While Skyline Medical (SKLN) hasn’t turned a penny’s profit in 14 years, it’s sure learned how to dilute stockholders’ shares.
Shares have blasted up recently, placing the medical device company’s quivering finger on the trigger to continue draining share value.
The Eagan, Minnesota company – previously saddled with the gag-worthy name of “BioDrain Medical” – offers a system that drains fluids from patients using standard surgical tubing.
Here’s a bird’s eye view of the reasons Skyline is a highly risky investment:
1. Skyline is low-cash, high-cash-burn and has sold only one unit since 2015.
2. It funds operations solely on a loan, convertible debt and stock offerings.
3. The company is under threat of being delisted from Nasdaq.
4. It recently filed a $20 million offering. Those shares can be sold at any moment, representing a significant dilution event.
5. The firm depends on reverse stock splits and professional stock promoters to boost the stock price.
6. Skyline repeatedly touts an unfortunate Polish-American partner; the market falls for it.
Investors may find other viewpoints here. Meanwhile, let’s look more closely at the factors conspiring to dump this stock.
*1. Financial Despair
Skyline had always been in serious financial straits but things had grown much worse by the end of last quarter.
The company had been crippling along on ~$22 million in debt financing and offerings, including the public offering of August 2015.
Skyline had given up on even trying to sell its surgical drain product Streamway FMS. In the entire first half of 2016, they hadn’t sold a single unit.
“There were no sales of STREAMWAY FMS units in the 2016 period, as sales efforts were curtailed in late 2015 due to our concentrated efforts on customer management. The ramp up in our sales efforts following our public offering have not yet resulted in sales of units.”
Skyline’s cash had predictably tanked and the burn was hot and high:
(Source: Company SEC filing, TheStreetSweeper)
Skyline must be getting used to such trouble …
*2. Despair Deepens: Nasdaq Delisting
Skyline stumbled and fell at the very beginning.
The company first tried to sell shares in the public market in September 2014. But factors such as ongoing operating losses – Skyline lost $6.5 million in 2014 and lost another $4.4 million the next year – delayed its public offering until August 2015.
Not long after Skyline’s delayed offering, Nasdaq warnings arrived saying the stock was at risk of losing its listing.
That was no surprise because at times, investors could have picked up five or even 20 shares of Skyline for the price of a latte.
The stock was failing both Nasdaq’s $1 per share price minimum and the $2.5 million minimum shareholder equity requirement.
Carl Schwartz, a dentist and then-interim CEO, said during a September update-proxy conference call that shareholders needed to approve three proxy items, including a proposed reverse split. The company simply didn’t have the luxury of time:
“We believe the only practical way to meet the NASDAQ requirement in time, or to be eligible for an extension, is to get approval now for a reverse split.“
Shareholders approved the measure. They understood all too well that a delisting would push the stock to the dreaded over-the-counter bulletin board where sickly companies typically go to die.
*3. Reverse Stock Split
So on Oct. 28, Skyline conducted what it fruitlessly hoped would be a Nasdaq listing-saving 1-for-25 stock split:
(Source: Yahoo Finance, TheStreetSweeper)
The desperate measure didn’t change the value of the stock one bit. These reverse splits increase the stock price awhile and later serve as an ugly footnote to companies that go on to under perform.
The reverse split has pushed the share price to $1 or more for the past seven days (minimum requirement is 10 consecutive trading days).
But the stockholder equity rests well below the $2.5 million minimum:
(Source: Company SEC filing)
So Skyline appears to be perfectly positioned to weaken the value of stockholders’ shares …
*4. $20 Million Offering: Watch For Diluting Shares
Skyline has been stirring up an unpleasant surprise: A big ol’ pot of shares – up to $20 million worth – poised to water down the existing stock.
(Source: Company SEC filing)
The Securities and Exchange Commission has already given its “effectiveness” statement, allowing shares to be sold immediately.
This means dilution is looming. Those shares can be sold at any moment and will likely be sold soon now that the share price is absurdly high.
If all $20 million worth of shares were sold at the current price of about $3, investors would have to deal with an additional 6.7 million shares – nearly twice as many as today’s tradable shares.
