – management at Pfizer may need some Protonix for the heartburn sure to follow upon completion of the merger with Wyeth.
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
Matrixx Initiatives (MTXX-$5.55) confirmed that it received a warning letter from the Food and Drug Administration about several of its 19 existing homeopathic Zicam products, specifically Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs. The letter cited consumer reports that the use of these products could cause a temporary or permanent loss of smell, known as anosmia. The company is complying with the FDA request, but management is seeking a meeting with the FDA to defend the scientific data demonstrating the products’ safety. Nonetheless, the resulting adverse publicity could damage public confidence and kill sales across all product lines.
"Matrixx Initiatives stands behind the science of its products and its belief that there is no causal link between its Zicam Cold Remedy intranasal gel products and anosmia,"
said William Hemelt, Matrixx Initiatives' acting president in a press release. "It is well understood in the medical and scientific communities that the most common cause of anosmia is the common cold, which Zicam Cold Remedy intranasal gel products are taken to treat. Given the enormous number of doses sold and colds treated, there is no reason to believe the number of complaints of anosmia received is more than the number that would be expected in the general population.”
Management says, “no reliable scientific evidence exists that supports the claim that Zicam causes anosmia and that no plaintiff has ever won a product liability case against the company.” Still, that has not stopped folks from trying, with hundreds of lawsuits having been filed against the company since 2003. As part of the overall attempt to wind-down product liability litigation connected with Zicam, the company did settle approximately 500 of these lawsuits in recent years—at a cost of about $12 million. In addition, the company has spent almost $17.9 million on litigation expenses in just the last four years.
Hemelt had previously noted on the 2009 earnings call (ended March 31) that net sales would grow five-percent in fiscal 2010, representing a targeted amount of approximately $117 million. Based on forecast, share-net was expected to come in between 10 percent –to- 15 percent higher, at about $1.61 to $1.68 per share.
The company had factored into 2010 guidance that perhaps 20 percent of the oral Zicam cold remedy line was at risk from increased generic competition—but now all bets are off until management meets with the FDA to review safety issues. In our opinion, an FDA mandate requiring new safety studies would likely sink Matrixx.
Investors seduced by Matrixx Initiatives’ clean balance sheet—approximately $4.25 a share in cash and zero long-term debt—might pause and reflect on the fact that product recalls and a predicted slew of new lawsuits challenging the safety of Zicam will quickly drain the $51 million in working capital. In addition, the company acknowledged in its 2009 annual report that it is did not anticipate receiving any significant reimbursements from its insurance carriers in 2010. As of March 31, Matrixx had set aside only $785,000 and approximately $2 million in reserves for product liability litigation and product recalls, respectively. Oops!
The actual fallout from product recalls and the resulting publicity nightmare (adverse effect on allergy relief swabs business) could prove to be the killer cold virus for Matrixx, as cold remedy products (intranasal and oral) constituted almost 73 percent of its $111.6 million in sales last year.
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
Richard Pascoe, chief executive of Somaxon Pharmaceuticals (SOMX-$1.10), expressed confidence that the resubmitted New Drug Application of Silenor (doxepin) for insomnia in adults will address the FDA’s concerns about the drug's sleep maintenance efficacy and cardiac safety profile (risk of ventricular arrhythmias). Irrespective of a favorable approval, the commercial success of Silenor is far from a certainty.
It will take at least six-months for the FDA to complete its review—and the marketing window for Silenor is closing quickly, with the in-licensed patent for the treatment of chronic insomnia (when the inability to fall asleep last for more than three weeks) scheduled to expire in March 2013. In addition, although the company claims that Silenor’s selective histamine H-1 blockade – and lack of specificity for re-uptake at other central nervous system target sites – makes the drug a good candidate for insomnia, it is unlikely that mechanism of action alone will be enough to convince physicians to switch from better established sleep hypnotics, which include Lunesta (eszopiclone), Ambien CR (and its generic zolpidem), and Restoril (and its generic temazepam).
Somaxon is running out of cash, and is expected to announce a highly dilutive capital offering by the end of July (likely stock-warrant units). Management has yet to formalize a strategic partnership with a pharmaceutical company that already has established access to the highest prescribing physicians of insomnia treatments, too. The longer it takes the company to announce a strategic deal, the less income it is likely to keep in a royalty-sharing arrangement.
It’s a common myth that your sleep quality decreases as you age. Existing Somaxon shareholders, however, have plenty of worries to keep them up at night.
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
