Fool Me Once, Shame on Me; Fool Me Twice, Shame on You: Fool Me Again and Again for Years, Must be a Tonix or DryShips Investor
In life, second chances do not come by often. This is why there is a version of the old adage, "You only get one chance to make a first impression" for almost all cultures. This tends to be the case for businesses too; investors usually have a very good memory for the failures of companies, but not always. While most companies fade away after their first big failure, there are always the select few that seem to have the nine lives of a cat.
It's often said that the definition of insanity is doing the same thing over and over and expecting a different result. By this definition, both the management team and investors in Tonix (TNXP) Pharmaceuticals and DryShips (DRYS) must be insane. Despite years of failure, investors have continued to shell out money, hand over fist, giving both companies chance after chance after chance. In consideration of each business' substantial capital requirements, keeping Tonix and DryShips afloat was no small feat. Tens, if not hundreds of millions dollars have gone into these companies in the hopes of an imminent turnaround.
Has anything actually changed over the last few weeks?
Over the last week, both companies were finally able to report some positive developments. This news was met by a surge in buying, due to growing investor excitement over the turnaround possibly beginning. With valuations continuing to retrace back to former highs, is this rally really justified? Has anything actually changed to materially benefit either company? Is the time for redemption finally here? Or will history repeat itself, and burn investors yet again?
The long, bumpy road Traveled by Tonix Pharmaceuticals
To put it lightly, it's been a bumpy and expensive road for Tonix Pharmaceuticals and its shareholders. A few years back, Tonix was flying high with a market capitalization over $70 million, as investors anticipated the success of the company's drug, TNX-102, for fibromyalgia. Suffice it to say, things did not go as planned. The company ran into a number of trial failures on both data and study design, with each failure leading to a drop in its valuation.
2016 was a particularly bad year for Tonix, beginning with the resignation of CFO, Dr. Gershell. As an early member of the management team, he filled a number of roles including the treasurer. With a Ph.D. in chemistry and an MD in medicine, his resignation led many to believe the writing was on the wall for Tonix. Soon after, institutions blew out of the stock, driving share price to new lows.
The CFO's resignation made a lot of sense later in the year, as the company revealed that its phase 3 study in fibromyalgia wasn't truly double blind. Moreover, the company was surprised to discover that many patients suddenly dropped out and even moved out of the area of the 12-week study. Management decided to immediately discontinue the fibromyalgia program, destroying the millions of dollars that had already gone into the program.
Start of the Turnaround
Initially, CEO and Chairman Seth Lederman's decision to suddenly shift to pursue just PTSD confused many investors. In hindsight, it's clear that this was the start of the turnaround. The focusing of the clinical pipeline is actually brilliant, it not only reduced the need and burn rate of cash on the balance sheets, but also shifted the company to address a substantial unmet market. The FDA recognized this by granting the drug Breakthrough Therapy Designation (BTD) in December 2016, which is intended to speed up the development and review of a drug candidate planned to treat a serious or life-threatening disease or condition. This is an incredibly rare status to receive, with less than 150 BTD's issued since the beginning of the FDA program.
The benefits of this grant have been made clear this year. Two days ago, Tonix announced the enrollment of the first patient in Military-Related PTSD in a Phase 3 Trial, which amazingly followed just one Phase 2 Trial. PTSD is a terrible condition where patients wind up reliving horrible traumatic experiences, which can lead to substantial psychological issues. This is especially salient for the military, where roughly 20% of the 1.9 million U.S. veterans who were deployed to Iraq and Afghanistan are said to be suffering from PTSD.
Tonix is Going To Need Much More Than $8 Million
The drug development process is incredibly expensive, and can easily cost well in excess of tens of millions of dollars just to finish one Phase 3 Study. Most early stage biotech companies are constantly "Refueling" through capital raises. While management teams of these companies will generally attempt to raise money at an attractive valuation that isn't a significant discount to market, Tonix hasn't had that luxury very many times. This is especially important to Tonix, even though they're at the final lap; they're still going to need a lot of extra gas to reach the finish line.
