Tuesday, February 28, 2006

Marchex: New Growth Drivers--Yahoo!

Online ad seller Marchex Inc. (MCHX-$23.28) said income was up 61 percent in the fourth quarter ended December 31, 2006, aided by a sharp jump in revenue. The Company reported net income of $980,000, or $0.03 per share, compared to net income applicable to common stockholders of $607,000 or $0.02 per share for the same period of 2004. Revenue grew 97 percent to $29.8 million for the fourth quarter, compared with $15.1 million in the fourth quarter last year.
The 10Q Detective is attracted to Marchex because of its increasingly ability to monetize its own traffic with its own advertisers. For the fourth quarter, revenue attributable to proprietary traffic sources was $14.4 million, with $10.3 million arising from the Name Development and Pike Street Industries asset acquisitions.

The Company is focused on search marketing, local search, and direct navigation. Marchex's platform of integrated performance-based advertising and search-marketing services enables merchants to efficiently market and sell their products and services across multiple online distribution channels, including search engines, product shopping engines, directories and selected Web properties.

According to the comScore Media Metrix Search report for December 2004, Yahoo! Search accounted for 32% of the online searches in the United States and Google accounted for 35%. As a result, these larger distribution partners have greater control over determining the market terms of distribution, including placement of merchant advertisements and cost of placement.

Yahoo!, primarily through its subsidiaries, such as Yahoo!Shopping, is the Company’s largest distribution partner and delivers traffic to Marchex’s merchant listings, accounting for approximately 10% of total revenue for the most recent full-year December 31, 2005.
Some of these advertising and search marketing contracts with Yahoo! expire in FY ’07 and corporate may not be successful in renewing some of these agreements, or if they are renewed, they may not be on terms as favorable as current agreements. The reason for this is simple—Yahoo! (and Google) controls significant portions of its traffic that it delivers to advertisers.
Nonetheless, in 2005, the Company added more than 100 new partners, and these new partnerships include relationships with two of the largest search networks, MSN and Ask Jeeves. Marchex also added several of the largest shopping networks such as Shopzilla, MSN Shopping and Become.com and several premium vertical publishers such as Forbes.com, BusinessWeek, Travel and Leisure, Investors Business Daily, Fodors, and USAToday. As a result of this progress, corporate believes that it now has one of the largest, high-quality, third-party distribution networks online, as well as having relationships with, and access to top-tier partners in each online customer acquisition channel.
In looking at Marchex’s search marketing technology and expanded partner distribution network, corporate significantly expanded its future monetization platform.
The 10Q Detective is also intrigued with the potential for Marchex’s local search engine business as a growth driver. According to The Kelsey Group (a provider of strategic research and analysis, data and competitive metrics on Yellow Pages, electronic directories and local media) 22 million small and medium sized businesses spend 46 percent of their advertising budgets on Yellow Pages marketing and put only 3 percent into search engine keywords. The Kelsey Group also reports that 25 percent of every Internet search is local in nature; meaning local consumers are looking for local merchants. However, less than 1 percent of local businesses have established an online marketing presence.
In looking at Marchex’s progress in local search, the Company added several new super-aggregator partners in 2005. These partners leverage Marchex’s search marketing technology and monetization platform to sell local online search packages to their offline and online local merchant customers. The addition of these new local super-aggregator relationships coupled with the growth in the advertiser basis of the existing super-aggregator partners led to a significant increase in the number of local merchant advertisers utilizing Marchex’s search marketing technology and distribution network.
According to management in its fourth quarter conference call, there are now thousands of local merchants utilizing the Company’s platform. Additionally corporate said that they were very pleased with its progress in this channel, for the signup and renewal rates of local merchants utilizing Marchex’s platform continues to track favorably.
Proprietary traffic metrics are growing sequentially, too. According to internal log files, corporate said on the earnings call that the Company had more than 27 million unique visitors in December 2005, up from more than 24 million unique monthly visitors in September of 2005, who accessed vertical and local websites.
Consistent with internal efforts to provide more utility and relevance for users, corporate focused on several technology driven enhancements to these websites that included elements such as targeted advertisements related to the location, integration for from local information services such as weather maps, jobs and related functionality, and, travel information on a demographics—all in an enhanced, more intuitive user interface.
As mentioned previously, revenue attributable to proprietary traffic sources, Name Development and Pike Street, contributed $10.3 million to top-line growth in the most recent quarter. Furthermore, the Company was successful in increasingly monetizing its own traffic with its direct Marchex advertisers. Prior to 2005, Marchex did not have a proprietary traffic source.
Management reminded listeners on the call, too, that the focus during the fourth quarter was not supporting its local super-aggregative partners to drive more local merchants online. This local search engine opportunity is viewed by corporate as a great growth driver that is relatively early in its lifecycle.
In our opinion, there is a strong need for technology providers to assist local merchants in creating, tracking, fulfilling and maintaining locally focused advertising campaigns. Today this channel is vastly underrepresented in online advertising spending.
According to another recent forecast by the Kelsey Group, the global online local search distribution channel—which includes Internet yellow pages, local search, and wireless—will grow to nearly $13 billion by 2010.
Management provided first guidance for 2006 on the call, too. For FY ’06, corporate is anticipating revenue in the range of $125 million to $133 million. For adjusted operating income before amortization, the Company gave a range of $33 million to $38 million. In addition, management is maintaining its long-term target for adjusted operating income before amortization targets of 30% or more.
Marchex is tracking to be one of the largest, most targeted vertical networks online.
That said, however, the stock price is selling for a multiple of 31.5x forward December 2007 estimates of $0.74 per share. This leaves little wiggle-room for operating mishaps. The 10Q Detective prefers to watch the stock for now—looking for an entry point below $20.00 per share—its 200-day moving average. [ed. note. Given the fragmented online advertising market, it would not surprise us to see Marchex gobbled up at about a 15% premium to its existing trading value].

Saturday, February 25, 2006

PhytoMedical--Pass the Duche on the Left-Hand Side.

