08/12/2007
VOLUME 312
Companies featured in the current edition of the newsletter: ACCP, ARGA, AXMP, BSGC, CYTR, DOC, ENZ, GSHF, HSOA, HYTM, ILNS, JMAR, PBIO, PLKH, TAGS, TKO, USAT, VOII, VQPH
It was a wild week for stocks as soaring volatility and hedge funds liquidations whipsawed stocks in manic trading. When it was all done, all of the major indexes closed higher for the week. The Dow closed up 58 points for the week, holding on to annual gains of 6.2%. Similarly, the Nasdaq rose 34 points for the week, resulting in year-to-date gains of 5.4%. The S&P gained 21 points and is now up 2.5% for the year. Small-cap stocks were the best performers the past week with an impressive 33 point, or 4.4%, advance by the Russell 2000 which is now back out of the red for the year and is up 0.1%.
The market started the week on a bullish note ahead of the Federal Reserve’s policy meeting and the central bank kept the key Fed Funds Rate unchanged at 5.25% citing that inflation still remains its primary concern and not the current weakness in the credit and housing markets. However, investor sentiment sharply swung into the bearish camp on Thursday after French bank BNP Paribas announced that it had frozen 3 hedge funds that invested in sub-prime mortgages as it became impossible to properly value their assets due to lack of liquidity. The announcement quickly confirmed that the previously announced problems with two Bear Stearns hedge funds were not isolated incidents. Word that a fund at Goldman Sachs was liquidating a hedge fund created further uncertainty. By week’s end, central banks around the world (Europe, Japan, and U.S.) injected billions of dollars into the markets in the form of additional overnight loans to banks. While such coordinated efforts initially unnerved investors early Friday, the markets were able to recover by the close as the Fed said it is providing liquidity to smooth markets. Speculation has also increased that the Fed will reduce its key lending rate by 25 points at the September meeting, as futures suggest there is a 75% possibility of such an event occurring. But, while the current credit situation remains uncertain, volatile trading in the equity markets is likely to persist.
How volatile was trading last week? The VIX, or Volatility Index, reached its highest level since September 11th, helped by hedge fund liquidations that contributed to wild gyrations in small stocks. For example, or Thursday, the worst day of the week for small stocks, the 30 stocks in the Russell 2000 with the largest percentage of short interest (all small-caps) were up 0.3%, while the rest of the market was down nearly 3%. In addition, many of the stocks in the Russell Microcap Index posted outsized gains, likely due in part to short-covering. According to published reports, several quant funds who were short small stocks were forced to liquidate positions, causing many of these stocks to surge significantly.
What should investors look for? As earnings season concludes, earnings reports for the week include food conglomerate Sysco Corporation (NYSE: SYY) on Monday before the bell followed by DTE Energy (NYSE: DTE) after the close. On Tuesday, Home Depot (NYSE: HD) and WalMart (NYSE: WMT) will announce earnings prior to the open, while Applied Materials (NYSE: AMAT) and Agilent Technologies (NYSE: A) will do so after the close. On Wednesday, Deere (NYSE: DE) will release its earnings in the morning, followed by Salesforce.com (NYSE CRM) after the bell. Thursday will wrap up the current earning season with retailers Big Lots (NYSE: BIG) and J.C. Penney reporting numbers before the open and technology heavyweights Computer Sciences (NYSE: CSC) and Hewlett-Packard (NYSE: HPQ) as well as additional retailers Kohl’s (NYSE: KSS) and Nordstrom (NYSE: JWN) announcing earnings after the close.
The coming week brings a number of important releases of July economic indicators including Retail Sales on Monday, PPI on Tuesday, CPI and Industrial Production on Wednesday, and July Housing Starts on Thursday. Retail sales for July are forecast to gain modestly, while PPI, measuring wholesale inflation, is expected to look mild for the month and CPI is pegged to remain flat. Housing starts and building permits may have slipped further in July. In addition, there will be lesser reports on June Business Inventories on Monday, U.S. Trade Balance for June on Tuesday, and the August NY Empire State Manufacturing Index and Industrial and Capacity Utilization for July on Wednesday. On Thursday, the Philadelphia Fed’s Manufacturing Index for August along with Weekly Jobless Claims. Concluding the week will be the preliminary August reading of University of Michigan Consumer Sentiment Index on Friday.