Not only do they need it, but also the company is desperate for cash. This should be pretty obvious based on how Tonix pulled the trigger on an $8 million raise at a discount to market within 24 hours of having announced first patient enrollment. With top line results of its Phase 3 Study not expected until the second half of 2018, expect this raise to be the first of many more over the following two years.
The Mystery of DryShips
Despite being one of the most traded stocks by volume on the market, it's hard to say what DryShips really is. On the surface, the company represents itself as a diversified owner of ocean cargo vessels that operate worldwide. While DryShips owns a sizeable fleet of assorted sea-based shipping vehicles that is continuing to grow, the company has experienced a marked decline in revenue while hemorrhaging cash over the past two years. While DryShips' valuation correspondingly declined over this period, shares rallied significantly over the past week as the company announced the acquisition of four bulk carriers for $124 million.
A Completely Unnatural Ability to Raise Capital
DryShips, for better or for worse, has never experienced any problems in continuing operations, even despite the troubling operation concerns in cash flow and revenue shrinkage. Although investors have been excited by the recovery of dry bulk shipping rates, this fails to account for the incredible ease DryShips has been able to aggressively and repeatedly conduct capital raises to grow its fleet of ships. With income statements revealing the burn rate continuing to get worse, the company's ability to receive capital injections and invest in very expensive shipping vehicles is shrouded in mystery. By almost any standard understanding of capital markets, this is ridiculous.
DryShips' strong access to capital makes even less sense when its industry is considered. Investors are typically wary of capital raises by shipping companies. This stems from an extensive history of such companies overinvesting in their fleets beyond their means of expansion. Terrible capital allocation is fairly common for shippers and where they frequently drown the earning potential of hundreds of millions of dollars when said companies are unable to find a profitable use for newly acquired shipping carriers.
Cash Is Dwindling, That Raise is Coming
The company reported $243 million in cash on hand at its last fourth-quarter results. Although this seems like a tremendous amount of cash, the impact is diminished by the complete lack of positive cash flow in addition to the company's recent $124 million acquisition, implying cash levels are currently below $110 million accounting for the accelerating burn rate.
Based on current information, it seems unlikely that DryShips will be able to achieve any meaningful level of profitability over the next two years. With recent acquisitions impacting the company's financial liquidity, one can only assume another raise is in short order for DryShips.
Mystery Investment Group Will Dilute All Shareholders
Because DryShips just seems to lack the ability to say "no" to sources of capital, existing shareholders should just expect to get diluted down to nothing eventually. This isn't an exaggeration; look at the last two equity rounds announced within just two months of each other from December 2016 and February 2017.
When the first round was announced late last year, it was announced that the $200 million stock offering could take up to 24 months to complete, it completed in under 40 days. Less than a month after completion of the first round, an offering with the exact same terms was announced again. Representing a massive total of $400 million, completion of this financing probably blew out any previously existing shareholders.
What's worse is that proceeds from these offerings went on to purchase speculative investments such as oil and gas tankers. This shouldn't come at a surprise though, DryShips has an established five-year history in really destroying shareholder value, and it's nearly an art form now.
The most important question remains, what entity provided DryShips such substantial and rapid access to capital, not once- but twice? That would be Kalani Investments Limited ("Kalani"), an "entity apparently unaffiliated" with the Company. Despite the group being capable of fully exercising $ 200 million + offering in under a month, nobody else had heard of the group until their involvement with DryShips. With little proof of Kelani actually existing in the function of an investment group, some investors suspect Kelani may actually be a puppet controlled by the head of DryShip.
So Is DryShips Actually Improving, or will it sink like the Titanic?
Like one of the seven wonders of the world, the tremendous liquidity of DryShips is a sight to behold. A number of investors have likened the company to the Titanic, a ship shrouded in mystery and intrigue that sank in the early 20th century. While DryShips hasn't sunk yet, many seem to believe that the company will suffer the same fate.
This is highly unlikely, as seen with Ocean Rig's bankruptcy proceedings, the CEO realizes that his public companies are incredibly important for his success. That being said, it's hard to imagine that the company will ever become profitable or even viable as a long-term investment, given the random nature of its substantial acquisitions, and the rapid dilution from Kelani's $200 million stock offerings. At the very least, betting on a turnaround could be like staying on the Titanic.
