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Edward Vranic, CFA
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I am a private investor based out of Toronto, Canada and I have been investing since 2003. After 8 years in Corporate Finance with a Canadian Telecom company I have decided to dedicate myself full-time to the capital markets. I write on Seeking Alpha to demonstrate my financial analysis and... More
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  • Short Seller Prescience Point Goes Into Hiding After Amira Fights Back Against Fraud Allegations

    Amira Nature Foods Ltd. (NYSE:ANFI) has twice been the victim of short seller Prescience Point hit "reports". The first one on February 9th caused ANFI to plunge from $13.40 to $9.95 but had little staying power in the minds of investors as the stock actually closed above $14 briefly in July. This prompted another desperate report by Prescience Point on July 30th. It was largely ignored on the first day, but for the first 14 trading days in August ANFI dropped from $12.26 to $2.84, culminating with Amira changing its auditors, an announcement that really spooked the market. Shortly after that, I wrote an article which scrutinized Prescience Point's attack on ANFI and raised several issues that demonstrated flaws in the firm's research. In anticipation of a rebuttal that would once again put downward pressure on the stock, I was careful to take profits on a part of my ANFI holdings. But I never did receive a rebuttal.

    On November 10th, Amira filed with the SEC that an Independent Third Party Forensic Investigation has been completed by BDO LLP, with the following conclusion:

    (click to enlarge)

    The result of the review by BDO came to the conclusion that allegations made against Amira by Prescience about inflated export and domestic Basmati Rice sales and any unreported related party transactions were completely unfounded. This strikes a huge blow to the credibility of the Prescience reports. Now perhaps the firm is willing to ignore the criticisms of just another market commentator like myself, but certainly it would try to provide a rebuttal against ANFI's SEC filing if it had an ounce of ammunition to stand on, right?

    Prescience has had two weeks to respond to ANFI's SEC filing, with something, anything, that would save its credibility. But the firm has been silent. In fact, Prescience hasn't said one word about ANFI since September 25 on neither its Twitter feed, nor the one of its founder, Eiad Asbahi:

    In market action that I don't believe to be the least bit coincidental, ANFI rose 16% from $4.77 to $5.51 on 2.4 million volume on September 25, building up on a 17% rise on 747K volume the previous day:

    This spike in volume over those two days pretty much matched the volume for the first half of the month. This leads me to one conclusion - that Prescience Point and its associates covered their short and slithered away around that time. Prescience Point no longer has a position, and therefore has no interest in defending its report even at the expense of its credibility. The firm has a target of $0 on ANFI, so why cover at around $5 if the target had any conviction? Not even me mocking Prescience with respect to this failed thesis prompted any action:

    (click to enlarge)

    I have no issues with being bearish on stocks due to overvaluation, perceived cash flow issues or inconsistencies in SEC filings. But if you're going to make a hit piece on a company claiming fraud, make sure you can back up your words and be prepared to combat any rebuttal. As far as I'm concerned, Prescience Point is a disgraced short seller with no credibility that outright lied on its "research reports" in order to reap short term profits from investor fears over a little-known foreign company like Amira. Investors should be very wary of any future reports that this short seller research firm creates.

    Prescience has been useful in enabling myself and others to pick up cheap shares on ANFI. I have been long either the stock or call options since the $3's, and I expect ANFI to head back to the $13 range, where it was before the continued attacks by Prescience as they have been shown to have no merit. At the time I started writing this article, ANFI was around $8. It is closing on $10, so the $13 level should be attained in short order at this pace.

    Tags: ANFI, long-ideas
    Nov 24 11:20 AM | Link | 1 Comment
  • Peak Nears Closing The Deal For LongKey And Has Pleasant Surprises For Shareholders

    Shareholders of Peak Positioning Technologies Inc. (OTCPK:PKKFF) (PKK.V) such as myself have finally been rewarded for their patience as the company has outlined the final steps to closing the acquisition of LongKey Hong Kong Limited over the next few weeks. It's been quite a wait, but two key changes have taken place that have led to some pleasant surprises for investors.

    Reviewing my prior article on the deal, Peak was to issue a private placement that has ranged anywhere between $1.6 million and $4 million at anywhere between two and five cents over the last several months and submit most of that money to LongKey for working capital purposes in exchange for 51% of the company and an opportunity to buy the rest of the interest in the company at some later date. The private placement and submission of shares to LongKey owners was going to more than double the share count of Peak and result in a planned 1-for-5 reverse split. Many potential investors were discouraged by the dilution and pending reverse split so the stock price has struggled around the 2 cent range despite the obvious upside potential as Peak claims that there are enough clients on standby for $72 million in revenue for LongKey.

