03/04/2007
Companies featured in the current edition of the newsletter: ADSX, ARGA, BSGC, CYTR, EEEI, EMIS, GSHF, HYTM, IRBO, ISOND, ITUI, LFBG, PTCH, SCLL, SWTS, RTK, VOII
It was one of the worst weeks for stocks since September 11th, with investors finding nowhere to hide. The sharp selloff hit both growth and value stocks, cyclical issues and defensive ones, large and small caps and even commodities. When the dust settled, the Russell 2000 led the way lower, falling 51 points, or 6.2% to end the week off 1.6% for the year. The Nasdaq was close behind, dropping 147 points, or 5.8% and is down 2% this year. The Dow fell the most in total points, declining 533 points, but in percentage terms it fell just 4.2%, leaving it down 2.8% on the year. Finally, the S&P 500 declined 64 points, or 4.4% contributing to a 2.2% decline for the year.
Last week, we made cautionary comments about the market, as the number of companies trading above their 200-day moving average was at the highest in decades. That changed quickly, as a result of a plunging Chinese stock market, cautious comments by a Japanese financial minister about unwinding the yen-dollar carry trade, which has served as a source of liquidity for international stock markets, comments by Former Federal Reserve Chairman Alan Greenspan that the U.S. could face a recession later this year and renewed fears that problems in the sub-prime lending market could create further weakness in the housing sector. The latter could grab further attention on Monday, after shares of New Century Financial, the second largest sub-prime mortgage lender, fell 25% in after-hours trading after the company said if faced a criminal probe and would breach financial covenants to lenders. The Nasdaq dropped as much as 6.3% from its high to low point to put in its worst weekly performance since August, 2004.
When markets react as sharply as they did last week, technical considerations often trump fundamental ones. For the Nasdaq, it will take sustained gains back through the 2390/2400 (closed 2368) to neutralize the near-term negative bias. Further weakness could lead to a test of notable support, in the 2343/2333 area, which represents its 200-day Exponential Moving Average (EMA) and 38% retracement of the July/February rally. Below that is 2316, marking its November low. For the S&P 500, sustained action above 1397 and 1403 is needed to begin to improve the tone, while support is at last week’s low 1381 (closed 1387), 1377/1375 (November lows), 1371 (38% retracement of the rally) and 1364 (200-day EMA). For the Dow (closed 12114), upside targets above 12180/12200 and 12247 would improve sentiment, with support at 12059 (last week’s intra-day low), 11989 (38% retracement of the rally) followed by 11965 (November low) and 11939 (200-day EMA).
What should investors look for this week? With few notable earnings releases schedule, most of investors’ attention will focus on foreign markets. Those companies reporting including homebuilder Hovnanian Enterprises (NYSE: HOV) on Thursday afternoon along with National Semiconductor (NYSE: NSM) after the close that day as well. Xilinx (NASDAQ: XLNX) hosts an Analyst Day on Monday. Citrix Systems (NASDAQ: CTXS) holds an Analyst Meeting on Tuesday, along with Avery Dennison (NYSE: AVY), Estee Lauder (NYSE: EL) and JPMorgan (NYSE: JPM). Stanley Works (NYSE: SWK) and Tyson Foods (NYSE: TSN) host similar events on Thursday. Target (NYSE: TGT) will release February sales results on Thursday, along with many other retailers next week.
The conference schedule will be busy next week as well, highlighted by the four-day Morgan Stanley Technology Conference in San Francisco, the two-day Bear, Stearns 20th Annual Media Conference in Palm Beach and the two-day Thomas Wiesel Partners 2007 Internet Digital Media Conference beginning Tuesday in San Francisco, featuring many leading technology and media companies. Other events include the Merrill Global Automotive on Monday in San Francisco, the two two-day UBS West Coast Life Sciences Conference in Santa Clara, the two-day Raymond James Institutional Investor Conference beginning Tuesday in Orlando, CSFB’s Small/MidCap Transportation Conference on Tuesday in Boston and CIBC’s 2nd Annual Mid & Small Cap Ideas Conference on Wednesday in San Francisco.
