Perhaps the most significant statement in the 27 page report by Ryan, Beck is the following: "Furthermore, we believe that Nautilus� new management, under the leadership of Gregg Hammann, is among the finest in the sporting goods and recreational products industry. "Poised for turnaround Nautilus is currently in the midst of a turnaround designed to better address consumer shopping preferences. The company should complete the stabilization phase by the end of 3Q04, and appears well positioned to begin the growth phase by 4Q04. In our view, NLS has a solid financial position and should benefit from favorable demographic trends, recent operational and cultural changes, and sales channel expansion in 2005 and beyond. � Growth prospects not reflected at current levels NLS shares currently trade at 0.4x PEG and PEGY ratios, well below the 0.8x PEG of peers. Our $27 target price is derived by applying a 0.9x PEG ratio to our 2005 EPS estimate of $1.20, based on an intermediate earnings growth rate of 25%. We believe that NLS shares are priced attractively based on the company�s growth prospects and return measures. "
is a very recent 10-K for TQ.
Below are my reasons, based upon the 10-K, for having sold short 25,000 shares of TQ at prices ranging from $1.26 to $1.43. Much below is opinion, and none is investment advice.
Page 2: There are over 15 million shares issued and outstanding, so the market cap is $18 million at a conservative (from the point of view of a short seller) $1.20/share.
Page 28: The first paragraph paints a sad portrait of cash consumption, debt, and a very narrow margin of safety. The second paragraph mentions the means by which TQ has survived until now (among them the one you mentioned, selling shares).
Page 33: The balance sheet is weak. Particularly noteworthy is �Current maturities of Notes Payable (Note 3)� of $4,478,997 (see pages 42�43 below).
Page 34: The income statement looks bleak.
Page 35: As you noted, many shares are being sold to raise cash or issued for debt relief.
Page 36: As you noted, they took in cash by selling many shares.
Page 37: In Note 1(a) is the assertion, �We plan to increase revenues and reduce our costs in order to generate sufficient positive cash flow beginning in second quarter of fiscal year 2005. While we believe that our financing and revenue generation plans will be successful, no assurances can be given that we will be successful and that we will continue as a going concern.� I do not believe the assertion, but it might be true.
Pages 42�43: They owe GE Capital Corporation more than $3.9 million. Interest is accruing at 9.5%. The entire amount is due in October, 2004. TQ cannot pay it. In my opinion, GE Capital, being unrelated to TQ, may run out of patience. The third item from the bottom of page 12 indicates that securing assets to obtain credit is not an option. Unless TQ can sell even more shares (and they do seem to be good at it) or modify the agreement with GE again, disaster looms.
I cannot figure out how much money TQ hopes to raise by selling the 3000 shares of Series G Preferred Stock. The stated value for liquidation/conversion purposes is $1000 per share. The Series G Preferred Stock shareholders can obtain at least these numbers of shares at any time by conversion (using the upper boundaries of the Conversion Rate Brackets):
G-1: 1,000 x 1,000 / 2.75 = 363636.4 shares
G-2: 500 x 1,000 / 3.00 = 166666.7 shares
G-3: 500 x 1,000 / 3.25 = 153846.2 shares
G-4: 500 x 1,000 / 3.50 = 285714.3 shares
for a total of 969863.5 shares, so at a price of $1.30 or so per share, $1.3 million might be a minimum amount that could be raised. (I�m assuming that the issuance itself would not affect the share price�)
For a maximum amount that could be raised, consider just giving the Series G Preferred Stock shareholders both the greatest numbers of shares that they could receive through conversion (using the lower boundaries of the Conversion Rate Brackets) and $180,000 cash annually (6% x $3,000,000). This alternative seems very superior to what they actually get, and its value might be about $1.9 million (for the shares) plus $2 million (for a perpetual stream of $180,000 annually discounted at 9%, less than the GE interest rate), for a total of at most $4 million. I don�t think they�ll get $4 million for it, though. I know that I would not want to pay much for it.
What's your argument on TQ? They seem able to raise endless funds by selling shares for 1.50 or so. Nobody ever seems to get tired of paying that much, despite 3:1 dilution since the practice began. Maybe they'll still trade at 1.30 in 2024, with 60 million shares outstanding.
first, from the most recent (and getting a bit dated) 10-Q:
page 2 (balance sheet, 04/30/04):
There are over 27.8 million shares outstanding. At $2.6/share, the market capitalization is over $72 million. Total assets, including over $10 million in customer lists and over $3 million in goodwill, are under $62 million. There are over $52 million in liabilities, though. The current ratio is well under 1.
page 3: interest expense of $1.9 million (9 mo. ending 04/30/04)
page 4: about $1 million paid in cash for interest (9 mo. ending 04/30/04)
page 36: sundry bad news and "going concern" warning in KPMG's opinion in the 2003 statements
page 32: check out their "primary source of cash to fund our operations and meet our contacted obligations and commitments"--the Silicon Valley Bank A/R financing agreement, which expires in 19 months, has a hefty interest rate, and has been tapped for $15.2 million out of the available $20.4 million (as of 06/11/04)
now a bit about
page 3 (balance sheet, right column): looks weak to me--not worth $72 million
NAVI's value seems less than $72 million by an amount significant enough to make it worth a bit of a short position. I may just leave it at 2200 sh. and see what happens.
My TQ short position is 25000 sh. now. I like TQ better as a short than NAVI.
You are correct about "averaging up" a short position--it takes much more confidence than averaging down a long position.
Check out everything yourself--you don't know me, and I'm not qualified to give investment advice--and I'm not giving it.
Good to hear it. One quibble though. Price targets give me the heebie jeebies. Targets tend to be consistent with investors' emotions, not with the accompanying analysis.
dromore, you know the history as well as I do. But perhaps there are some recent "converts" in the audience. When the stock was close to $45 and flying, analysts said it was worth $60+. When the stock was $12 and had declined for a year, analysts said it was worth $6. Needless to say, those who made money were those who bet exactly opposite the analysts' consensus.