PAR – 12 month lookahead

A rare post on my part. Given the surge in optimism, bordering on euphoria, I think its timely to have a cold, calculating review of PAR, where we are now, and how the next 12 months are likely to unfold. We have gone from the depths of despair to irrational exuberance in the space of a couple of weeks – both sets of emotions are a threat to sound investing.

The purpose of this post is to:

1. Promote constructive discussion and debate

2. Challenge some of the recent bullish sentiment around the stock

3. Pressure test some of my own views

4. Have a bit of fun

Background

By way of background – lest I be unfairly accused of up/down ramping – I first bought into PAR in 2020. I have enough invested in the stock to be wealthy (by my moderate standards) if it comes off, but to experience a bit of pain should it fail. Over time, I have become disgusted with some of the governance issues clouding the stock, but remain invested as I believe the risk/reward equation is quite compelling. After averaging down, my average cost is ~ $1.30. Clearly, I want this stock to succeed, but worry about (what is left of) my investment.

Governance Issues

There is a long history of poor governance with the stock. Many of these issues remain relevant, and unfortunately clouds my willingness to place any faith in management’s recent commentary, let alone their ability to execute. For my part, some of my purchases were driven by the impression, created by management, that a marketing deal was just around the corner – more fool me. Some of the more recent issues include:

1. Last years announcement around Nov 23 that an international search for an independent chair had been launched. There appears to be no progress on this front

2. Post last year’s raising – where the company tried to pass itself off as being fully funded until mid 2025, which was patently untrue given our reliance on the exercise of out of the money options

3. Claims that, with the commencement of the dosing phase of PARA 002, PAR is/was a ‘Phase 3’ company. With hindsight, it seems that this was quite false

4. Jan 24’s quarterly…..which trumpeted the opening of 120 testing sites, and asserted that these would be available for phase 3, and would serve to expedite trial recruitment. There has been no subsequent mention of this, which implies that this investment has likely been wasted. MOZZ,WOULD BE VERY INTERESTED IN ANY INSIGHTS YOU COULD OFFER ON THIS, AS I FEEL ITSAN IMPORTANT ISSUE WHICH HAS BEEN OVERLOOKED

5. We are still awaiting peer reviewed publications. This has been promised for some time, but now appears critical for funding (see below)

6. PR’s salary ($850 k to $~1 million plus performance rights) is appalling. For a pre-revenue company like outs, I would expect performance rights should be granted where the company can’t afford to pay a market level base salary. In our case, we are paying above market base salary PLUS rights . To be blunt, PR should be on ~ $500k – we could then pay an independent chair ~ $150k (above average for a pre-revenue company), and ‘save’ the balance.

Conclusion: The company plays very fast with the truth, and so we need to really scrutinise their claims/timelines

Funding/Funding Issues

Our ongoing funding requirements are substantial. Whilst in ‘cash preservation’ mode outgoings are still ~ $6-7 million per quarter. My base case is:

1. Based on past experience, FDA may still have some follow-on issues, in which case IND most likely March 25 quarter (nb thankfully, this base case is now likely to prove too conservate, however, I won’t be comfortable that we have Phase 3 approval until the end of NEXT week)

2. Trials, submission, marketing approval will take ~ 3 years….so final marketing approval should be expected end 2027

Hence, at ~$25 million pa, we require ~$75m just to keep the lights on. Trial costs are on top of this, so the funding requirement is likely to be in excess of $150 m

Funding Options

Much has been made of our broad funding options:

1. Marketing deal. Clearly our preferred option. Milestone payments will be critical to our success. An early regional deal would provide the company with much needed credibility, support the share price, and generate competitive tension in other regions

2. No debt/equity funding. PR made much of this. To be blunt, this is an incredibly expensive source of what is debt like funding – PR stated that we would repay 4x the funding received via share of royalties. To put this in perspective, lets say we are provided $100 million – this implies a repayment of $300 million on top of the original $100 million. This would equate (simplistically) to a $100 million loan repayable over 10 years at 33% interest! I hope we don’t go down this path, and can only hope that it is being touted as a potential funding source in order to create competitive tension with those parties with whom we’re negotiating regional deals

3. Convertible notes. We are a pre-revenue company, which means that debt funding is far from ideal. My view is that any convertible notes would be extremely expensive, and less preferable to equity

4. Equity raising. Equity raisings don’t have to be dilutive, as long as they are done via rights issue (with any shortfalls being placed to institutions). This is my preference, although at this (pre-Phase 3/pre marketing deal) point of time the market is unlikely to support such a raise, and underwriting a rights issue probably is not feasible

12 month pathway

Based on the above, I suspect the company’s best approach/most likely (?) pathway is as follows:

1. FDA clearance for Phase 3 (Nov 24 – Mar 25). This will provide some SHORT-TERM support for the share price

2. Publish peer review studies. Likely Q1 CY25, based on management guidance – but I have concerns over the ‘accuracy’ of this guidance. It appears that the peer review is a pre-requisite to any marketing deal

3. Small regional deal (Q2 CY25). I don’t believe that these are currently ready to go – my base case is that there is 6 months of negotiation ahead of any deal. Negotiations to commence once Phase Three is confirmed, with the peer study being an additional pre-requisite to sign-off

4. Capital raise to occur post announcement of a regional deal. This will support funding until the finalisation of INTERIM results

5. Once interim results are available – assuming the results confirm historical performance – we should be able to raise equity on reasonable terms and/or finalise other regional deals on very favourable terms

To summarise, our future is highly contingent on timely FDA approval to commence Phase Three, and the publication of peer reviewed studies. There is a LOT that can go wrong here, however, assuming this goes to plan, our future will then rely on speedy negotiation of a regional deal (South Korea?), along with expedited enrolment of trial subjects. In short, we remain a very high risk proposition, with the potential to substantially derisk by June 2025.

Post Script

TGA provisional approval would clearly be of benefit, but again, our progress here appears opaque.