06/10/2007
VOLUME 303
Companies featured in the current edition of the newsletter: ARGA, CHIP, ENZ, GSHF, HSOA, HYTM, ITUI, PBIO, PLKH, RTK, TAGS
Interest rate fears reared their ugly head last week, causing stocks to sell off sharply before regaining some lost ground on Friday. All of the major indices posted large declines. The Dow lost 243 points, reducing its annual gain to 7.7%. The Nasdaq declined 40 points, lowering its annual gain to 6.5%. The S&P shed 28 points for the week, equating year-to-date gains to 6.3%. The Russell lost 18 points, lowering its yearly gain to 6%.
The sell-off that started on Monday as a result of weakness in the Chinese stock market gathered strength after investors received more evidence that the Federal Reserve might be less willing to cut short-term interest rates. Further complicating matters is that the economic data released continues to point to conflicting signs about the strength of the U.S. economy. April U.S. factory orders came in at a weaker-than- expected 0.3% versus expectations of 0.6%, but applications for unemployment benefits fell last week, indicating a strong labor market. Rising gas prices that affected spending further hampered consumers, as indicated by the mixed sales reports from retailers for the month of May and by weak consumer confidence that reached a 10-month low last week. Further depressing market sentiment was the rise in the 10-year Treasury note above 5 percent that makes a rate-cut in the near-future even less unlikely.
What should investors look for this week? Small cap stocks could be impacted by the posting tomorrow after the market’s close of the list of companies included and excluded from the Russell indexes, which are scheduled to be newly reconstituted on June 22nd. Three of the largest Wall Street brokerage firms will also release their quarterly profits as Lehman Brothers (NYSE: LEH) will announce results on Tuesday morning, followed two days later by Goldman Sachs (NYSE: GS) and Bear Stearns (NYSE: BSC) reporting results on Thursday prior to the opening. Adobe Systems will release earnings after the close on Thursday. Loews Corp. (NYSE: LTR) will host investors on Thursday.
The conference schedule will be busy for the week. Beginning Monday, Bear Sterns hosts its two-day 18th Annual Technology, Communications & Internet Conference in New York. Goldman Sachs holds its four-day 28th Annual Global Healthcare Conference in California beginning Monday. JP Morgan sponsors its two-day Basics & Industrials Conference starting Monday in New York. Beginning Tuesday, Morgan Stanley hosts its three-day Small Cap Executive Conference in New York. Needham & Company begins its three-day 6th Annual Biotechnology & Medical Technology Conference on Wednesday in New York.
Investors will be most focused this week on inflation, as key economic reports are released. On Tuesday, the May Treasury Budget will be reported. Before the opening on Wednesday, May Import/Export Prices will be released along with May Retail Sales. At 10:00 a.m., April Business Inventories will be announced, followed by Weekly Crude Inventories shortly afterwards. The Fed’s Beige Book will be released later that afternoon. Thursday morning, the Producer Price Index for May will be posted along with Weekly Jobless Claims. Friday morning, the widely followed Consumer Price Index for May will be released before the opening, along with a number of releases including Q1 Current Account, the June NY Empire State Index, May Industrial Production and Capacity Utilization and April Net Foreign Purchases. Shortly after the opening bell, the June Michigan Sentiment will be reported. The markets are also likely to react to comments from Fed officials including Cleveland Fed President Pianalto and Chicago Fed President Moskow who will be speaking on Monday.