The economic calendar will be highlighted by Friday’s February Employment Report, where economists forecast that 100,00d new jobs were created during the month. The ISM Services Report for February will be released on Monday morning. Weekly Crude Inventories will be announced on Wednesday, mid-morning. Later that day, the Federal Reserve’s Beige Book will be released. Thursday brings Weekly Unemployment Claims. Friday’s reports include the January Trade Balance and Wholesale Inventories. Fed officials, who generally tried to calm financial markets last week, will also share views with investors this week on the economy. Poole will speak on Monday from Chile. Plosser speaks on Tuesday and Moskow discusses the economy on Wednesday.
Healthcare services company Hythiam, Inc. (NASDAQ: HYTM), said last week that data was presented supporting a mechanism of action underlying the company’s PROMETA Treatment Protocols., which treat drug and alcohol addiction through the brain. Speaking at the 2007 Neurobiology of Addiction Conference taking place in Santa Fe, New Mexico through March 1st, Sheryl Smith Ph.D., a leading researcher in the field of neurosteroids, presented data from her research on methamphetamine dependent rats, describing the methamphetamine induced increase in the a4 subunit of the GABAa receptor and the post-treatment decrease of this pathological marker, which has been associated with states of hyper-excitability and anxiety. This receptor dysregulation and associated symptomatology has previously been associated with alcohol and neurosteroid withdrawal, and suggests a common cause of cravings in substance dependent individuals. The researcher noted the fact that this same change in GABAa receptor subunits has also been shown in an animal model of alcoholism points to a common basis in addictive disorders, which is consistent with use of the PROMETA protocols to treat addiction to alcohol, cocaine, and methamphetamine – chemically diverse substances – as well as poly-addiction to those substances. Perhaps most significantly, the data has important implications for the clinical trials that are being conducted by clinical investigators in cocaine, methamphetamine and alcohol, as a key premise underlying the Protocols is their ability to reset the brain chemistry of an addict. Data is expected from these trials this year. Note that short interest, which rose approximately 900,000 shares in February, now represents 24% of the float. The stock ended the week at $8.00, down 59 cents.
Hot stocks can turn into cold ones very quickly in a market that goes through a significant correction, as investors seek to lock in profits. CytRx Corporation (NASDAQ: CYTR) is an example of such a company, as shares fell 22.9% last week despite the company providing further details on RXi Pharmaceutical Corporation, its majority-owned subsidiary that was recently formed to develop the company’s RNAi platform. The company said that members of the RXi scientific advisory board received consent from their institutions to join the company. Members include Craig C. Mello, Ph.D., the 2006 Nobel Laureate for co-discovering RNAi, Tariq M. Rana, Ph.D., inventor of fundamental technology for stabilizing RNAi and of RNAi nanotransporters, Gregory J. Hannon, Ph.D., discoverer of RNAi mechanism (RISC) and short hairpin RNAi (shRNAi) and Michael P. Czech, Ph.D., a leader in the application of RNAi to diabetes and obesity. The company also formed a Board of Directors for RXi, putting in place the infrastructure to support the company’s development activities in RNai. Shares ended the week at $3.63, down $1.08.
Drug delivery company Emisphere Technologies, Inc. (NASDAQ: EMIS) said last week that that Novartis Pharma AG and its development partner Nordic Bioscience had notified Emisphere that they had initiated a Phase III clinical trial for the treatment of osteoporosis with an oral form of salmon calcitonin, a new drug candidate, using Emisphere’s eligen delivery technology. As a result of the initiation of the trial, Emisphere will receive a milestone payment from Novartis. The use of Emisphere’s novel eligen technology suggests that for the first time salmon calcitonin may be available as an oral medication, rather than the currently available injectable or intranasal options. Osteoporosis is a disease that reduces the density and quality of bone and worldwide affects an estimated 75 million people in Europe, the United States and Japan. The Phase III trial, which will include more than 4,500 osteoporosis patients in Europe, United States, China and Latin America, is a three year, randomized, multi-center, placebo-controlled study to evaluate the safety and efficacy of oral calcitonin. Despite the news, the stock fell 14.8% to close at $4.42, its lowest level since February, 2006, perhaps as a result of the company disclosing in its quarterly conference call that it had enough cash to operate until the third quarter of this year. Notably, the company was in a similar position last year when it raised more than $32 million in an at-market deal.