    The changes that have occurred include a move to the Canadian Securities Exchange from the Toronto Venture Exchange and a collaboration between Peak and LongKey that enabled a transition of LongKey's financial services client setup process to a self-registration process. The former allows Peak more flexibility in terms of foreign ownership rules of the company while the latter dramatically reduces or possibly eliminates the client setup costs that would have required a large upfront working capital investment.

    LongKey owners don't want or need the cash. They want a bigger share of the overall company which is fair because LongKey will represent nearly all of Peak's revenue upon consolidation. The TSXV demanded that LongKey interests couldn't hold more than 30% of the overall company. This doesn't make a whole lot of sense since even though LongKey operations take place in China and the two founders are of Chinese descent, both are citizens of North America (one Canadian and one American) and my understanding of why they want to list a North American company is so they can move back home. This is the list of LongKey shareholders as of May 2014:

    (click to enlarge)

    The CSE does not have a problem with this "foreign ownership" which is why Peak chose to list there. Upon discussions with management, getting around this issue was the only reason for making the move, with auxiliary benefits such as a lower cost to list on the exchange. It has nothing to do with Peak trying to skirt some legal or business issue as some people have approached me with concerns about that.

    The lower working capital needs and move to the CSE results in a much lower private placement amount that ranges between $500K to $800K and an ability to acquire 100% of LongKey in one shot as Peak can submit shares instead of cash in the deal. Peak didn't specify how many shares would be given to LongKey but the previous agreement had Peak issue 82,000,000 shares and contribute $1.6M to LongKey's working capital for 51% of the company.

    There will still be dilution as Peak will have to submit a lot more shares than 82 million to LongKey shareholders now, but these shares will be in tight hands and they will likely occur at a much more favorable price than what the market is willing to give. The 82 million shares were submitted at a deemed price of 10 cents. If Peak is able to acquire all of LongKey for shares at 10 cents rather than cash acquired through private placements at 2.5 cents that is a huge win for shareholders and a big stamp of approval by the LongKey management team. They are willing to consolidate under the Peak umbrella which currently trades at a price that's 4 times lower than 10 cents.

    I am a participant in the private placement and a participant in the $200K bridge financing in excess of 10% which I have directed the company to roll into the equity. Thanks to this far lower private placement amount and as a significant stakeholder in it I have high confidence that the stock price will take off upon its closing and move to the CSE. Many retail traders point to private placements as a reason to not buy a stock because the market will get flooded with cheap paper. I don't believe this is the case with PKK as I have no intent to sell my shares at these low prices and I believe the bulk of PP participants share the same view. I also know people who were turned away from participation in the placement when it was announced to be anywhere from $1.6 million to $4 million and given its significant reduction I can only surmise that even more investors have been turned away. Some may leave Peak in protest but I suspect the majority who understand the opportunity know they can make money and will buy shares on the open market instead.

    Peak investors should be extremely excited for near-term price gains. I believe the stock will trade in excess of 10 cents within 12 months driven by these factors:

    1. The 100% acquisition of LongKey immediately occurring. Official price targets are still pending until Peak discloses the terms for which shares are released to LongKey shareholders, but if those are also deemed at 10 cents I see no reason for it to trade below that level for an extended period of time assuming proper execution of the business.

    2. The lower private placement leads to more buying pressure as those people who couldn't get filled on the private placement will have to buy shares on the open market.

    3. No need for the reverse split at this time, which will attract retail traders who were previously turned off by this fact.

    4. Peak has disclosed that LongKey has streamlined operations and a much lower need for working capital. In effect Peak has disclosed that LongKey is much closer to profitability than first anticipated.

    5. A switch to the CSE will discourage high frequency trading that some have claimed has contributed to the downfall of the Venture. The several million shares up for sale up to 5 cents will disappear until orders are re-entered on the CSE. Also, the recent agreement between the CSE and various brokers have ensured that traders can trade CSE listed stocks as easily as they can TSX stocks so the move shouldn't be a concern for investors.

    6. Once the acquisition is complete, Peak will be able to present consolidated financials and more specific outlooks in the company's MD&A. When prospective results are shown on paper, I believe that will drive further investor interest.

    There are about 227 million PKK shares outstanding inclusive of the 82 million already submitted to LongKey shareholders. Assuming an additional 30 million shares for the private placement and maybe another 125 million shares submitted to LongKey shareholders for the rest of LongKey's interest will result in a total of 380 million shares.