PhytoMedical Technologies, Inc. (PYTO.OB-$1.06), an early stage research-based biopharmaceutical company, is focused on the development and commercialization of innovative plant derived pharmaceutical and nutraceutical compounds. Currently, the Company is involved in the identification, research, and development of plant-derived compounds for diabetes and cachexia (which is characterized by dramatic weight loss, particularly in AIDS or end-stage Cancer patients).
PhytoMedical is not the first biopharma company looking to develop novel drugs based on the science of ethnobotany.
Do any readers recall a company called Shaman Pharmaceuticals? Founded in 1989, this Company aspired to be a model of bioprospecting—staking its ventures strongly on the knowledge of traditional healers (shamans). At one time, Shaman had a diabetes program that resulted in the discovery of multiple new compounds, and formed the basis for a collaborative relationship with Ono Pharmaceutical Co., Ltd. The Company also had two compounds in the later stages of clinical development, Virend, a topical antiviral for the treatment of herpes, and Provir (SP-303), for the treatment of AIDS/HIV-associated diarrhea.
For all its millions spent on R&D—and salaries—the Company had nothing to show in the way of commercial successes. Shaman did market its once-promising prescription drug, SP303, as a dietary supplement, for which prior FDA approval was not necessary. The product was temporarily sold in health food stores, under the name, NSF, for normal stool formula. In 2001, Shaman Pharmaceuticals lost its ‘magic’ and filed for bankruptcy.
So forgive us for laughing when we read about Phytomedical’s decision to expand the scope and scale of its research efforts.

If you have nothing to show—obfuscate. Or, if you really have nothing and want to boost the price of your company’s share price—use sizzle and buzzwords—talk about ethnomedical investigation and proprietary, sophisticated screening models which can result in a more efficient drug discovery process.

In news story filed on February 15, 2006, PhytoMedical trumpeted the news that the Company was expanding its research activities to include new plant-derived drug candidates for obesity, Cancer, and Alzheimer's disease.
PhytoMedical has only one plant-derived compound in development. Named, BDC-03, the compound has shown success in increasing lean muscle mass and reducing body fat –in animal studies!
Through ‘make me legitimate’ contracts called, Cooperative Research and Development Agreements (CRADAs), PhytoMedical is also working towards synthesizing the active components of several polyphenolic compounds found in cinnamon bark—the end objective being to develop a commercially viable compound that can lower the blood sugar levels in diabetics. CRADAs, by Federal Law, are limited to partnerships that do not exceed a combined dollar value total of $150,000 over the life of the agreement.

For the nine-months ended September 30, 2005, PhytoMedical had spent a whopping $132,815 on research and development!
Now how is PhytoMedical going to fund its so-called expanded R&D activities with a one-dollar share-price and a cash balance of $95,538?

To quote from our friends at the blog, www.tradingquotes.blogspot.com , I have made money from no money. I have lost money with money, and I have made back the money I lost. Now I must learn to make money with money.
The 10Q Detective suggests that if PhytoMedical Technologies really wants to be taken seriously by the investment community—Perchance the Company could design a clinical trial that examines the safety and efficacy on the potential appetite-stimulating properties of a well-known plant-derived compound on the cachexia of cancer, HIV/AIDS symptomatology, and other wasting syndromes. This medicinal plant is called , cannabis sativa.

To be blunt—given the Company’s current fundamental outlook—one would have to be smoking cannabis daily to even consider buying this stock.

PhytoMedical--Pass the Duche on the Left-Hand Side.

PhytoMedical Technologies, Inc. (PYTO.OB-$1.06), an early stage research-based biopharmaceutical company, is focused on the development and commercialization of innovative plant derived pharmaceutical and nutraceutical compounds. Currently, the Company is involved in the identification, research, and development of plant-derived compounds for diabetes and cachexia (which is characterized by dramatic weight loss, particularly in AIDS or end-stage Cancer patients).

Wednesday, February 22, 2006

Gluttony = Executive Pay

On June 8, 2005, CellStar Corp. (CLST.PK-$2.15), a distributor of wireless handsets and accessories and a value-added reseller of services, such as channel development, warranty claims management, and inventory management, received notification from The Nasdaq Stock Market that the Company's securities were to be delisted from the Nasdaq National Market because corporate had been unable to timely file its Annual Report on Form 10-K for the fiscal year ended November 30, 2004 and its Quarterly Report on Form 10-Q for the period ended February 28, 2005.

Overshadowing the just reported losses from continuing operations of $7.3 million, or $0.35 per share, was the fact that the Compensation Committee recommended the payments of 2005 bonuses to key executives of the Company. Pursuant to his employment agreement, Robert Kaiser, the Chairman and CEO, made his target bonus of $262,500. The Board of Director's approved Mr. Kaiser's bonus--based in part--on the achievement of the timely filing of the Company's 10-K for the fiscal year ended November 30, 2005, and Form 10-Q for the period ended February 28, 2005.

...And file this one under: Maybe no one else wanted the job?

On February 16, 2006, Exide Corp. (XIDE-$3.91), one of the world's largest producers and recyclers of lead-acid batteries, entered into an employment agreement with Francis M. Corby Jr., and appointed Mr. Corby as Executive Vice President and Chief Financial Officer. The 10Q Detective thought our readers might be interested in yet another corporate display of executive gluttony:

  • Mr. Corby will receive annual base compensation of $400,000 for the first year and $450,000 for the second year of the employment contract.
  • A target bonus of 50% of base salary for the first year, of which $92,000 will be guaranteed, and target bonus of 100% of base salary for the second year.
  • A bonus of $150,000 payable on his first day of employment with the Company and $150,000 at the conclusion of the second year.
  • Mr. Corby has been approved to receive options valued at $200,000 and shares of restricted stock valued at $150,000, both of which have a two-year vesting period. [ed. note. When I worked for a Fortune 500 company as a medical sales rep, I had a five-year vesting period for my--whopping--200 shares of stock.]
  • In accordance with the Company's relocation policy, reimbursement for all reasonable expenses incurred in relocating himself to Atlanta, Georgia and from Atlanta, Georgia to any U.S. city at the conclusion of the two-year term.
  • During the Employment Period, said Executive shall be entitled to at least four (4) weeks of paid vacation per year.
  • Executive is currently entitled to a $950 per month allowance under the Company's automobile policy. [ed. note. One would think that an executive making $400,000 per annum could afford TO BUY HIS OWN CAR!]
  • Oh--lest we forget--Exide Corp. will reimburse Mr Corby up to $25,000 for his reasonable legal fees and expenses relating to the preparation and negotiation of the aforementioned employmentagreementt.