Earnings Preview: Applied Digital (NASDAQ: ADSX) will announce fourth quarter and year-end results on Friday before the market opens. Since the VeriChip Corporation IPO last month, the stock has languished reflecting the pricing of the IPO at the low-end of the range and subsequent weakness in the VeriChip stock price. ADSX’s results are expected to include majority-owned subsidiaries Digital Angel and VeriChip, along with Pacific Decision Sciences Corporation, its proprietary service automation software subsidiary. ADSX reported revenue of $91.3 million and a loss from continuing operations of $9.8 million for the nine months ended September 30, 2006. Since it reported third quarter results, shares are down 21.5%. The stock ended the week at $1.57, down 22 cents.
Three weeks ago Isonics Corporation (NASDAQ: ISOND), a developer of homeland security and semiconductor technologies completed a reverse stock split in an attempt to maintain its Nasdaq listing. Last week, the company received notification that the move was successful, and that its stock would continue to trade on the Nasdaq as it had met the Nasdaq’s “minimum bid” requirement by trading above $1 for 10 consecutive days. Shares ended the week at $1.85, down 15 cents.
Alternative energy company Electro Energy Inc.’s (NASDAQ: EEEI) plug in hybrid electric vehicle battery technology was featured on NBC Television’s NBC4 New York nightly newscast last week. The story focused on innovative battery technologies that could be used in electric vehicles and that would help improve the country’s national security by easing its dependence on foreign oil while simultaneously improving the environment by reducing the emission of green house gases. Shares ended the week at $1.30, down 3 cents.
Specialty pharmaceutical company Auriga Laboratories, Inc. (OTCBB: ARGA), said last week that it had launched Aquoral for the treatment of xerostomia, also known as “dry mouth.” This new, patent-pending, prescription-only product introduction marks Auriga’s entrance into the $1 billion xerostomia marketplace. Aquoral will be rolled the product out to high-prescribing physicians nationwide via its 200-member national sales force. Auriga will also launch a direct-to-patient campaign. The product adds to the company’s Extendryl, and Levall product lines which recently generated robust sales in January, as dispensed prescriptions reached a record 26,004, an increase of 324% from the year earlier period. ARGA also said it reached a settlement agreement with Athlon Pharmaceuticals, Inc. regarding a dispute between the parties related to its license agreement which provided Auriga an exclusive license to certain pharmaceutical products developed by Athlon, including the Levall brand of cough and cold medication. The new agreement reduces the initial period of time for which Auriga is obligated to make royalty payments at the rate of 50% of net sales, from the first year following the closing date of the license agreement to December 31, 2006. Effective February 1, 2007, the royalty payment rate on all sales by Auriga was reduced to 25% of net sales until the aggregate royalty payments total $10 million. Once the aggregate royalty payments total $10 million, Auriga will not be required to make any further royalty payments to Athlon. Shares ended the week at $1.26, down 34 cents.
Volume Alert: Shares of Stem Cell Innovations (OTCBB: SCLL) rallied late last week, surging 34% on Friday on more than four times average volume. Still, shares have lost 57% this year, as the stock has been under pressure until recently due to the expiration of a lock up of approximately 100 million shares that occurred on February 14th as a result of a private placement that was completed a little more than one year ago. Shares ended the week at $0.057, up 1 cent.
Sweet Success Enterprises (OTCBB: SWTS), the developer of a line of innovative healthy-lifestyle beverages, announced last week that it had formed a strategic alliance with NutriTech International, the maker of Aktivated Barley, a key ingredient in the company’s product line. The Company now has access to NutriTech’s scientific studies, and 20-years of research data. NutriTech International has specialized in developing nutritious food solutions designed for the needs of the food industry and the well-being of people of today. “Aktivated” Barley was launched in 2003 and is manufactured through a patented process that increases the beta-glucan content by 94%, according to research done at AnalyCen, a well respected and accredited laboratory in Europe. The benefits of beta-glucans include energy/ glucose control, cholesterol control and immune boosting capabilities. In December of 2005, the FDA approved an amendment which added barley as a source of beta glucans to the “oat beta-glucan health claim” which relates the consumption of beta-glucan soluble fiber in whole oat foods, as part of a diet low in saturated fat and cholesterol, and reduced risk of Coronary Heart Disease. Shares ended the week at $0.45, down 10 cents.
i2Telecom International, Inc. (OTCBB: ITUI), a developer of ultra-portable high quality Voice-over-Internet Protocol products and services, said last week that it had signed a Master Services Agreement with CSC Management, an infrastructure company providing services to Broadcast, Mobile, Carrier and Enterprise customer segments, including a number of Fortune 500 companies, for distribution to a number CSC’s clientele worldwide. CSC said that it has already begun to receive orders from domestic and international customers for the product. ITUI also raised $2 million through a private placement, further strengthening its balance sheet. Shares of i2Telecom rose 4 cents last week, closing at $0.24.
