Here are the big reasons why I think Coast could tumble:

• Negative cash flow. According to its most recent 10K, Coast burned through $33.7 million worth of cash in 2006, leaving it with $14.3 million worth of cash on its balance sheet. If it weren't for an unusually large $10 million tax credit for the Alternative Minimum Tax, Coast would have burned through $44 million worth of cash -- nearly wiping its cash balance out completely.
• Big payment due this year. Coast owes $29 million to creditors -- $11.6 million of which will be due in 2007. This obligation leaves very little room for any other uses of its cash. If in 2007 it burns cash at 2006's rate, and cannot raise more, Coast will run out of cash by the end of May. And this would leave Coast no choice but to file for bankruptcy given the $11.6 million it owes this year.
• Rising bad loans. Due to a huge increase in bad loans -- including 362% more loans (totaling $6 million worth) on which it is not receiving payment, Coast increased 11.6-fold its provision for loan losses to $22.6 million in 2006. It's hard to see this situation improving in the next year.
• Weak capital structure. Bank regulators have a five level scale for rating the capital structure of a bank -- ranging from well capitalized to critically under capitalized. At the end of 2006, Coast was in the middle -- Under capitalized. If its capital structure deteriorates further, it could face significant operating restrictions.
• Poor financial controls. Coast's auditors reported no confidence in its financial controls. They said that "management's assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2006, is fairly stated. Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2006."
• Heavy short interest. As of March 12, 2007, 20.2% of Coast's outstanding shares were sold short.

On the other hand, Coast's stock tumbled 55% between January 18th and January 25th after it announced $110 million worth of bad loans and it hired Sandler O'Neill, an investment advisor to help Coast "evaluate strategic alternatives." So there's a chance that someone will buy Coast or infuse it with cash. These outcomes would hurt short sellers.

Nevertheless, I think it's unlikely that things will improve in Coast's markets. And if they get worse, Coast's shares could sink into the sea.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Bally, Coast, or Novastar.