The stock price of New Jersey-based Exide shares' have sagged approximately 73 percent of their value in the past 12-months, shedding approximately $245 million in market capitalization value. Exide Corp. has posted an aggregate net loss of $140.8 million, or share-net loss of $5.63, in the past four quarters. Corporate blamed pricing pressure(s) from lower-cost Asian competitors, shortages in obtaining spent batteries, and higher commodity prices (which the Company was unable to pass on to its customers) for the continued losses.

Lead is the primary material by weight used in the manufacture of batteries, representing approximately one-third of the Company's cost of goods sold. The market price of lead is subject to fluctuations. Generally, when lead prices increase, customers may resist price increases.

The price of lead on the London Metal Exchange (LME) averaged $976 per metric tonne during the third quarter of fiscal 2006 compared with an average of $901 during the third quarter of fiscal 2005. In 2006, lead prices have risen as high as $1,414 per metric tonne on the LME.

Conclusion--Mr. Corby enters a corporate dining room replete with talk of the the usual tactics to improve margins, including the selling of non-strategic assets and businesses, streamlining cash management processes, and implementing corporate restructuring initiatives.

The 10Q Detective would be thrilled to see Mr. Corby earn his pay package in LEAD--successfully implementing lead price escalators in some contracts, lead hedging, and long-term lead supply contracts. Afterall--as corporate has said, "lead represents one-third of total Cost of Goods Sold."

Good luck, Messrsrs. Kaiser and Corby.

Monday, February 20, 2006

NBTY, Inc.--Needs a New Growth Vitamin?

NBTY Inc., (NTY-$21.72), the leading U.S. nutritional supplements marketer, posted a 9.3% increase in January sales, boosted by recent acquisitions and a strong performance from its North American retail stores. According to its preliminary results, sales climbed to $165 million from $151 million in January 2005.
Sales at the company's North American retail stores, including its Vitamin World stores, jumped 29 percent to $22 million from $17 million the year before. Sales at the company's Direct Response and Puritan's Pride division rose 21 percent to $23 million from $19 million.
On January 27, 2006, NBTY also reported better-than expected 1Q:06 share-net earnings.
Responding to “proof of life”—shares of NBTY have soared almost 39 percent year-to-date, as investors anticipate an increase in consumer demand for the vitamins of this vendor.
Given the aforementioned good news, the timing of the February 15, 2006, SEC 8-K filing by NTBY, Inc, could not have been more propitious. Scott Rudolph, Chairman and CEO, and Harvey Kamil, President and CFO, were awarded 2005 cash bonuses of $500,000 and $350,000, respectively.For 2005, the salaries of Messrs. Rudolph and Kamil were $813,472 and $455,545, respectively.
While we are on the subject of openness—the Company maintains a consulting agreement with Rudolph Management Associates, Inc. for the services of Arthur Rudolph, a director of the Company. The agreement requires Mr. Rudolph to provide consulting services to the Company through December 31, 2006, in exchange for a consulting fee of $450,000 per year, payable monthly. In addition, Mr. Rudolph receives certain fringe benefits accorded to other executives of the Company. {ed. note. Any relation to Scott Rudolph?]
Not that we are beholden to paranoia—but after dusting off and perusing through NTBY’s more recent 10-Q filings, we question—once again—what metrics are the Compensation Committee using to award corporate performance bonuses for 2005?
NBTY’s business strategy is to target the value-conscious consumer segment by offering supplements at value prices. Management’s performance can be best judged objectively, therefore, on the following metrics: sales, improvements to manufacturing efficiencies, and increased profitability.
As reported, sales for the 1Q:06 ended December 31, 2005, increased approximately eight percent to $455.3 million, primarily due to acquisitions. For example, were it not for the February 2005 acquisition of Le Naturiste, a chain of 101 retail stores located throughout Quebec, organic growth for stores open more than one year in North America would have been flat.
Net sales for the Wholesale / US Nutrition segment, which markets certain brands including Nature’s Bounty, Sundown and Solgar brands, increased 24.8% compared to last year. Exclude the fiscal 2005 acquisitions, and net sales for existing products grew only 9.3%, year-over-year.
On a performance basis, COGS jumped 360 basis points to 54.0% of net sales and income from operations fell 330 basis points to 8.5 percent. To management’s credit, net cash provided by operations for the 1Q:06 jumped $62.7 million year-over-year to $99.6 million, principally due to management’s ability to work through $52.7 million in inventories.
Earnings slipped to $0.33 per share from share-net of $0.43, largely on an impairment charge and write-downs of about 40 non-profitable Vitamin World stores. However, on an adjusted basis, 1Q:06 earnings did beat the consensus estimate of $0.30 per share.
The vitamin business is price/promotional sensitive. For example, In the Direct Response / Puritan’s Pride operating segment, sales decreased approximately 27 percent due to the timing of promotional catalogs. In addition, Internet orders remained flat as compared to the prior like period. On-line net sales comprised 32% of this segment’s net sales—a slight decrease in the three months ended December 31, 2005 as compared to the prior comparable period.
NBTY reported almost a 25 percent increase in advertising, promotion and catalog expenses as compared to last year. Total advertising, promotion and catalog expenses—as a percentage of net sales—increased sixty basis points to 5.5%, as compared with 4.9% in the prior year period.
Performance card for senior management:
  • Sales: A
  • Operating Efficiencies: C
  • Profitability: B-
Does someone with a B/B- average on their report card deserve a $350,000 –to- $500,000 bonus? NO!
We do give credit to management for finding new growth through acquisitions: (a) 2004 results benefited by the July 2003 purchase of Rexall; and, (b) the recent acquisition of Solgar vitamins.
Going forward, we caution that management needs to build-out a strategy that will sustain organic growth—not just growth through accretive acquisitions. Also corporate has become too dependent on promotional blitzes [and we are not even talking about sales incentives to merchants]. This aggressive advertising cannot continue—without adversely impacting the bottom-line.
In our opinion, NBTY’s current top-line growth is just a blip on the radar—rather than a visible, direction-course change in consumer demand.
Anti-oxidative medicines to keep us young, glucosamines for arthritis, and herbs for weight-loss or colonic cleansings—among the many natural—alternative—therapies that help to drive sales at companies like NBTY. At present, there are no new therapies that have grabbed headlines and consumers’ pocketbooks. This does not bode well for future industry-wide growth prospects.
NBTY’s price-earnings multiple (21x), Enterprise Value-to-EBITDA ratio (8.91), and Enterprise Value-to-Revenue multiple (1.0x)—these valuations are in-line with peer comparables like USANA Health Sciences (USNA) and Nature’s Sunshine Products (NTRE). In other words, NBTY’s current share price already discounts any fundamental improvements. If you bought at the most recent lows—take your profit. If you bought last year, prior to earnings’ missteps—be thankful for the rebound—and sell, too!