Why Companies With Substantial Capital Requirements Have Tremendous Risk
When businesses require substantial amounts of capital to continue operations that represents a salient risk to investors. This risk is amplified if a turnaround is required for these companies. In addition to large amounts of dilution risk, almost guaranteed in the case of DryShips, investors banking on a turnaround voluntarily take on execution risk.
Companies belonging to this category are often marked by years of poor decision making by their respective management teams. With very little precedent to back the possibility of a financial 180, it's clear why commitment to an investment on this basis can be seen as a moonshot.
Capital-intensive Businesses May Not Represent The Best Option For Investors Looking for Growth
That being said, investors looking for growth may be much better off looking at businesses with low capital requirements that are already growing. An investment into such a company would significantly limit their exposure to dilution and execution risk. Although these companies often trade at a premium, some have gone unnoticed and trade at a significant discount to its peer group.
Immydyne (IMMD) Is a Low-Capital Business With a Management Team Executing on Incredible Growth
One such company is Immudyne, which has started to gain awareness amongst growth-seeking investors.
1) Immudyne's Branded Health Products Outsold Expectations
Premium health products have grown explosively over the past few years. Of particular note, the global skin care market is expected to reach $196 billion by 2024 with the emergence of new skin care solutions with organic ingredients that are being sold on e-commerce platforms.
By tapping into this developing market, Immudyne has quickly established its position in national and global premium health products with its proprietary doctor endorsed products. The company has a strong portfolio of patented product lines with endorsements from leading doctors in the field.
They leveraged this advantage by utilizing an e-commerce platform, and the capital efficient, direct-to-consumer sales strategy allowed Immudyne to scale sales of its skincare line to over $4 million in top line revenue in just the first year of launch. Even the company didn't anticipate just how high demand for its premium health products would be, having to invest in its direct marketing infrastructure just to keep up.
2) Immudyne Is Achieving Record Sales Growth Without A Substantial Capital Raise
Immudyne's new product achieved $4 Million in top-line revenue its first year of launch. It may be possible that this revenue may have been bottlenecked. With newly developed infrastructure to keep up with demand, it is reasonable to expect a similar or higher level of growth for this fiscal year. The company is in a pivotal period of execution, having accomplished quadrupling of 2015 revenues in 2016.
Revenue by Year
2014- $714,000
2015- $1,250,000
2016- >$5,000,000 Expected
Amazingly, Immudyne achieve this substantial level of growth with only $500k in outside investment from its long-term shareholders.
3) Immudyne Management Team's Upside is Intimately Tied to Equity
The most comforting aspect about the company is that the management team's upside is strictly in the equity. The efficient team works for equity over cash, with a combined cash salary under $20,000/month for all senior management. Moreover, with management, affiliates, and respective family member ownership accounting for over 60% of the common stock, it is incredibly unlikely that the company will engage in dilutive raises like Tonix or DryShips.
Buy Growth Without Dilution or Execution Risk
What does this mean to investors? At the very least, unlike Tonix or DryShips, Immudyne is a company that is already delivering on growth. With a business model that clearly works, compounding double to triple digit sales growth goes to show how Immudyne's management team is continuing to deliver. Better yet, insider ownership is very strong and the company has very low capital requirements. Unlike Tonix and DryShips, that must raise money or risk bankruptcy, Immudyne can continue to grow without ever having to raise capital again. On the whole, Immudyne represents a compelling opportunity for investors seeking long term growth without dilution.
About One Equity Stocks
One Equity Stocks is a leading provider of research on publicly traded emerging growth companies. Our team is comprised of sophisticated financial professionals that strive to find the companies and management teams that will outperform the market and deliver investment returns to our subscribers. We are not a licensed broker dealer and do not publish investment advice and remind readers that investing involves considerable risk. One Equity Stocks encourages all readers to carefully review the SEC filings of any issuers we cover and consult with an investment professional before making any investment decisions. One Equity Stocks is a for profit business and is usually compensated for coverage of issuers. In the case of Immudyne, we have been compensated 250,000 shares of common stock in for advisory, marketing and business development services. The owner of One Equity stocks is long IMMD.
Contact:
Joe Ocasio
347.480.1397