Not surprisingly, after shares of Home Solutions of America, Inc. (NASDAQ: HSOA), a provider of restoration, construction and interior services to commercial and residential customers, reached their highest level since June, 2006, short sellers began their campaign to smear the company. Let’s recap. First, it started out with a web blog stating that the company did not even have the two $100 million contracts it previously announced. The blog also tried to imply that SD Consulting, the parent company of Blue Diamond, which is a joint venture partner with Home Solutions on the New York project, is owned by David Goldwasser, an individual convicted of mortgage fraud and that it was unlikely he would have the resources to pay on the contract. However, if one looks closely at the New York State filing, Goldwasser does not own SD Consulting, but was merely an agent to receive service (it is similar to somebody receiving your mail when you are out of town). There is no evidence that Goldwasser has any relationship with HSOA, or ownership of Blue Diamond. The way we believe the deal may have been put together was that Blue Diamond had a relationship with the owner of the properties which are part of the deal, and brought Fireline, HSOA’s subsidiary in to partner on the work as Blue Diamond appears relatively small. HSOA also said in a press release during the week that it would likely announce shortly the role of a development partner for the project that “may be one of the largest multinational construction and engineering services companies in the world.” Large companies like these could provide bonding on the project. Yet, two days later, in a negative article written by a reporter at the street.com (yes, the same one who was bearish on the stock when it was approximately $4.75), he was apparently able to confirm two of the New York projects that the company was working on (so much for the other blog’s claim that the contract was fraudulent). We visited one of the projects mentioned in his article this weekend, located at 142 North 6th St. in Brooklyn and found there was drilling equipment on site and work clearly had been in progress. Either the writer never bothered to visit the site, or omitted that “detail”. While work on the other two New York properties has not commenced yet, Home Solutions said it only expects to generate approximately $12 million in revenue this year from the work. With one of the three projects apparently already underway, ahead of when the company said it expected work to start (Q3), this estimate appears reasonable to us, if not conservative. Finally, the blog implies that somebody at Blue Diamond/SD received S8 stock, when the language in the company’s regulatory filing states that the S8 covers “shares issuable under the Home Solutions of America, Inc. 1998 Stock Option Plan and the Home Solutions of America, Inc. 2001 Stock Plan.” Short sellers would also want you to believe that the Tampa contract, also worth approximately $100 million, does not exist. However, if the developer is seeking tax breaks, as the company’s press release implies, it would not want to announce ground breaking or any other development activities publicly so as not to compromise his ability to negotiate further tax concessions. Again, the company has said it only expects $10 million in work this year from the project, so work would not even have to begin until the fourth quarter to meet that target. We believe that at current valuations the stock provides a compelling investment opportunity. Apparently, Matrix USA, LLC agrees with us, as the New York-based brokerage firm, which has been accurate in many of its ratings calls on the stock, upgraded HSOA on Wednesday on the stock’s weakness, in a move that received little notice, to a Strong Buy rating. While it is highly probable that short sellers will continue to attempt to distract investors from focusing on the growing backlog of predictable revenue the company is generating through a campaign of misinformation (we hear they could next try and smear the company through comments supposedly made by anonymous former Fireline employees), we urge investors to focus on the fundamentals, which appear to be strong. Trading for just 10 times the ’07 analyst EPS estimate, the stock has a very attractive P/E multiple relative to forecasted earnings growth. Shares ended the week at $6.21, down $1.78.
Earnings Preview: Enzo Biochem, Inc. (NYSE: ENZ), a company engaged in the research, development and manufacture of innovative health care products, will hold a conference call to discuss its fiscal 2007 third quarter results for the period ended April 30, 2007 on Tuesday, June 12, 2007, at 8:30 a.m. Top-line growth should continue to rise, mainly due to higher sales at Enzo Clinical Labs as it continues to benefit from its strong relationships with Aetna and United Healthcare/Oxford. Commentary pertaining to R&D activity at Enzo Therapeutics, combined with updates regarding competitive pressures and legal costs for the Life Sciences division should be monitored. Separately, the company announced last week that its subsidiary, Enzo Life Sciences, Inc., has completed the acquisition of Axxora Life Sciences, Inc., and has begun the process of combining the two entities. The acquisition is expected to expand the company’s marketing and product development capabilities both in the U.S. and abroad. The company is likely to discuss the acquisition in greater detail on the call. Shares ended the week at $15.27, down $1.00.
New 52-week high: VeriChip Corporation (NASDAQ: CHIP), a leading provider of identification and security technology, reached a new all-time high of $9.75 before giving up ground, after the company announced its Xmark Corporation subsidiary had sold two of its hospital asset/staff location and identification systems for a total value of more than $400,000. With the market for RFID systems in the healthcare industry expected to grow from $90 million in 2006, to over $2.1 billion by 2016, VeriChip’s investment in the research and development of its hospital asset/staff location and identification system will help the company take advantage of this very lucrative opportunity for years to come. Shares ended the week at $8.22, down 45 cents.
Healthcare services company Hythiam, Inc. (NASDAQ: HYTM) said last week it received patents from the People’s Republic of China Patent Office, and the Korean Intellectual Property Office for the use of a composition of matter for the treatment of alcoholism and cocaine dependence. Hythiam has now received notifications of allowance or grants of patents for inventions underlying its PROMETA protocols from over 28 countries, including some of the most populous industrial nations, further strengthening its already impressive IP portfolio. The company also announced that it has been ranked in FORBES.com’s list of the “100 Most Trustworthy American Companies,” a first-time list of 100 American companies that showed the highest degree of accounting transparency and fair dealing to share-holders during 2006. Shares ended the week at $7.66, down 36 cents.