IR BioSciences Holdings, Inc. (OTC BB: IRBO) said last week that as a result of its subsidiary ImmuneRegen’s recent successful study of its immunomodulator Viprovex, which successfully prevented adverse effects from H3N2 avian influenza, that it would study Viprovex in conjunction with Roche’s Tamiflu, the FDA-approved neuraminidase inhibitor used to treat, and as a pre-exposure prophylactic, to protect against influenza. In a previous experiment performed in cotton rats at Virion Laboratories, Viprovex successfully prevented the decreases in temperature and weight in cotton rats exposed to H3N2 avian influenza. The most recent study confirmed decreases in viral titers in animal nose and lungs correlate with these indications of well-being, which were seen in Viprovex-treated animals despite influenza infection. IRBO also inked a deal with The Translational Genomics Research Institute, a non- profit organization focused on developing earlier diagnostics and smarter treatments. The parties will collaborate to identify and develop innovative solutions to mitigate the side-effects of radiation therapy in cancer patients using the company’s proprietary compound Radilex. The parties believe that the solutions, based on completed and ongoing animal and cell culture studies, may also mitigate the effects of non-therapeutic radiation exposure. Radilex has already demonstrated through animal studies the potential for treatment of acute radiation syndrome following lethal doses of radiation. Non-therapeutic radiation exposures might result following the explosion of a dirty bomb or nuclear weapon. Recently the company said that it had retained Battelle, the world’s largest independent research and development organization, as an accredited testing facility. Battelle will perform additional specialized laboratory services supporting additional studies of the biological and radiological effectiveness of Radilex Shares ended the week unchanged at $0.14.
VoIP, Inc. (OTCBB: VOII), a provider of turnkey Voice over Internet Protocol communications solutions, said that its VoiceOne subsidiary generated a substantial increase in monthly minutes of use during the fourth quarter ended December 31, 2006 and for the month of January. Monthly minutes carried over its network increased by approximately 50 million since September, when VOII completed the initial expansion of its facilities based network, generating an additional $350,000 per month in recurring revenue. The company has also increased its billable rate per minute by approximately 20%. As a result of the increase in traffic and improvements to the network, the company also reduced the cost of carrying the traffic by 26%. Although the company has struggled with issues surrounding its capital structure, high-profile customers such as Google are increasingly using its network, positioning VOII for further growth as click-to-call technology is increasingly adopted. Shares ended the week at $0.26, down 4 cents.
Junior energy company Patch International Inc. (OTCBB:PTCH) said last week that it had raised $20.1 million via a private placement at $1.50 per share plus warrants. The company is likely to utilize the proceeds to develop the Dover Oil Sands Project and the Firebag Oil Sands Project near Ft. McMurray in northeast Alberta. Shares ended the week at $2.25, down 15 cents.
GreenShift Corporation (OTCBB: GSHF)’s GS Carbon Corporation subsidiary said last week that its Sterling Planet portfolio company received an investment from United Kingdom-based Low Carbon Accelerator Ltd. (LCA). LCA is a closed-ended investment company created to invest in a portfolio of fast-growing low carbon businesses. Sterling Planet is the nation’s leading retail provider of solar, wind and other types of clean, renewable energy through direct sales and electric utility partnerships. The investment from LCA will enable Sterling Planet to expand its existing retail business, both in the United States and abroad, as well as establish itself as a renewable energy project developer. Shares of GreehShift ended the week at $0.09, unchanged
On the Wires: Rentech, Inc. (AMEX: RTK) said last week that it had named Dr. Harold A. Wright as Senior Vice President and Chief Technology Officer, as the company continues to attract key personnel necessary to develop its ultra-clean fuel technology. Dr. Wright will be responsible for the implementation of the Fischer-Tropsch Process at the Product Development Unit being built in Commerce City, Colorado and at Rentech Energy Midwest Corporation’s ultra-clean fuels and chemical conversion project in East Dubuque, Illinois. Dr. Wright served in various capacities for ConocoPhillips from 1991-2005, including the Director of Gas-to-Liquids Research and Development from 2004-2005, and the Director of Synthesis Gas Development from 2000-2004.