Thursday, February 16, 2006

GigaBeam Corp--Communicating the Wrong Message?

GigaBeam Corp. (GGBM.OB-$9.00) was one of the first entrants into the emerging market for wireless point-to-point communications equipment designed to operate in the 71-76 GHz and 81-86 GHz radio spectrum bands, which were authorized by the FCC, in October 2003, for commercial use.

GigaBeam’s proprietary technology, utilizes these large blocks of authorized contiguous spectrum, enabling multi-Gigabit-per-second communications through use of Gigabit Ethernet and other standard protocols. The current speed achieved by GigaBeam’s wireless fiber (WiFiber) product lines is one Gigabit-per-second—equivalent to 647 T1 lines or 1,000 DSL connections.

GigaBeam’s WiFiber technology is similar to terrestrial fiber in terms of speed and reliability for deployment in Metropolitan Area Networks (MANS). However, WiFiber has a substantial advantage over terrestrial fiber for the “entire last mile,” because WiFiber can be deployed in a day and costs less to deploy than terrestrial fiber. Terrestrial fiber can take months to deploy and also require significant regulatory and environmental approvals prior to installation.

According to Cisco Systems’ exparte filing with the FCC (May 2003), less than 5% of the 750,000 commercial buildings in the United States have current access to fiber.

The 10Q Detective does applaud corporate for complementing its core strength in millimeter wave systems architecture and design with the intellectual property portfolios and trade secrets of leading component suppliers. This integrated approach of working with third parties to develop components that could be incorporated into the Company’s WiFiber technology has resulted in the rapid transition of products from drawing board to prototype to commercial-ready products in only two years.

The Company’s target customers are network providers, communications and IT service providers, Fortune 500 companies, government and military entities, and other enterprises seeking cost-effective “virtual” fiber solutions.

Sadly, however, as we have borne witness to—again and again—corporate insiders have rewarded themselves with riches before the hard work of digging up sustainable profits has been finished. The 10Q Detective unearthed an SEC 8-K, filed on February 9, disclosing that the Compensation Committee authorized the payment of discretionary cash bonus performance awards for calendar year 2005 to certain employees, including the following top executives: (1) $37,500 to Louis Slaughter, CEO; (2) $33,750 to Douglas Lockie, President and CTO; and, (3) $30,000 to Thomas P.Wetmore, Senior Vice President, Sales and Marketing.

Since GigaBeam’s inception in January 2004, primary funding mechanisms for the design, development, production, and installation of the initial product lines have been equity and debt placements totaling approximately $43 million.

The Company did not recognize its first revenues until the second quarter of 2005, which resulted from the shipment of its WiFiber 2 series GigE links. Accordingly, since commercial deployment of product commenced only recently, and the Company has not yet generated any meaningful revenues, corporate continues to be dependent on debt and/or equity financings to fund its cash requirements.

For the nine-months ended September 30, 2005, revenues of $479.4 K were swallowed up by operating losses of $9.5 million. Managements’ ability to maintain planned levels of activity and bring development stage products to a commercial sales level remains subject to the Company’s ability to access additional working capital.

If the Company is unable to obtain additional funding, corporate has already disclosed in SEC filings that they will need to change GigaBeam’s business strategy, which could include a reduction or scale back of existing operations to conserve cash and maintain operations as a “going concern.” GET WHILE THE GOING IS GOOD—the aggregate salaries of the senior executives (8) exceeds $1.6 million per annum (excluding cash bonuses, stock option awards, and other undisclosed benefits). Co-founders Louis S. Slaughter and Douglas G. Lockie had base salaries in 2005 of $240,000 and $216,000, respectively. Each Co-Founder also owns more than $9 million in company stock, too.

In order to commercialize its products, GigaBeam will have to develop an infrastructure and/or rely on third parties to perform these functions. To market products directly, corporate will have to develop a marketing and sales force with technical expertise, and a dedication to developing third party distribution channels—efforts which would require significant amounts of capital—monies that currently do not exist

Further, any agreement to sell its products through a third party, such as an established telecommunications provider or network services provider, could hamper GigaBeam’s ability to sell its products to that third party’s competitors.

The wireless communications industry in which the Company principally competes has a variety of firms with potentially competitive products and services, and some may offer broader telecommunications product lines. These companies include Terabeam Corp. (TRBM), Bridgewave Communications, Stratex Networks, Inc. (STXN), Ceragon Networks Ltd (CRNT), and Harris Corporation (HRS).

The ability of GigaBeam’s management team to integrate its WiFiber architecture with component suppliers is impressive. Unfortunately, the backbone of corporate to bring costs in line and to reach breakeven or profitability is equally unimpressive.

Looking ahead, GigaBeam is but one of many WiFiber companies with cost-efficient “bridging” technology. The Company has an enterprise value of $45.69 million—a valuation grounded solely on its potential promise. Terabeam Corp.—with a price of $4 per share—has an enterprise valuation of $79.0 million—and is forecasting profitability in its 4Q:05 on sales in the upper range of previously-provided guidance of $23 to $27 million. On a comparison basis, GigaBeam—like its payroll—is too expensive.

The 10Q Detective believes that there is no compelling reason to buy GigaBeam. SELL.

Monday, February 13, 2006

Raser Technologies, Inc. - Unbiased Update?

Raser Technologies, Inc. now trades on the Pacific Stock Exchange (PCX:RZ).

A review of our initial SELL recommendation from the December 29, 2005 (archives) posting:

The Bottom-line--Raser Technologies, Inc. is touting this breakthrough motor technology that will increase both the performance and efficiency of engines/motors, yet the Company has no tangible sales--and spends more money on perks than on R&D.
Enclosed is an e-mail sent to the 10Q Detective from Investor's Stock Daily, which has a BUY rating on the stock:

February 13, 2006

Editor's Note:

Greetings, I wanted to share some observations/opinions relative to my visit to Provo, Utah to sit with and observe Raser Technologies, Inc.'s management last week.

We all know that validation in terms of a license agreement/contract regarding their core Symetron™ technology is what will take Raser to the next level and I do not mean to minimize the significance of that goal, one that I believe is not far away. Embracing that, a great product or service is unable to obtain customers and meaningful market share without the expertise, guidance and execution of a dynamic and capable management team. I state again, I believe Raser has the executives, the focus and the drive to get the Company parallel with market and shareholder expectations.