The conference schedule for the week includes Keefe, Bruyette & Woods, Inc. hosting its two -day Large Cap Bank Conference starting on Monday in Wisconsin. On Tuesday Credit Suisse will start its three-day Communications Conference in Boston.
Home Solutions of America, Inc. (NASDAQ: HSOA), a provider of recovery, restoration and rebuilding/remodeling services to commercial and residential areas, reported second quarter financial results for the period ended June 30, 2007 last week. What we liked: 1) Revenue of $51 million, for the first time since the company has provided guidance, significantly exceeded the top end of its revenue range ($44-48 million) and analysts’ estimates, suggesting that the transition to a construction services model is providing a much more predictable stream of revenue than previously; 2) EPS of $0.15 was within the range of its guidance, but actually would have been nearly 2 cents higher except that the company had expenses for legal services related to expanded transaction work and compliance fees and costs for implementing an ERP System totaling $720,000; 3) Agreement in Principle to settle the $21.65 million Seller Note in connection with acquisition of Fireline should improve balance sheet, but more significantly boost cash flow. We doubt that Brian Marshall, the company’s EVP and the holder of the Note, would have agreed to allow the company to receive half of the first $14 million in proceeds before his Note was settled unless he had a high level of confidence that the FIGA receivable would be sufficient to cover his Note as well as payments to the company. The agreement is subject to approval by HSOA’s lenders. 4) Gross margins remained strong, coming in at 46.6%, less than 1 point below the 2006 second quarter, despite the transition to a construction services model. Investments in a much needed ERP system should allow improved reporting and increase investor confidence in management. What concerned us: 1) The company provided little insight into the New York and Tampa projects other than to reiterate its confidence in the two projects and to say it would hold a conference call to discuss them later this quarter; 2) Although the company clearly was in a position to provide specific Q3 guidance, it instead chose to disclose backlog ($332 million/$80 million in ’07) and operating margins rather than revenue. It did say that historically the second half of the year was much stronger than the first half. 3) The company used $12 million in cash flow from operations, and DSO’s increased to 105 days. However, companies growing rapidly can consume cash during high growth periods, and the company’s revenue increased by approximately $12 million on a sequential basis increasing working capital requirements. The company did say that the majority of receivables over 90 days were related to New Orleans and were with government entities and insurance companies. It said that it is now seeing indications that these receivables are starting to be paid. Both analysts who cover the company reiterated their Outperform/Buy Ratings last week, price targets of $9 and $9.50 respectively and full-year EPS estimates of $0.60/$0.61. We believe the filing of the 10-Q, expected this week, should alleviate investor concerns and receipt of proceeds from the FIGA receivable and additional disclosure on the NY and Tampa projects, both expected this quarter, could serve as catalysts for the stock. We would challenge investors to find many companies growing EPS organically at more than 35% that trade for just 9 times current year earnings. As the company discloses additional details on these two key projects, it could lead to multiple expansion. Shares ended the week at $5.29, down 11 cents.
Volume Alert: Shares of Hythiam, Inc. (NASDAQ: HYTM), a provider of comprehensive behavioral health management services, jumped 12% on six times average volume last week. The company reported solid results for the second quarter ended June 30th, which included record quarterly revenues from PROMETA and a full quarter of CompCare operations and handily topped analysts’ estimates. Overall, total revenue reached $11.3 million which consisted of a record $2.2 million from PROMETA and $9.1 million from CompCare’s operations. The company continues to see top-line growth from increases in the number of patients treated at its U.S. licensed sites and at the PROMETA Centers, administrative fees from new licensees and revenues from the commencement of operations in Europe. There were a total of 249 patients treated with the PROMETA treatment program in the second quarter of 2007 compared to 175 patients in the second quarter 2006, and 155 patients in the first quarter of 2007. During the second quarter of 2007, there were 42 licensee sites contributing to revenues versus 20 in the same period last year. Based on second quarter growth initiatives, the impact of double blind placebo controlled data, and the expected Managed Care and Government Affairs revenues coming on stream in the second half of 2007, Hythiam reiterated its previously provided consolidated revenue objective for fiscal 2007 of approximately $50 million, including the consolidation of financials from the acquisition of a majority controlling interest in CompCare. After the results, Emerging Growth Equities upgraded the stock to Buyfrom Neutral, raising its price target to $16 noting that the company had demonstrated a path to profitability and that it was encouraged by the breadth of progress across the public, private and managed care fronts. The stock ended the week at $8.09, an increase of $0.87.