    According to Peak's latest investor presentation from March 2015, page 18 outlines LongKey's revenue projection of $40 million for 2016 and $95 million for 2017. This is quite a step up from 2014's actuals of $3.6 million and 2015 expected annual revenue of $11 million:

    (click to enlarge)Even with 380 million shares, a 3 cent stock price leads to an $11 million market cap. That's a price to sales ratio of just one, which is miniscule for a company with such a high revenue trajectory. With the deal in place, Peak and LongKey's next job is to execute on these projections. If they can do as such, a market cap valuation in excess of $100 million is not far away. In the meantime, if Peak can demonstrate a revenue run rate for the first couple of quarters in 2016 that meets the numbers outlined in the chart above, the stock price should easily exceed 10 cents.

    Tags: PKKFF
    Oct 17 7:00 PM | Link | 8 Comments
  • Oculus Has Made Significant Gains In The Dermatology Industry After Just One Year

    For years, Oculus Innovative Sciences, Inc. (NASDAQ:OCLS) has tried to find a home for its Microcyn technology. Jim Schutz, the company's COO until he took over the role as CEO last year has admitted that the company was "a mile wide and an inch deep" in reference to its past business relationships and market strategies. That lack of focus has caused the stock price to suffer as skeptics questioned the effectiveness of Microcyn and Oculus' proprietary technology.

    One of the things I look for when investing in a speculative growth stock like Oculus that has had a history of poor stock price performance is a willingness to candidly admit to past mistakes and an ability to demonstrate a realistic strategy moving forward. Looking at the commodities sector as an example, there are many examples of gold and oil stocks which aggressively drove forward with a single-minded strategy until they crashed into a brick wall of U.S. Dollar strength and find themselves divesting themselves of assets or putting themselves up for sale at very unfavorable prices in a desperate attempt to remain solvent.

    This is not the case with Oculus. Mr. Schutz and the remaining Oculus team have worked hard to strengthen the balance sheet (as outlined in a previous article of mine) so that the company has the cash needed to direct focus to the dermatology field. Dermatology has a demonstrated history of lucrative enterprise valuations and has a favorable competitive environment. As I outlined in another article, buyouts of dermatology companies have generally occurred in the 3.0x to 6.0x revenue multiple range while companies like Dermira, Inc. (NASDAQ:DERM) and Anacor Pharmaceuticals, Inc. (NASDAQ:ANAC) continue to have revenue multiples in the 100x range even after the recent pullback in health care stocks. With the last two quarters trending towards annual revenue in the $15 million range and growing, I believe that Oculus should trade at a minimum in the $75 million market cap and $5 stock price range.

    With the past mistakes behind Oculus but the stock price still reflecting a business that has no focus or traction, OCLS represents a compelling investment opportunity for investors who like health care stocks but are wary of the many recent high fliers that have seen their prices tumble in the past couple of months. Oculus has had its fair share of naysayers for various reasons over the years, some of it with merit, but this time around the company has come out swinging with a demonstrated ability to market a product that is effective, favorably priced and highly profitable.

    Referring to page 13 of the company's latest investor presentation:

    (click to enlarge)

    The company has disclosed the total number of dispensed prescriptions of the four dermatology products available in the market under the Alevicyn and Celacyn product lines of its wholly owned subsidiary, IntraDerm Pharmaceuticals. The business has grown from zero prescriptions in October 2014 to a high of 3,000 in July 2015. August pulled back slightly to about 2,800 prescriptions, ending the company's streak of nine months of sequential growth, but IntraDerm is set to start a new streak of month-to-month growth as Oculus started to ship a post procedure pack of Alevicyn and Celacyn and a branded oral drug to its wholesalers in September in preparation for the product launch by the end of 2015.

    What is behind the early success of IntraDerm? I believe there are three key drivers:

    1. An effective product

    2. Favorable pricing

    3. An experienced sales team

    The prescriptions are growing because dermatologists believe that the Microcyn technology in an effective treatment for their patients' conditions. A recent article on Oculus does an excellent job in summarizing the advantages to using Celacyn as a prescription scar gel, driving over 6,000 prescriptions for that product alone since November 2014.

    Oculus has been accused of selling "overpriced bleach" when the evidence points to the opposite being true. If anything, Oculus is coming up with products that are cheaper alternatives to their competitors. On page 11 of the investor presentation, Oculus outlines the cost of the Alevicyn gels against various alternatives to the treatment of atopic dermatitis.

    (click to enlarge)

    Alevicyn comes in at a price per gram of $0.50 while the spray gel is at $0.47, well less than half of the price than the next cheapest competitor and less than 10% of the price of the high end products available for atopic dermatitis.

    Alevicyn is not going to be for all sufferers of atopic dermatitis, but that is no different than any other condition where a variety of strengths and mixes are needed to cater to various severities as well as consider preferences and allergies of the patient. The important thing to note is that Alevicyn is clearly gaining traction at the low-end/low-strength sect of the market without disqualifying itself as a potential solution for patients who currently have to pay for a much pricier product.