Raser's business plan calls for the acceptance, infusion and expansion of its technology in three main markets: Transportation/Military, Industrial and Power Generation. I believe that RZ has made significant strides in all three, the most tangible being the pending acquisition of Amp Resources. Each of these markets is, in fact, hundreds of millions of dollars in size. Combine that with a new technology that has to be scrutinized, tested and retested all the way up until its commercial acceptance and I can accept a longer validation calendar.

Do not think that anyone at Raser is confusing hard work with results, they certainly understand more than anyone what needs to be accomplished. Having spent a "day in the life", I feel even exponentially more enthusiastic and secure regarding the future and success of Raser Technologies, Inc., both short and long-term.

Thanks for your time, feel free to call/email me anytime.


Jody Janson


10Q Detective ed. note: This tidbit from http://moneycentral.msn.com/content/P76852.asp:

Jody Janson, a former broker who offers paid stock research from his Investor's Stock Daily in Rochester, N.Y, accepts stock as payment. But he does so only with the intention of holding it for the long-term, he says.


Dear Readers:

Indulge us, for as you are all witness to--this site is experiencing technical problems.

We will republish the PokerTek, Inc. blog in its entirety A.S.A.P.

Best Regards-

David J Phillips

PokerTek, Inc.--Dealt a Bad Hand? Fold!

The World Series of Poker on ESPN, The World Poker Tour on the Travel Channel, Celebrity Poker Showdown on Bravo, Poker Royale on the GSN (formerly the Game Show Network), and the Hollywood Hold'em series which aired on the E! channel—the growth of tournament poker dominated the TV landscape, as seen by an unending stream of programming on these and other TV networks last year.

The American Gaming Association reports that nearly one in five American adults played poker during the last 12 months, a more than 50 percent increase from the previous year. Consumer spending on poker has increased dramatically, too. Additionally, the American Gaming Association reports that in Nevada and New Jersey (the only states that track poker revenue) poker players spent $151.7 million on organized poker in 2004, a 45% increase over 2003.

According to Casino City Press, as of June 2005, there were approximately 3,900 poker tables operating in the United States and close to 2,000 outside the United States. And, According to the Tribal Court Clearinghouse, of the 562 Federally-recognized Native American tribes, 224 were engaged in gaming, operating an aggregate of approximately 1,245 tables in 28 states.

The commercial casino segment of the poker market is the most mature and is almost as large as the tribal casino segment. The American Gaming Association reports that there were 445 casinos operating in the 11 states that offer legalized gaming in 2004. The largest market for commercial casinos was Nevada, which in 2004 had 258 casinos, and New Jersey, which in 2004 had 12 casinos. According to Casino City Press, commercial casinos operate approximately 1,210 poker tables in the United States.

Seeking to cash in on the poker craze, PokerTek, Inc. (PTEK-$11.00) was formed to develop and market the PokerPro system, an electronic poker table that provides a fully-automated poker-room environment, to tribal casinos, commercial casinos and card clubs. The computer-operated table game allows as many as 10 people to play Texas Hold 'Em. The two-year old Company offered approximately 22% of its equity with a two million share IPO on October 14, 2005, at $11.00 per share.

The gaming technology firm’s shares fell 8 percent, closing at $10.15 per share on its first day of trading.

In our opinion, like the ratings of some of the aforementioned programs, this stock has much further to fall.

The PokerPro system is designed to increase casino revenue and security while helping to reduce the labor costs associated with poker rooms. The Company’s limited testing of the PokerPro system has shown that by eliminating a live dealer, more hands of poker can be played in a given amount of time, thereby increasing revenue generated by the “rake.” The rake is the amount a casino or card club charges for each hand of poker. In addition, the elimination of a live dealer allows casinos and card clubs to avoid the labor costs of using a live dealer to operate a poker table.

The Company generates revenue from licensing the rights to use the software necessary to operate the PokerPro system, from providing maintenance and support services to customers that license the PokerPro system, and from sales of equipment. Looking at operational results for the three-month period ended September 30, 2005, the company reported a net loss of $2.5 million, or $(0.35) per share. The agreement with the Seminole Tribe of Florida was entered into on a month-to-month basis. Revenue from licensee fees was $42,000 along with $5,360 in equipment sales during the quarter.

The monthly cash burn rate for the third quarter was approximately $307,000--principally for salaries, professional services, marketing, office expenses and the purchase of the hardware components for PokerPro systems. As a result of expected growth, management anticipates this rising to $500,000-to-$750,000 in the New Year.

Corporate intent is to a build a presence for the PokerPro system in tribal casinos first, as the regulatory requirements for manufacturing and distributing gaming machines to tribal casinos are the least burdensome.

After installing tables at its Hollywood, Fla., Seminole Hard Rock Hotel and Casino earlier this year, the Seminole Tribe has installed PokerPro tables at a second facility, too, the Seminole Hard Rock Hotel and Casino in Tampa, Fla.

In addition to the four PokerPro tables at its Winstar Casino, the Chickasaw Tribe of Oklahoma recently installed PokerPro tables at two additional casinos and has ordered tables for its fourth casino. With this installation, which was scheduled for early December, PokerTek will have a total installed base of 21 PokerPro tables. That, however, is the only good news that we could unearth on the Company.

To implement its business plan and generate revenue from other sources, management must obtain regulatory approvals in additional jurisdictions. Obtaining these requisite approvals is a time-consuming and costly process.

In a three-month period, we estimate that these 21 PokerPro tables could generate approximately $300,000 in fees. Sadly, approximately fifty cents on every dollar will go towards paying the base salaries of the top five insiders (this figure excludes stock compensation expenses and any “salary” paid to Lyle Berman, for his role as the titular Chairman).

While we are on the subject of executive perquisites—Chairman Lyle Berman was granted an option to purchase 200,000 shares of common stock when he was appointed to the Board of Directors in January 2005. “Chairman Mao” and other early shareholders—who collectively own approximately 78%, or 7.3 million shares—paid an average price of $0.07 per share. Insiders also hold exercisable options to purchase an additional 216,825 shares of common stock at an average weighted price of $2.67 per share.