Volume Alert: Shares of Enzo Biochem, Inc. (NYSE:ENZ), a company engaged in the research, development and manufacture of innovative health care products, jumped 28% on more than four times average volume after a U.S District Court issued Enzo a favorable ruling on a motion in its patent-infringement lawsuit against Applera Corporation. Enzo is claiming infringement by Applera’s sequencing products and systems, including its TaqMan genotyping and gene expression assays, and the gene expression microarrays used with its Expression Array Systems. Shares may also have received a boost from the liquidation by quant funds of short positions in the stock. Shares ended the week at $16.00, up $3.46.
CytRx Corporation (NASDAQ: CYTR), a biopharmaceutical research and development company, reported second quarter financial results last week. Revenue for the three months ended June 30, 2007 was $2.4 million and consisted primarily of service revenue recognized from CytRx’s 2006 royalty transaction with the ALS Charitable Remainder Trust. CytRx will continue to recognize the balance of the deferred revenue recorded from the royalty transaction with the ALS Charitable Remainder Trust on a dollar-for-dollar basis for ALS-related research expenses incurred. The company continues to make progress towards initiating a Phase IIb clinical trial with its lead molecular chaperone drug candidate arimoclomol in ALS later this year and now has clinical data believed to support administering arimoclomol at a higher dose level than used in the Phase IIa trial and open-label extension. Based on favorable clinical and preclinical results, CYTR also intends to begin two additional Phase II clinical trials in the first half of 2008, one with arimoclomol in stroke recovery and a second with its drug candidate iroxanadine for the therapeutic treatment of diabetic foot ulcers. The stock ended the week at $3.85, up an impressive 27%, or 82 cents.
Earnings Preview: Pressure BioSciences, Inc. (NASDAQ: PBIO), a company focused on the development of a novel, enabling technology called Pressure Cycling Technology, will host a teleconference on Tuesday after the market closes to discuss its second quarter 2007 financial results for the period ended June 30, 2007 and to provide a business update. Previously, the company said that by the end of the second quarter it would increase its sales force by 400%, which should help increase sales. Investors should pay close attention to similar comments and see if revenues continue to increase from the $132,000 reported for the first quarter of the year. Additionally, it appears that there exists significant interest in PBIO’s new Barocycler NEP2320, which is a smaller, more compact version of its existing Barocycler instrument. The company believes that there may be a niche in genomics and proteomics research laboratories for a Barocycler instrument with a lower sample throughput and a lower price, but with many of the technical capabilities of the higher throughput Barocycler NEP3229. Shares ended the week at $3.84, down 42 cents.
Volume Alert: Shares of USA Technologies, Inc. (NASDAQ: USAT), a developer of cashless vending and energy management products, continue to gain momentum and rose another 23% on heavy volume after the company and MasterCard Worldwide expanded the MasterCard PayPass rollout to an additional 7,500 Coca-Cola Enterprises vending machines nationwide. This deployment not only gives consumers more payment options at vending machines, but also helps vending machine operators improve efficiency by allowing companies to monitor and manage their vending machines online. This announcement comes after Coca-Cola Enterprises, the world’s largest non-alcoholic beverage bottler, entered into a three-year supply and licensing agreement with USAT. Additional deployments could follow in the future. Shares ended the week at $10.18, up $1.80.
Earnings Preview: Tarrant Apparel Group (NASDAQ: TAGS), an innovative design and sourcing company for private label and private brand casual apparel, will report its second quarter results for the period ended June 30, 2007 on Monday, August 13th before the market opens. Although net sales fell 8.4% to $56.1 million last quarter, the company provided full-year revenue guidance of $230 – $240 million, signaling that it expected an increase in sales during the remaining quarters. The company will also host a conference call and audio webcast at 2 pm EST on Monday to discuss the results and outlook for 2007. Investors should pay attention to what management says regarding implementing greater efficiency in sourcing in order to further improve gross margins (22% for the first quarter of the year) as well as expanding sales at the company’s Private Label to existing customers. The stock rose 12 cents last week to close at $1.28.