Let’s look even deeper beneath the red flags piling up against Skyline’s shuddering foundation …
5. GLG/Skyline: Market Falls For Regurgitated Announcements
Leading up to and beyond the share registration, Skyline released a flurry of very similar announcements related to a deal with GLG Pharma … In five weeks, Skyline has pitched FIVE variations on the Skyline/GLG theme.
Skyline trumpeted a Skyline/GLG interview by a 5-kilowatt radio station in Port St. Lucie, Florida:
Then on Halloween, a few days after the reverse stock-split, Skyline touted yet another Skyline/GLG interview with the tiny radio station:
The very next day on Nov.1, Skyline pushed the fourth Skyline/GLG tout:
The following day, the company trumpeted the Skyline/GLG partnership again:
(Source: Skyline Medical)
The announcements boil down to, in our view, two losers forming a partnership to create one big loser.
*6. What Is GLG?
GLG Pharma looks rather abysmal in many respects.
The company’s website is not updated and a mixture of English and Polish. “Current Reports” shows the stock price in Polish:
Click on “Investor Presentation” and you get this:
GLG’s website features fluff in English and vital financial information in Polish. Financials include this telling line: “Zgodnie z wiedza Zarzadu Spólki nie istnieja okolicznosci wskazujace na zagrozenie
kontynuowania dzialalnosci przez Spólke. “
The English translation is: “In accordance with the knowledge of the Board of the company there are circumstances indicating a threat to continue the business of the company.”
We do know that GLG Pharma reverse-merged with algorithm trading company M10 SA and pulled its own reverse stock split in July. The stock apparently last traded on the Warsaw Exchange for the equivalent of ~$0.18 per share.
GLG had lost about $7,000 in one quarter and had made no sales, according to a Reuters brief in February 2016.
Yet GLG is the company that Skyline has not only incessantly pushed … it is the company slowly receiving the lion’s share of Skyline.
Thanks to the September arrangement allowing GLG to develop diagnostic tests using surgical fluid collected by Streamway, Skyline will give up 10 million shares over time.
“The Company will issue an aggregate of 10,000,000 shares common stock to GLG in four separate tranches of 2,500,000 shares of common stock in each tranche. The shares reserved in each tranche will be released after the achievement of certain development milestones designated in the agreement. In addition, the Company will pay a royalty to GLG on the sale of individual tests.”
Skyline’s other potential partner, arguably even weaker than GLG, was the driving force behind the reverse split and the endeavor to increase the authorized shares from 100 million to 200 million.
Let’s consider that planned joint venture partner, Electronic On-Ramp.
*7. EOR Offers Failed Government Contracts
The reverse stock split and increased share authorization were approved by shareholders after Skyline asserted those measures were necessary for a planned joint venture with Electronic On-Ramp.
If the deal closes, the JV will bid to place Streamway in mobile operating rooms and give EOR ownership of 51% of the joint venture.
But EOR is a Native American-owned small disadvantaged business that does not mention any experience related to placement of hospital products.
(Source: EOR website)
EOR apparently doesn’t have a particularly good relationship with the government, either. EOR has twice failed to get government contracts … and twice has been denied its protests:
(Source: US GAO)
So maybe the next red flag is no big surprise …
*8. Promoted Stock
Skyline has been the subject of numerous promotional campaigns. We believe professional stock promotions like the ones below are one more clue to Skyline’s inherently risky nature.
Professional stock promotions drum up the company and inflate the price of a stock for a while but the company’s poor fundamentals help hammer the stock back down … after promoters and friends have sold their high-flying shares.
Once the panic hits, many retail shareholders who want to sell typically can’t or at least not before the price collapses.
Skyline shares have levitated following rampant hype and the misconception that the company is moving forward. But its cash position, reverse-split desperation, unfortunate partnerships, likely Nasdaq delisting and ridiculous promotions suggest that it has no choice but to dilute shares.
Like the medical waste it tries to manage, Skyline is going down the drain. TheStreetSweeper expects shares will quickly reverse and arrive at a more reasonable valuation of $0.30 per share.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in SKLN and stand to profit on any future declines in the stock price.
Editor’s Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to email@example.com.