Henry David Thoreau wrote: “It is a characteristic of wisdom not to do desperate things.” In June 2004, withering and in desperate need of funding, PokerTek executed an unsecured promissory note with World Poker Tour for approximately $185,000. In consideration for the Note given to the Company, the Company issued 1,080,000 shares of common stock to WPT. As part of the transaction with WPT, the Company received a 10-year royalty-free license to use the “World Poker Tour” name and related logo and trademark in the United States within the commercial poker table market. Nonetheless, management of PokerTek left $11.9 million on the table—all for the untested goodwill of a trademark and pennies in funding. Not a good poker move.

Commercial casinos could be a lucrative market opportunity for the Company. For now, however, corporate will not offer the PokerPro system to this business segment. There are two reasons for this intended delay: (1) Regulatory approval for commercial casinos could take up to 24 months or longer. (2) To date, gaming authorities have determined that only PokerTek’s Chairman, Lyle Berman, is suitable to lease, license or sell the Company’s PokerPro system Lyle Berman is also the CEO of Lakes Entertainment, Inc. (LACO), a Minnesota-based publicly traded company whose primary business is managing tribal casinos, and Executive Chairman of WPT Enterprises, Inc. (WPTE), the operator of the World Poker Tour.

It is no secret that corporate is highly dependent on Mr. Berman for top-line growth. Of the top six executives in the Company, only Mr. Berman has a gaming background. As such, the Company will be looking to develop business relationships from introductions to strategic partners in the gaming industry that we Mr. Berman could facilitate. However, Mr. Berman is under no obligation to facilitate such introductions. Mr. Berman is 62 years old, and his health status is unknown.

On a related note-- Gehrig “Lou” White, CEO, and a director and holder of approximately 25% of PokerTek’s common stock, has disclosed that the IRS had challenged the tax treatment of his 2001 filing. Specifically Mr. White anticipates that the IRS will issue a notice of deficiency that assesses additional income taxes as the result of disallowing deductions for tax advice in connection with a partnership investment transaction and an accuracy penalty in connection with the losses claimed with respect to that investment. According to SEC filings, due to the broad discretionary powers of gaming authorities, it is unknown what effect the IRS examinations of Mr. White’s federal income tax returns may have on Mr. White’s applications for a determination of suitability.

On April 28, 2005, filed an application with the U.S. Patent and Trademark Office to register the PokerPro trademark. The application is pending.

The Company currently has applications for 27 patents pending before the U.S. Patent and Trademark Office, which relate to various aspects of the PokerPro system. However, patent applications can take many years to issue and management can provide no assurance that any of these patents will be issued at all. We only mention this at all because there are limited barriers to entry in the Company’s market(s), and third party infringement of intellectual property rights would likely require substantial financial resources.

And speaking of intellectual property rights—a key component of the PokerPro gaming system architecture is licensed from a third party, Standing Stone Gaming, an operating unit of the NY Oneida Indian Nation, for its Oneida II Lite software. The Oneida OII account-based gaming system utilizes cashless, personal identification cards, making it easier for the casino(s) to gather critical marketing information—such as names, wagering amounts, and preferred games and frequency of visits—to create successful promotions and activities.

This is a NON-EXCLUSIVE SOFTWARE LICENSE AGREEMENT and PokerTek must pay to SSG the sum of $25,000 for each initial integration of the SSG Licensed Software. Due to the limited barriers to entry, the 10Q Detective believes that it is highly likely that a company with greater resources—like an International Game Technology (IGT)—could easily supplant the PokerPro system with directly competitive products.

PokerTek’s inability to enter into anything more than month-to-month licensing agreements, questionable market acceptance of the PokerPro system itself, and an inexperienced management team—all these variables make for a less-than visible revenue stream.

In the opinion of the 10Q Detective, the stock price of PokerTek has no material catalyst for an upside move. Come April 2006, the lock-up agreements on millions of common stock held by company insiders—including employees, their friends and family, and venture capitalists— will expire. Expiration of these lockup agreements will be the first time in the PokerTek’s public life that insiders could start to sell their shares in the open market, subject to Rule 144 restrictions.

One restriction is that sales over a three-month period cannot be greater than the average weekly trading volume of the common stock during the four calendar weeks preceding the sale. The average daily trading volume of PokerTek’s stock has been approximately 24,000 shares over the last three months. Insiders own millions of shares at an average cost price of $0.07 per share. Such an infusion of shares into the market by these investors could potentially have a negative impact on PokerTek’s stock price for months to come.

This being the Poker(tel) hand dealt, we recommend folding.


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PokerTek, Inc.--Dealing a Bad Hand? Fold!

The World Series of Poker on ESPN, The World Poker Tour on the Travel Channel, Celebrity Poker Showdown on Bravo, Poker Royale on the GSN (formerly the Game Show Network), and the Hollywood Hold'em series which aired on the E! channel—the growth of tournament poker (WPTE), the operator of the World Poker Tour.

It is no secret that corporate is highly dependent on Mr. Berman for top-line growth. Of the top average daily trading volume of PokerTek’s stock has been approximately 24,000 shares over the last three months. Insiders own millions of shares at an average cost price of $0.07 per share. Such an infusion of shares into the market by these investors could potentially have a negative impact on PokerTek’s stock price for months to come.

This being the Poker(tel) hand dealt, we recommend folding.

Friday, February 10, 2006

Genesis Microchip--Cramer Says Buy--Turn Off the TV!