Auriga Laboratories, Inc. (OTCBB: ARGA), a specialty pharmaceutical company with products for the treatment of acute respiratory diseases and dermatological conditions, reported strong financial results for its second quarter ended June 30, 2007. The company generated record second quarter gross revenue of $7.2 million, an increase of 1170% from the same period a year earlier, as a result of a growing product line being sold by a rapidly expanding national sales force, and strong sales of the Extendryl and Levall product lines. The second quarter is seasonally a slower period for Auriga. The company also issued an upbeat business outlook for the remainder of this year, raising its full-year gross revenue guidance from $29 million to a range of $30-$33 million which compares to gross revenue of $7.4 million for the company’s first full year of operations in 2006. Shares ended the week at $0.93, down 6 cents.
The August issue of the scientific publication Nature has an article on the growing interest in platinum compounds, and mentions Access Pharmaceuticals, Inc.’s (OTCBB: ACCP) ProLindac. ProLindac is the company’s lead oncology drug, which is in phase 2 clinical development. It is a therapeutic that utilizes a safe, water-soluble nanoparticulate system to deliver DACH platinum (the active moiety of oxaliplatin) to tumors. Platinum-based drugs are among the largest classes of chemotherapeutics and oxaliplatin (Eloxatin; Sanofi-Aventis) is a DACH platinum drug that is projected to have had worldwide sales of over $2 billion in 2006. Shares ended the week at $3.69, down 11 cents.
Intellect Neurosciences, Inc. (OTCBB: ILNS), a biopharmaceutical company focused on development of disease-modifying therapeutic agents for the treatment and prevention of Alzheimer’s disease and related disorders, entered into an agreement with Medical Research Council Technology (MRCT) of U.K. to humanize two monoclonal antibodies ILNS is developing for the treatment of Alzheimer’s Disease. The antibodies are intended as a form of passive immunization to promote clearance from the brain of the endogenous soluble Alzheimer’s toxin, beta-amyloid, where it accumulates and causes devastating damage to victims of the disease. Humanization is an essential step in making antibodies safe for use in humans. This step marks an important milestone in the development of ILNS’s antibodies as the company believes that these compounds reduce the risk of triggering adverse reactions because of their specificity. Under the terms of the agreement, Intellect will pay MRCT milestone payments related to the development and commercialization of the humanized antibodies and a royalty based on sales of the resulting drug products. Shares ended the week at $1.40, down 40 cents.
ProLink Holdings Corp., (OTCBB: PLKH), the world’s largest provider of Global Positioning System golf course management systems and on-course advertising, added another leading golf course to its list of customers when it announced that Dodge Point Country Club in Mineral Point, Wisconsin now features the ProLink Solutions GPS system and plans to participate in ProLink’s exclusive national advertising opportunity. Dodge Point joins popular state neighbors including Northern Bay Golf Club, Bridges Golf Course, and the Bull at Pinehurst Farms in providing its guests the benefits of the ProLink system. Shares ended the week at $1.09, down 11 cents.
VoIP, Inc. (OTCBB: VOII), a leading provider of Voice over Internet Protocol (VoIP) communications solutions for service providers, resellers and consumers, is starting to reap the benefits from the investments it has been making in building its Network. The company reported monthly revenue of $852,000 for July 2007 which represents a 59% increase sequentially over June 2007 and a greater than 100% increase over a comparable period a year ago. Due to recent enhancements to its Network and rapidly growing traffic the company also reported a 47% increase in total termination minutes of use and a 15% increase in the average price per minute charged to its customers. The company expects usage to grow even further in August 2007 and according to management VOII is close to reaching cash-flow break-even. Shares ended the week unchanged at $0.04.
