Saturday, February 04, 2006

Host America--Anecdote for Growth.

On January 30, 2006, in a SEC 8-K filing, Host America Corporation (CAFÉ.PK-$2.75), signed a Release and Cancellation Agreement with Laurus Master Funds, Ltd. The two parties had previously entered into a financing agreement, in July 2004, which included two price convertible notes, each with a face value of $4.0 million. This announcement kicked up some dust in the price of Host American shares. In the last three days of trading, the share price rose 77.4 percent.

Host America Corporation provides customized energy management and conservation solutions for commercial, industrial and real estate customers. The Company's food management business provides outsource food management on a long-term contract basis for corporations, schools, Meals on Wheels, and Head Start programs.
Why the sudden interest in the shares of Host America? And, is there investment merit to becoming a stakeholder in the Company?

Prior to 2004, Host America was principally a full service food management company providing employee dining and special events catering to large office complexes. In December 2003, corporate completed the acquisition of GlobalNet, which held a license to distribute energy saving technology products and software. These products possessed the capacity to reduce the energy consumption on inductive loads for electrical equipment, motors and the majority of existing lighting systems. GlobalNet [correctly] believed that it could provide potential customers with significant savings on their electrical energy use and minimize down time costs associated with power outages. Likewise, the increase in energy efficiency would reduce its customers’ repairs and maintenance expenses.

GlobalNet’s initial sales were limited to customers located in Texas; however, GlobalNet’s intent was to solicit business throughout the United States. In addition to direct sales by its executive officers and sub-distributors, GlobalNet wanted to establish a multi-channel marketing and sales platform to bring its energy savings product to the market. The problem was--as it always is--money. As of December 30, 2003, Host America had accumulated losses of approximately $9.7 million. Enter Laurus—which liked to quote that it “invested in the future of small and micro cap companies.”

On July 6, 2004, Host America closed on its $8 million funding arrangement with Laurus. The proceeds of the Notes were used to accelerate marketing initiatives at the company's wholly owned subsidiary, GlobalNet Energy Investors, Inc. and for targeted acquisitions.

On September 29, 2004, The Company purchased RS Services, an electrical contractor that specialized in the installation and monitoring of control devices. This acquisition provided the Company with an additional revenue stream, expertise in the installation and monitoring of its energy management products, and an existing pipeline of customers, which included Wal-Mart, Cutler-Hammer, and others. Of interest—RS Services had been providing Wal-Mart with electrical controls and power components for ten years through a “preferred vendor agreement.”

The RS Services acquisition also provided the Company with an opportunity to combine the sales and energy savings technology of GlobalNet, and the technical and installation expertise of RS Services. The newly aligned energy management subsidiary was known as RS Services.

This newly integrated subsidiary offered a line of energy saving products, branded as EnergyNSync (ENS). Including, too, the aforementioned ENS energy saving products, which had the capacity to reduce the energy consumption on inductive loads for electrical equipment, motors, and the majority of existing lighting systems.

One product of particular interest was the ENS LightMaster Plus, a hardware-software proprietary platform that regulated the amount of electricity used in fluorescent lighting systems to avoid wasting energy. This was accomplished by reducing kilowatt consumption while maintaining visible light. The Company's digital software automatically adjusted waveform to correct the power load.

Thomas Jefferson once said, Experience declares that man is the only animal which devours its own kind…. and to the general prey of the rich on the poor. And so it was with Host America; for the monies brought by Laurus came with a price, too—a toxic-spiral deal. The second note of this convertible financing contained a ratchet—or reset—clause. If the price of the common stock fell, the conversion price dropped according to a set formula, enabling the investor to get more stock for the same amount of principal.
The problem with spiral convertibles is that an investor has every incentive to pound the price of the common stock down after the deal closes so they can rake in more stock—or profit from short-selling. Among companies that underwent the toxic spiral—and paid for it—were eToys and @Home.

In effect, with the release from Laurus’ obligation(s)--by converting the I.O.U. into common stock--other stakeholders are no longer pressured by dilution concerns. Now one can understand the aforementioned 77% jump in the price of Host America shares.

On June 27, 2005, we recommended this company in a published report of The Dick Davis Digest. The investment thesis behind our former recommendation of Host America Corporation (price-$3.06) was that a successful rollout of its [high-margin] energy-management products would turn the company around--attracting Wall Street's attention to a visible earnings stream. R.S. Services, the wholly owned subsidiary, had moved beyond beta-testing, and now had proven energy-management products that offered viable means of reducing energy consumption and reducing electricity costs.

R.S. Services received third party validation of the effectiveness of their energy saving ability from both Oklahoma Gas and Electric, a subsidiary of OGE Energy Corp. (OG&E) and the Department of Energy—Oak Ridge Laboratory. OG&E had announced a 20% energy savings during an on-going research project it conducted on the ENS LightMasterPlus. And, a recent report from the Department of Energy stated that the LightMasterPlus controller reduced ballast temperatures and produced a subsequent 15% - 30% energy savings when connected to a fluorescent lighting system.

As stated in The Dick Davis Digest at the time, "the catalyst for a sustainable upward move in the stock will be a successful rollout of its high-margin energy management products…. Investors take note—the fuse has been lit. BUY Recommendation."

In July 2005, Host America subsequently soared some 400 percent, peaking at $16.00 per share, after the Company announced that it would start surveying 10 Wal-Mart stores in the southwest, in preparation for installation of its LightMasterPlus on the fluorescent lighting system of each store. A happy time for our readers, who made approximately 285% on their initial stake—assuming they sold at our targeted price of $12.00 per share.

Why the incredible rise in the stock price? We suspect, among other variables, that speculative fever swept over the Company stock when news outlets began inaccurately headlining that the Company was installing its fluorescent lighting system into some of the retail giant's stores—not surveying as initially reported.

As one would suspect, the SEC stepped in to investigate, the shares of Host America were eventually delisted from the NASDAQ:SM, and re-emerged as a penny stock on the pink sheets.

Host America has cleaned house, sweeping former CEO, Geoffrey Ramsey, and related family members out the door. In our opinion, The Release and Cancellation agreement with Laurus is just the anecdote the Company needed to counter-act the poisons that were slowly killing the Company [and the stock price]. The 10Q Detective is re-instituting a BUY recommendation on Host America Corp.
Information has been obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. We advise readers to recognize that they should not assume that present or future recommendations will be profitable or will equal the performance of securities listed or recommended here in the past. Readers should be aware, too, that the purchase of securities, particularly in the case of low-priced shares, involves substantial risk of capital. The 10Q Detective is published by Blue Sky Enterprises, LLC. Blue Sky Enterprises, LLC. is not a registered investment advisor and therefore cannot give individual investment advice. The opinions expressed herein are subject to change without notice. Neither the information nor any opinion expressed herein constitutes a solicitation by us of the purchase or sale of any securities. Blue Sky Enterprises, LLC., its affiliates, and/or their officers and employers may from time to time acquire, hold, or sell a position in the securities mentioned herein. Upon receipt of queries, specific information in this regard will be furnished.


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