On Friday, January 20, 2006, Genesis Microchip Inc. reported a profit in its fiscal third quarter ended December 31, 2006; but investors were disappointed with the Company’s weak fourth-quarter outlook and its stock price fell 9%, or $1.73, to close at $17.50 per share. The stock has changed hands between $11.96 and $27.69 in the past 52 weeks.
Genesis Microchip, Inc. (GNSS-$19.25), develops and markets integrated circuits that receive and process digital video and graphic images. The target market for the Company’s image-processing solutions are the manufacturers of advanced display products, including LCD monitors and flat-panel televisions.
On Tuesday, January 24, during the lightning round segment of his Mad Money television show, host James Cramer blithely said: “Take my word for it and buy Genesis Micro [$18.30]…. if you opened up the guts of a big flat-screen TV, you'd see a lot of Genesis product inside.”
Unfortunately, as Cramer knows too well, a 30-second sound bite does not begin to depict the true state of affairs of Genesis—or any publicly traded company.
According to Elias Antoun, CEO, on a GAAP basis, earnings were $7.4 million, or $0.20 per diluted share, down from $9.3 billion or, diluted share-net $0.25, in the prior quarter. This drop was largely due to a higher effective tax rate in the December quarter.
Sales were slightly below the midpoint of previous guidance, primarily due to lower shipments of LCD monitor units to the Company’s largest end customer (Dell?). For the fourth quarter, Genesis said it expects revenue in the range of $62 million to $67 million. Analysts had previously forecast earnings of 19 cents per share on sales of $70.1 million.
Looking at the Company’s key markets: In the TV controller market, revenue’s grew 4% sequentially to $44.4 million. TV controllers contributed 60% of the revenue for the third quarter ended December 31, 2005, up from 57% in the previous quarter. Unit shipments of flat panel TV controllers grew 5% to 4.5 million units during the quarter. This modest growth in units was in-line with corporate expectations, especially following a significant surge in unit shipments during the September quarter.
In addition, the moderate growth in unit shipments was slightly impacted by the beginning of an anticipated transition away from shipping a two chip solutions—mainly Malibu and FLI2300—into many of Genesis’ flat panel TV design wins to shipping the single chip Cortez. This product is central to the Company’s strategy of maintaining market leadership through integration of new features and functions and by providing the highest image quality at a cost-effective price.
For its monitor products, average selling prices (ASPs) decreased by approximately 20% for the three months ended December 31, 2005 from the same period in the prior year, reflecting product transitions and competition driving other companies to design lower-priced and cost-efficient next generation products. ASPs increased 4% in the TV/video market for the three months ended December 31, 2005 from the same period in the prior year, reflecting higher demand for chip shipments into displays with video capability, such as flat-panel televisions.
Gross margin’s increased for the third quarter to 48.9% from 46.5% in the prior quarter. This improvement was substantially the result of the continuing shift in the Company’s product mix. As previously mentioned, flat-panel television continued to become a larger proportion of total revenue volume. Yes- Cramer called the ball—but he was irresponsible for failing to mention, too, that ASP increases are not expected to grow exponentially as the market expands and competition increases. Still, the 10Q Detective applauds Genesis for quickly bringing to market next generation technology.
The problem that Genesis will continue to face is technological obsolescence. Ergo, ASP and product margins of products are typically highest during the initial periods following product introduction and decline over time and as volume increases.
From the 10-Q playbook: “Our industry is very competitive and growth industries like ours tend to attract new entrants. The LCD computer monitor industry is highly competitive. Our average selling prices of monitor display controllers, in spite of increased functionality have declined by more than 50% over the past two fiscal years. We expect the flat panel television industry will be as competitive over time.”
As competitive forces put pressure on ASPs, the Company’s selling cycle makes the stock more akin to a cyclical play—unending sales hiccups as customers hold of on buying legacy products as they transition to newer products—e.g. legacy two-chip solutions and newer one-chip solutions. Therefore, buying Genesis’ stock becomes like buying a semiconductor play—look to buy when supply exceeds demand—and stock prices are bouncing around “seasonal” lows.
The offset to product obsolescence, seasonality, and competitive pricing pressures rests on the Company’s ability to gain momentum in design wins and ramp new designs into volume production. Genesis’ did report such wins in the third-quarter, which should boost top-line growth in the second half of calendar year 2006.
Hisense, the largest LCD TV OEM in China, chose Genesis’ proprietary Cortez and Hudson controllers for their new 32, 37 and 43-inch LCD platforms available in China’s domestic market.
Additionally, Westinghouse—one of the Company’s largest customers—selected Genesis as its primary supplier of video processing controllers in its 27 and 32 inch LCD TV’s, as well as their 37 and 42 inch ADP video monitors.
Cramer—in his BOOYAHH Way—also forget to mention several other radioactive nuggets that were easy to spot in the Company's most recent 10-Q filing:
  • · The majority of revenue—approximately 83 percent—continued to be to customers located in Asia. China represented approximately $32 million, or 43% of net revenue for the third quarter. This leaves the Company vulnerable to any political typhoons blowing through this part of the world.
    · For the three-months ended December 31, 2005, Genesis derived 25% of net revenues from just two customers. Sales to its largest five customers accounted for 49% of its revenues. Corporate, expects that a small number of customers will continue to account for a large amount of its revenues. The decision by any large customer to decrease or cease using Genesis’ products by bringing R&D in-house to internally develop its own solutions could harm Genesis’ business going forward.
    o In the third quarter, one of the Company’s largest South Korean customer decided to stop manufacturing LCD monitors for their OEM customers and instead will focus on producing monitors only under their own brand name.
    · Interest income of $1.4m contributed 4 cents to the Company’s bottom-line. Genesis is entangled in a licensing/royalty battle with Silicon Image, Inc. An amended final judgment stated that Genesis had received a license from Silicon Image, Inc. for certain of their DVI and HDMI patents, and must pay Silicon Image royalties on all of its DVI and HDMI products. This amended final judgment, if not overturned on appeal, could hinder the Company’s ability to compete with unlicensed competitors that are not required to pay royalties on competing products. [ed. note. The Company has not made provisions—set aside reserves—to meet this possible future obligation.

Management is confident that current market and product trends are temporary, and that the product mix shift will largely be complete by the end of the current fiscal fourth quarter. Corporate believes, too, that its design wins portfolio and customer penetration will allow the Company to resume its growth in the following quarter(s). If this proves to be true, a forward 12-to-24 month EPS growth rate of 20% could prove to be conservative. If so—Cramer is right—think flat-screens—buy Genesis Microchip.

Nonetheless, the 10Q Detective believes that management has another shoe to drop. We believe that management has not come totally clean on potential inventory logjams, which would dampen top-line growth. We also need to be shown that the transition to the new design wins/contracts will lift margins and the bottom-line, too. SELL.

Monday, February 06, 2006

Ricks Cabaret--Is Topless Entertainment Profitable?

Rick’s Cabaret International (RICK-$4.74) shares have surged 58% in the past four months, as investors anticipate that the launch of the new three-story Rick's Cabaret in New York City will be successful and accretive to earnings. Addressing a meeting of the FINANCIAL ANALYSTS AND MONEY MANAGERS, INC. (FAMMS) in New York City on October 6, 2006, Eric Langan, President and CEO, said the new club in midtown will be the Company's flagship establishment, and should generate about $8 million in revenue in fiscal 2006, which began on October 1, 2005.