Biopharmaceutical company VioQuest Pharmaceuticals, Inc. (OTCBB: VQPH), reported its financial results for the quarter ended June 30, 2007. While the company still does not generate any revenues, loss from operations widened to $2.1 million from $1.4 million a year ago as a result of R&D expenses almost tripling to $950,000. Furthermore, the company announced that it is continuing development of Lenocta in the treatment of leishmaniasis and anticipates filing a new drug application, or NDA, with the FDA in the second half of 2007. Also, in the second half of 2007, VQPH expects to complete patient enrollment in its own Phase I clinical trials of Lenocta and expects to initiate Phase II clinical trials of this antimonial drug. The company also expects to initiate Phase II clinical trials of Xyfid, which is a topical, adjunctive therapy which has shown early clinical promise in the treatment and prevention of Hand-Foot Syndrome, or HFS, a common, often dose-limiting and potentially life-threatening complication of several drug regimens, commonly used in the treatment of patients with breast, colon, and other cancers. Shares lost 9 cents last week, closing at $0.40.
JMAR Technologies, Inc. (OTCBB: JMAR), a leading developer of advanced laser, high resolution imaging and photonics technologies, last week issued a letter to shareholders from its CEO, C. Neil Beer, PhD. This letter outlined JMAR’s transition from a pure government R&D operation to the development of advanced technologies for commercial markets. Additionally, it was disclosed that the company is being reorganized so that its technology projects function as individual cost centers, as opposed to the existing model of segmenting the company by Divisions. This vertical structure will allow JMAR to move forward quickly in identifying technology licensing, acquisition and spin-off opportunities, as well as seeking strategic partners for joint ventures of mature technology products. The letter concluded by saying that JMAR is following an outlined five-year strategy which shows the company achieving profitability by the end of next year. The stock closed at $0.15, down one penny for the week.
AXM Pharma, Inc. (OTC: AXMP), a manufacturer of proprietary and generic pharmaceutical and nutraceutical products for the Chinese and other Asian markets, entered into an agreement with Beida Wei Ming Bioproduct Co. and will receive a $2.65 million investment through a convertible debt offering. The company has already received the first $200,000 tranche, and will receive additional payments upon achieving certain milestones. The funding is convertible into common stock at the investor’s election at $1.25 per share, a significant premium to the current stock price. Proceeds from this financing will allow AXM to invest in its pharmaceutical business to support growth and to make the necessary filings for a Bulletin Board listing. The stock closed at $0.15, an increase of 2 cents for the week.
BigString Corporation (OTCBB: BSGC), a provider of user-controllable email services, unveiled its new Three Layer Secure Email feature free to all users. This latest addition to BigString’s suite of unique email functionalities will enable users to send secure, encrypted, password-protected emails for correspondence that requires the utmost in email security. The Three Layer Secure Email is especially useful to professional services companies and consumers who regularly send content with proprietary or confidential information. It also enables businesses to enhance security for their clients by providing an extremely secure means in which to send and receive sensitive information to them with the expediency of the Web. Shares declined 2 cents last week, closing at $0.18.
On the Wires: Calypte Biomedical Corporation (OTCBB: CBMC), a manufacturer of medical diagnostic tests for the rapid detection of antibodies to the human immunodeficiency virus (HIV), appointed J. Daniel Clark as Vice President Sales and Marketing. Clark’s background includes over 35 years in general management and sales and marketing in the health care industry, with an emphasis on technology licensing and international distribution. CytRx Corporation (NASDAQ: CYTR), last week had two key executives represent its majority-owned subsidiary, RXi Pharmaceuticals Corporation, at IBC’s 12th Annual Drug Discovery & Development of Innovative Therapeutics World Congress in Boston. RXi’s President and CEO, Tod Woolf, Ph.D., chaired an RNAi technology workshop. Meanwhile, RXi’s co-founder, Scientific Advisory Board Chairman and Nobel Laureate, Craig Mello, Ph.D., delivered the keynote address on RNAi. GreenShift Corporation (OTCBB: GSHF), a company devoted to facilitating the efficient use of natural resources, will amend its financial statements for the year ended December 31, 2006 and the quarter ended March 31, 2007 in order to reflect debt instruments that were a liability of GS Carbon, whose financial statements are consolidated with the financial statements of GreenShift.