Pressure BioSciences, Inc. (NASDAQ: PBIO), a developer of enabling technology called Pressure Cycling Technology (PCT) for sample preparation and other life sciences applications, reported at its poster presentation at the American Society of Mass Spectrometry Conference on Mass Spectrometry being held last week in Indianapolis, Indiana, that it has developed a novel, potentially revolutionary method for the safe, rapid, efficient, and reproducible extraction of proteins from lipid-rich tissue, using the company’s PCT technology with certain organic solvents. This detergent-free method may offer valuable advantages to the thousands of researchers studying type II diabetes, obesity, certain cancers, ALS, other serious disorders, where current detergent-based methods can generate highly variable results, increasing cost and time for extraction and compromising the quality and quantity of the recovered proteins. An estimated 300,000 researchers working in 85,000 academic, government and industrial laboratories worldwide present a lucrative opportunity for the company. Shares ended the week at $4.74, up 7 cents.
Rentech, Inc. (AMEX: RTK), a developer of technologies that transform under-utilized energy resources into valuable and clean alternative fuels, said last week it has received an approval of inducement for up to $2.75 billion of tax-exempt and taxable bonds by the Mississippi Business Finance Corporation under the Rural Economic Development Finance Program. This award is the first step in the process to issue bonds to finance Rentech’s proposed ultra clean synthetic fuels and chemical complex in Natchez, Mississippi. A portion of the bonds will be issued under the Gulf Opportunities Zone Act of 2005 on a tax-exempt basis and the remainder of the bonds will be issued as taxable obligations, making the project eligible for exemptions from certain Mississippi sales and use taxes, and have the potential to reduce Rentech’s cost by millions of dollars. The repayment of the bonds will be the obligation of the project. The company also said it has entered an agreement with Adams County, Mississippi to acquire the land on which Rentech plans to locate the complex, a site that appears to meet all of the Natchez project’s requirements and offers space for potential expansion of the project. Initially, the plant is expected to produce 25,000 barrels per day of ultra clean synthetic fuels and specialty chemicals and have the potential to expand to 50,000 barrels per day. Additionally, the company also announced it will make a presentation at the on June 14, 2007 at the Thomas Weisel Partners Alternative Energy Conference 2007 in New York. Rentech also announced last week that Geoffrey S. Flagg will step down as the company’s Chief Accounting Officer and that Debra L. Harshman will serve as the Company’s interim Chief Accounting Officer effective upon Mr. Flagg’s resignation. Shares ended the week at $2.62, down 2 cents.
Auriga Laboratories, Inc. (OTCBB: ARGA), a specialty pharmaceutical company with products for the treatment of acute respiratory diseases and dermatological conditions, announced last week it has entered into an agreement to acquire the exclusive U.S. rights to a novel product for hair loss developed by Laboratories Carilene, a French-based developer of therapeutic products, including Aquoral, which Auriga currently distributes. The U.S. market for hair loss products is estimated at over $3.5 billion annually, with approximately 60 million customers a year. This formulation is available in Europe where it has sold over 2 million units since its introduction, bolstering Carilene’ss reputation of successful product development, and should have a favorable impact on Auriga’s revenue in the future. Shares ended the week at $1.17, down 27 cents.
GreenShift Corporation (OTCBB: GSHF), a company devoted to facilitating the efficient use of natural resources, announced last week that NextGen Fuel, Inc., the biodiesel equipment division of GS AgriFuels Corporation, recently received notice of approval for construction bonding capacity of up to $10 million per customer project, for projects in the U.S., and for U.S. government projects abroad. This bonding will help to reduce customer’s risk, and facilitate project funding. NextGen offers five and ten million gallon per year patent-pending biodiesel production systems producing ASTM specification biodiesel from a broad array of vegetable oils, animal fats, and waste greases using its continuous flow biodiesel production technology. GS AgriFuels is a majority-owned subsidiary of GreenShift Corp. Shares ended the week unchanged, to close at $0.03.
On the Wires: i2Telecom International, Inc. (OTCBB: ITUI), a developer of ultra-portable high quality Voice-over-Internet Protocol products and services, last week announced that Larry Stessel has joined the Company as the Chief Marketing Officer. Mr. Stessel, who has over thirty years of high-profile marketing experience, has been acting in a consulting capacity since November 2006. Tarrant Apparel Group (NASDAQ: TAGS), an innovative design and sourcing company for private label and private brand casual apparel, last week announced it has postponed its annual meeting, initially scheduled for June 27. Tarrant said it plans to convene its annual meeting as soon as possible after the audit, which is expected to take 30-45 days.