Rick's primary business is gentlemen's clubs catering to businessmen and professionals. Rick's offers live adult entertainment plus restaurant and bar operations. Nightclub revenues are derived principally from the sale of liquor, beer, wine, food, merchandise, cover charges, membership fees, independent contractors' fees [dancers], commissions from vending and ATM machines, and valet parking.

The Company operates in the online adult entertainment space, too. Rick’s Cabaret owns an adult Internet membership Web site and a network of nine online auction sites for adult products. Internet revenues are derived from subscriptions, traffic/referral revenues, and commissions earned on the sale of products and services through Internet auction sites, and other activities.

Industry forecasters predict that adult entertainment –Internet, clubs, and media—is a $15 billion industry in the United States, and is poised to expand significantly over the next 10 years.

The Company’s strategy for growth rest on management’s belief that its nightclub operations can grow organically, coupled with careful entry into markets and demographic segments with high growth potential [such as Rick’s Cabaret-NYC]. This past October 2005, Mr. Langan also told the FAMMS group that Rick's Cabaret intends to participate in what he predicted will be the rapid consolidation of the adult nightclub industry over the next few years. He noted that so far in 2005 the company has acquired clubs in New York City and Charlotte, NC. The Company hopes to acquire additional clubs through a combination of cash and issuance of its common stock in a model similar to that of the casino industry during the past decade.

For the fiscal year ended September 30, 2005, the Company had consolidated total revenues of $14.8 million, an increase of $965K, or 8.97%, compared to the prior year. This increase in total revenues was primarily due to revenues from new nightclub operations. Revenues from nightclub operations for existing locations decreased by 0.74 percent year-over-year.

As for the case with the acquisition of the New York club, which does appear receptive to the Company’s upscale club formula, we remain skeptical that house traffic will show sequential growth in the summer months to come.

  • The NYC purchase did not come cheap. Rick’s Cabaret paid a total of $7.625 million for the assets and stock of the erstwhile Paradise club, $2.5 million in cash and $5.125 million in a promissory note bearing simple interest at the rate of 4 percent per annum, part of which is convertible to restricted shares of common stock. In addition, the Company spent approximately $2.0 million dollars on remodeling initiatives—600K more than originally anticipated. The lease on this property is $41,469 per month, with built-in rate increase of 3.0% per annum.

Corporate paid a high price for their flagship property in New York City—leveraging existing properties that the Company owned:

  • Exhibit I. Club Onyx, located on Bering Drive in Houston. In December 2004, the Company paid off the old mortgage and obtained a new one with initial balance of $1,270,000 and interest rate of 10% per annum over a 10-year term. The money received from this new note was used to finance the acquisition of the New York club.
    Exhibit II. Rick's Cabaret—North Belt Drive, Houston. In November 2004, the Company obtained a mortgage using this property as collateral. The principal balance of the new mortgage is $1,042,000, with an annual interest rate of 10% over a 10-year term. The money received from this new note was used to finance the acquisition of the New York club.
    Exhibit III. XTC nightclub—San Antonio. In November 2004, the Company obtained a mortgage using this property as collateral. The principal balance of the new mortgage is $590,000, with an annual interest rate of 10% over a 10- year term. The money received from this new note was used to finance the acquisition and renovation of the New York club.

The 10Q Detective has concerns as to whether or not Rick’s has the assets in place to participate in this strategy of continued growth through acquisitions. For the FY ended September 30, 2005, the Company could not even cover all interest charges—never mind thinking about financing new clubs. Rick’s reported a loss from continuing operations of $359K and interest expenses of approximately $700K. Long-term debt increased to $13.3 million as compared to debt of $3.7 million in the prior year. The increase was primarily due to the purchase and renovation of the New York club.

Historically, the Company’s need for capital was a result of construction or acquisition of new clubs, renovation of older clubs, and investments in technology. As of September 30, 2005, Rick’s had a deficit in working capital of approximately $2.0 million. Forty-one percent of long-term debt, or $5.4 million, comes due in full by 2007.

There is an abundance of porn on the Internet, and it is popular. According to a recent study, the number of pornography related Internet pages grew from 14 million in 1998 to roughly 260 million in 2003. Adult entertainment is estimated to be the highest grossing sector on the Internet. Online pornography, a $2.5 billion business and growing rapidly, is being driven by technology. Ironically, such now-commonplace practices as streaming video, trading files and making online purchases—all were pioneered by the adult entertainment industry.

Rick’s reported that net income from its Internet businesses was $114,500 for the year ended September 30, 2005, an increase of 28.71 % from the prior year. However, Internet business revenue fell by 0.98 % to 787K. The gain in net income was directly attributable to a drop in cost of sales, 7.55% compared to 8.77% of related revenues for last year. Corporate has implemented measures to reduce expenses in its Internet operations—such as a reduction in promotional incentives for membership subscriptions.

The Company started its online adult entertainment businesses back in 1999. One has to question why—after six years—in such a high-margin, profitable segment, corporate is not too concerned that this operating segment contributes only $0.05 to every dollar in aggregate sales.

The 10Q Detective notes that Travis Reese, who became V.P.-Director of Technology in 1999, was a pilot for four years in the mid-1990s, and has an Associates Degree in Aeronautical Science from Texas State Technical College. [ed. note. (being sarcacstic) could his strong educational background in computer sciences say anything about the Company’s real dedication to its Internet business?] In 2005, Mr. Reese earned $165K in base pay. And, he just signed a new employment agreement that provides for an annual base salary of $175,000. Must be that Texas connection....

As of December 23, 2005, Directors and executive officers and their respective affiliates collectively and beneficially owned approximately 29% of Rick’s outstanding common stock. This concentration of voting control gives insiders and their respective affiliates substantial influence over all matters. For example, the 10Q Detective unearthed these juicy tidbits buried in the Company’s latest 10-KSB filing: (1) “We provide certain executive officers certain personal benefits. Since the value of such benefits does not exceed the lesser of $50,000 or 10% of annual compensation, the amounts are omitted.” [ed note. Are $20 bills for table-dancers part of these benefits?] (2) During the year ended September 30, 2004, the Company financed the purchase of a vehicle with a note payable in the amount of $31,235. [ ed. note. You would think with the monies that corporate made that they could afford to buy their own cars?]

In our opinion, contrary to managements’ claim, Rick’s upscale, adult club formula is not a proven, competitive killer application. Aside from—self-generated—media exposure, the Company has few visible earning’s drivers, and we would recommend spending your “tipping” dollars elsewhere.

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.