SPECIAL SITUATIONS:
Telkonet Inc. (AMEX: TKO) $1.80
Many times it will take a company with disruptive technology longer and more money than investors anticipate. Sometimes so long, that they end up in Wall Street’s discard pile, forgotten by the investment community. Sometimes these companies turn out to be bargains, as it often takes investors who have given up on their potential time to realize that the business has turned around. Such could be the case with Telkonet Inc., a developer of powerline communications (PLC) technology that enables broadband Internet access using a building’s internal electrical wiring. After a string of disappointments, the company reported its strongest quarter in memory, as revenue for the second quarter ended June 30, 2007 more than tripled to $3.7 million compared to $1.2 million in the 2006 second quarter. Gross profit also rose by a similar amount.
The company provides several technologies targeted at the hospitality industry, but the one that caused the surge in second quarter revenue was the SmartEnergy product, which allows customers, such as large hotels, the ability to maximize their energy uses by using intelligent programmable thermostats to adjust and maintain a room’s temperature. As a result, wasted energy from heating and cooling unoccupied rooms can be avoided as the SmartSytem Setback constantly varies each room’s temperature, guaranteeing that desired temperature will be achieved for any guest within minutes upon return to their room. Lights, using sensors, are turned off when the room is not in use. Energy consumption is reduced by up to 30% with this system which is a huge value-added in today’s volatile, high-priced energy market. Babson College recently selected SmartEnergy to manage the in-room energy consumption in one of its dormitories by eliminating wasted energy from heating and cooling unoccupied rooms.
Telkonet custom-designs and develops all of its products and services, an attractive feature that enables the company to offer unique solutions to customers based on their specific needs. TKO’s robust technology focuses on delivering high-speed transmission of secure voice, video and data communications over electrical wiring that is found in-premise for any building. This is done through the company’s trademarked Telkonet iWire System that taps into a building’s existing internal electrical wiring to establish Internet connectivity throughout an entire building. Telkonet iWire System offers a cost-efficient, reliable solution for properties not wired with CAT-5 or for those properties where such wiring is too expensive to install. There are thousands of hotels and properties that can’t afford the expense of installing expensive wiring throughout the property. Through TKO’s technology, they can offer state-of-the-art communications without a large capital outlay.
The targeted market for Telkonet’s products and services is vast and consists of the hospitality, multi-dwelling unit, multi-tenant unit, residential and small business markets. Well known customers including Choice Hotels International, Destination Hotels, Marcus Hotels & Resorts, Sandman Hotels, Inns & Suites, the U.S. Department of Defense, Trump apartment and condominium properties, all have deployed the company’s leading-edge technology.
The acquisitions of EthoStream and Smart Systems International allowed the company to expand its product portfolio to further diversify itself from competitors who rely on outsourcing for product development. TKO recognized the importance of EthoStream’s comprehensive management platform that is backed by a dedicated in-house customer and technical support team that has a customer base of over 1900 hotel and time-share properties. As a result, the company can offer a complete line of product offerings including wireless access points and bridges, Power-over-Ethernet devices, Ethernet switches, DSL equipment and digital video recorder equipment to a large audience. Property owners using Telkonet’s technology can remotely monitor and manage their high-speed Internet access system in real time to determine that their guests are receiving high quality, reliable service. The number of users on the Internet can be viewed in addition to monitoring the amount of bandwidth being consumed. Support calls can also be tracked by management to ensure employees are providing a quality customer experience, which is crucial to the viability for any company in the hospitality industry.
Other unique qualities found in the TKO system include E-Secure, an efficient, manageable digital video security solution that provides a new level of service for property security. Such a system has the capability to display and record from 1 to 16 cameras simultaneously, providing managers with rapid and easy access to their videos and recordings. With Internet use on the rise in today’s high technological world, alternative wiring options that are high quality and cost-effective are a must in the residential market as well as the commercial segment. Recently Telkonet signed a deal with 1-800-905-GEEK to penetrate the small business and residential market to bring together their family of broadband networking and energy management products to such customers.
As a result of the company taking longer than anticipated to ramp revenue, the stock has been a disappointment, creating the opportunity for risk-oriented investors. Shares that fetched more than $5 in late October, currently trade for just $1.80, giving the company a valuation of just $120 million. Recently, it implemented a program to perform nearly all of its installations in-house, virtually eliminating the need for outside contractors, which should result in higher margins and meaningful cost savings. The company said last week that it expected profitability by year-end. It also said that its energy management business should grow over the coming quarters as both electric utilities and building owners seek additional ways to conserve energy. Finally, its federal government-related programs are now well underway and are accelerating and its hospitality business is winning important contracts. Since the company appears to be heading down the right path, long-overdue rewards could be heading for shareholders.