    Oculus management knows from past experience that a great product at a competitive price is not going to be enough to assure a successful business. So the company has been aggressive with hiring sales people who are experienced in the dermatology industry. It hired 10 sales people for the original push with the intent to increase that to 14 by the end of 2015 and 20 in 2016. The high margins associated with the dermatology business allows for that business to cover its $40K per quarter in direct field sales costs within the first year, essentially hitting the breakeven point when excluding an allocation of indirect corporate overhead.

    How has the rising dermatology business impacted financials?

    Oculus' revenue has been trending upwards for calendar year 2015, driven by an increase in product revenue. Oculus does not report IntraDerm numbers separately from its legacy businesses, however IntraDerm is exclusively in the United States at this time and comprises a significant part of the company's overall U.S. product revenue, so that line item would be a close enough proxy to determine how the business is doing. Presented below is the revenue by region for Q1 2016 (ended June 30, 2015) and Q4 and full year 2015 (ended March 30, 2015).

    U.S. product revenue was up $582K or 41% to $2 million for 2015, but the bulk of that growth was in Q4 which saw a 117% increase or $336K from $287K to $623K. This aligns to the introduction of the dermatology products last October as the products were shipped to the wholesalers in preparation for the expected growth in prescriptions in 2015. The trend has strengthened in Q1 2016 as the product revenue in the U.S. was $787K, a $432K/117% increase from Q1 2015 and a sequential growth rate of $164K/26% over Q4 2015. The company achieved a total of 4,374 prescriptions in Q4 2015 which increased by 61% to 7,028 prescriptions in Q1 2016.

    Since revenue is recorded at shipment which is several weeks in advance of prescriptions being written, we can expect short-term variations between the growth rate in prescriptions and the growth rate in revenue depending on the level of inventory held by the wholesalers. Revenue can also be impacted by Oculus' rebate program for those who are uninsured. But the growth rate in prescriptions and dermatology revenue will be tightly aligned over the long term so prescriptions can only outpace revenue growth for so long as wholesalers will start ordering in bigger shipments once they see that the Alevicyn and Celacyn product lines are moving. Oculus increased the price of the Alevicyn gel from $45 to $85 which took effect in October. The expectation of increased unit sales as well as the higher price bodes very well for the company's U.S. product growth over the next several quarters.

    As the company has disclosed prescription numbers for July and August, it is possible to come up with a reasonable estimate of growth in U.S. product revenue for Q2 2016. Total prescriptions will likely be in the 8,500 range for the quarter, a 21% increase from Q1 2016. I expect revenue growth to be in line or slightly exceed this number as wholesalers try to build up their dwindling inventory of the existing product lines as well as start ordering the new products. A 25% to 30% increase in U.S. product revenue from Q1 would lead to revenue of about $1 million for the quarter and will be a top driver for another solid quarter of growth for Oculus. This growth will be partially offset by negative revenue drivers in the legacy businesses which are no indication of the company's potential going forward - weak international currency performance versus the U.S. Dollar and a declining revenue stream from past partnerships that are running their course.

    As time goes on, dermatology revenue will make up a substantially higher percentage of overall revenue as the legacy revenues grow less robustly and the royalty revenue dries up. I believe that Oculus will eventually be regarded as one of the few dermatology plays listed on the NASDAQ and its stock price will reflect a valuation more similar to the high fliers of DERM and ANAC. Considering that OCLS has a price to sales metric of just 1.4, it has a long way to go before it comes anywhere near those kinds of lofty valuations.

    Disclosure: I am long OCLSW, which are warrants on OCLS expiring in 2020 at a strike price of $1.30. They act similar to call options. I believe the warrants are under-priced given the long time to expiry and the volatility on the stock. Warrants represent a leverage opportunity and a risk management tool. For instance, a purchase of warrants at $0.30 when the stock price is $1.20 will result in intrinsic value of $1.10 if the stock price doubles to $2.40. Conversely, the warrants are worthless if the stock is under $1.30 upon expiry in 2020. But warrants can also be used to manage risk because an investor can put up less capital in OCLSW for the same dollar amount of upside compared to an investment in OCLS. Owning warrants is within my risk tolerance. Investors should decide if warrants are within their risk tolerance independently of my recommendation. I have been paid for this article. I purchased OCLSW prior to any contact or relationship to the company and this article is an accurate representation of my opinion on OCLS.

    Tags: OCLS, ANAC, DERM
    Oct 16 9:58 AM | Link | Comment!
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