SPECIAL SITUATIONS:
ProLink Holdings Corp. (OTCBB: PLKH) $1.36
The use of Global Positioning Satellites (GPS) systems is poised for huge growth within the golf industry as such systems benefit both players and golf-course owners alike. Recognizing the value-added of such computerized systems in this growing industry, ProLink Holdings Corp. provides a cutting-edge golf GPS system that is setting the high-water mark in its industry. Through ProLink’s system, golfers are provided with tools that can improve their play, including photo-quality graphics at each hole, access to tips from the course’s pro, the ability to order food and beverages at the touch of a button from the cart, while enabling course owners to control every aspect of the golf course including course setup, maintenance and marketing.
There are a number of key items that sets ProLink Holdings Corp. apart from its competition. The company offers a high resolution, innovative system in an easy-to-use format. Computer monitors are integrated into the roof of a golf-cart that display pinpoint-accurate distances, detailed pictures and information pertaining to greens, hazards, geographical features while providing personal scoring that significantly enhance the golfing experience for players.
Golf course owners have much to benefit from the company’s system as it provides multiple sources to enhance revenues. The GPS system reduces round times up to 30 minutes, as distance information and timer displays help golfers play quicker and more efficiently. Pace of play is accurately followed by the system where messages can be sent to players that are a few holes behind by clubhouse staff in a non-offensive way to speed-up-play, resulting in more tee times on busy days. Increased sales for food and beverage are another benefit as menu items can be ordered from the cart at the touch of a button on the computerized screen. With such a timely system, golfers are more likely to order a meal rather than a snack that otherwise would have taken too long to prepare, further adding to overall margins.
With the purchase of operating assets of ScoreCast, Inc. last quarter by ProLink Solutions, a wholly owned subsidiary of ProLink Holdings Corp., the company is positioned to capitalize on opportunities in the golf tournament space, as Scorecast is a well-recognized scoring system software and is the exclusive tournament management software used in The PGA of America’s Professional Golf Management curricula by some 10,000 students at 19 universities nationwide since 1999. ScoreCast tournament software allows for an easy and comprehensive tournament set-up for any club, and provides score entry and leader boards to all golfers in a real-time manner, further creating value to club owners as events are enjoyed by all.
Even more impressive is the ability of ProLink’s system to generate higher margin revenues through advertising. Ads can be sold and flashed on each hole or at alternating times throughout a round. In January, the company launched its Media Group. Already, it has secured $1 million worth of advertising from companies such as FedEx, General Motors, Citibank plus hundreds of local advertisers.
In January of this year, ProLink Solutions signed a letter of intent to acquire European-based Elumina Iberica and all of its operating subsidiaries, which is anticipated to close during the second or third quarter of this year. The significance of this purchase is that Elumina is one of the fastest-growing and most profitable businesses in the international golf GPS industry as it has secured GPS installations at over 70 courses in Europe, the Middle East and Asia as well as onscreen advertising with Saab, Lexus, Bose and Citroen. The analyst following ProLink projects that the Elumina acquisition has the potential to add $18 – $20 million in revenue and EBITDA of $5 – $6 million in fiscal 2008. Last year, it did $10 million in sales and $3 million in EBITDA.
However, beyond just golf courses, the opportunity for outdoor digital media is even larger. While many have seen the billboards in New York City’s Times Square, there are numerous other opportunities to apply the company’s technology. The potential is so significant that companies such as National CineMedia, the operator of the largest digital in-theatre network in North America, trades at a enormous multiple of revenue. If one includes the value of the entire enterprise, National CineMedia LLC would trade for more than 10 times revenue. Prolink, by contrast, fetches little more than twice revenue.
ProLink Holdings is well on its way to generating consistent revenue and margin growth as it continues to expand its geographic presence and sales force. ProLink completed 56 course installations during the first quarter compared to 152 courses for all of 2006. The company is expected to reach profitability by the third quarter of this year. Over the past few months the company completed the hiring and training of eight salespeople which should help trigger awareness and growth. With first quarter revenue of $6.7 million representing an increase of 17% from the same period last year and a 79.2% increase from the fourth quarter of last year, and gross margin in Q1 of $2.9 million representing the highest gross margin in company history, investors have a lot to look forward to in the upcoming months. As ProLink’s GPS system serves as a waitress, weather person, commentator and/or on-course host to players as well as an effective means to improve margins and operating efficiency for owners, it is no wonder ProLink has a solid reputation for its proven technology in its targeted market.
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