Digital Angel Corporation (AMEX: DOC) $1.51
Over the years many astute investors have credited two simple rules for their success: first, they would look for rapidly growing market segments and then they would search for the leading company in these segments. Well, one such rapidly growing market segment today is identification and tracking of high-value mobile assets. And the leading company in this segment is Digital Angel Corporation. Even though some investors may be hearing this name for the first time, Digital Angel has been around since the 1940’s when it first started selling visual ear tags to help ranchers keep track of their livestock. However, the company came a long way from its simple beginnings as it was quick to recognize how to use newly available technologies to obtain and maintain a competitive edge. And that’s where implantable Radio Frequency Identification, or RFID, microchips come into the story. Today, Digital Angel is a leader in the development, manufacturing and marketing of these tiny implantable chips used with livestock and companion pets.
Additionally, the company has a UK-based Emergency Search and Rescue division, Signature Industries, which is a leading developer and manufacturer of search and rescue beacons (SARBE) for the military, commercial, and recreational maritime and aviation markets. Its products are utilized by military forces in over 40 countries throughout the world. In 2006, Signature received a development contract with the U.S. Air Force, which will allow it to break into the important U.S. military market, the largest in the world. Signature’s recent acquisition of McMurdo Marine Electronics has expanded its military GPS capabilities to the commercial and recreational maritime and aviation markets where it is a world leader in EPIRB, or emergency position-indicating rescue beacon technologies.
Digital Angel Corporation is a leading supplier of visual and electronic solutions for identifying and tracking pets, livestock, fish, and wildlife. The company’s patented rice grain size implantable microchips coupled with its compact readers provide a secure and reliable means of pet identification. Over 1 million pets in the U.S. and over 10 million in Europe are currently protected by these products. The company expects to sell approximately 4 million companion pet microchips, sold exclusively through Schering Plough under the HomeAgain brand in the U.S, this year. That is more than double the amount sold in 2006.
The company’s family of visual and RFID ear tags, tag readers and software marketed under the highly regarded Destron Fearing brand provide accurate, economical solutions for identifying and tracking livestock through all stages of their life cycle. These products are well positioned to satisfying the growing need for increased accuracy and timeless of tracking information worldwide. Recently the company expanded into the lucrative South American markets, including Argentina and Brazil.
Perhaps the most intriguing part of Digital Angel’s story is that the company is rapidly growing and is well positioned to continue such growth in the future. Just last week, Digital Angel reported that it generated record revenues of $19.5 million during the second quarter of 2007, an increase of 57% from a comparable quarter in 2006. For the full year, the company expects revenues between $73 and $78 million, based primarily on growth in its companion pet identification business, livestock tagging business and SARBE business.
Another catalyst as to why now may be the perfect time for investors to consider adding Digital Angel to their portfolios has to do with a major corporate development that was also announced just last week. In the past, Digital Angel was majority owned by Applied Digital (NASDAQ: ADSX) which held a 55% interest in the company. Such ownership overhang may have discouraged investors from buying shares due to the control of a large shareholder, whose plans for the company were uncertain. Last week, it was announced that Applied Digital, will acquire the remaining 45% stake in the company at a 21% premium to the current market price. The combination of the companies will create the world’s premier innovator and leading provider of identification, location and wellness monitoring systems for people and animals. Such a merger will accomplish several key initiatives. First, it will result in immediate savings of over $2 million in combined corporate overhead. Additionally, it will strengthen the combined entity’s balance sheet and allow for internal financing of emerging growth opportunities. And finally, it will create a conglomerate-like business that will be able to focus on the most attractive opportunities while shedding non-core operations. In addition, DOC appointed an interim CEO, with plans to hire a permanent CEO shortly.
With Digital Angel’s new Bio-Thermo chip for companion pets and livestock, the increased demand for a U.S. nationally-mandated livestock traceability program and the increased demand worldwide for its SARBE search and rescue beacons, prospects for the company appear much more promising than reflected by the company’s share price, which is just 25% of the level the stock traded for less than two years ago. With a new management team and corporate structure, the company’s potential could be unlocked for shareholders.