SPECIAL SITUATIONS:
BigString Corporation (OTCBB: BSGC) $0.34
Did you ever send an e-mail that you wish you had not sent? Or worried that a picture you sent to a potential online mate might end up in the wrong hands? Well, a New Jersey company has come up with an innovative way to enhance the security of email and improve the effectiveness of marketing campaigns at the same time. The company, BigString Corporation, has created a unique new email service that allows users to control their sent email. The company offers an email service for both individuals and businesses that is recallable and changeable. With a patent pending technology, BigString allows a user to easily send, recall, erase, self-destruct and modify an email after it has been sent. Email service provider BigString has unveiled software that allows the creation of self-destructive video messages-a boon to online marketers and privacy fiends, its chief executive said Friday.
While there are many promising technologies looking for business models to support them, it appears that BigString may be in the right place at the right time. With increased scrutiny of emails in the wake of the Hewlett Packard pretexting scandal, the recognition that emails create a paper trail that the recipient could use later has forced businesses and individuals alike to think carefully before sending messages. Now, with BigString, emails can be recalled or deleted, leaving no hint as to its previous content.
While the company has seen growing adoption of its email applications, it recently launched BigString Marketer Pro, which gives a video marketing message a limited shelf life, thus creating a sense of urgency. Companies can now advertise using videos which disappear after a certain period of time, triggering a recipient to potentially purchase a product or service in a shorter period of time than if the video had no expiration date. With the proliferation of email marketing, advantages created by technology could increase the response rate for marketers.
With email becoming a way of life, the investment community has begun to focus on opportunities surrounding promising technologies. Recently, Goodmail received $12 million in funding for its certified email service, designed specifically to shut out spammers and phishers. Bigstring has also attracted the attention of a prominent investor, as Tudor Investment invested approximately $2 million last year through the purchase of a convertible preferred instrument, which gives them the opportunity to acquire 10.6% of the company.
Although revenue has been nominal to date, the company has recently increased marketing activities designed to attract corporate interest, as well as increase the number of individual users who obtain an email account through BigString, which offers a free service so long as users receive advertising. The company receives a fee each time a user views or clicks on the advertisement, similar to the way Google generates revenue. In addition to revenue opportunities from these areas, the company could partner with, or even become an acquisition candidate for, Yahoo!, Microsoft’s MSN, Myspace.com or anybody seeking a competitive edge against Google in the battle for online supremacy.
With approximately 47 million shares outstanding, the company has a nominal market capitalization below $20 million. However, with innovative technology, a growing marketing program and a blue chip investor, the company is well positioned for growth. The stock, which traded as high as 90 cents in May, 2006, currently trades for just 40% of that price. While still speculative, many promising Internet technologies such as BigString’s have been acquired by leading Internet companies seeking a competitive advantage. Based upon its current valuation, risk-oriented investors could reap rich rewards.
Left Behind Games, Inc. (OTCBB: LFBG) $0.41
While many are familiar with John Madden Football, few realize that it is one of the most successful franchises that video game giant Electronic Arts has ever had, with revenue exceeding $1 billion. The lead developer of the first 3D John Madden Game, Troy Lyndon, launched a promising video software company, Left Behind Games, a family-friendly Christian video game company with a new alternative to MySpace, which is seeking to capitalize on the popularity of the Left Behind series of books, which have sold over 65 million copies to more than 26 million people worldwide. Currently, there are 62 books published and the original novel has been translated into more than 30 languages.
For those who are not familiar with the series, Left Behind novels and products describe fictional storylines focused on events at the end of the world, including the ultimate battles of good against evil. The stories are very action oriented and supremely suitable for an engaging series of video games. The company has added a unique element to this, focusing on the inspirational, or Christian marketplace, currently estimated to generate more than $7.5 billion in revenue per year. The company’s first game, LEFT BEHIND: Eternal Forces, won praise from game reviewers shortly after it was released four months ago for the PC game platform. It offers gamers the ability to command apocalyptic battles raging in the streets of New York City between the Tribulation Forces and the antichrist’s Global Community Peacekeepers during the End of Days.
Despite limited marketing, the Game sold more than 65,000 units in the first six weeks of its release through retailers such as Wal-mart, BestBuy and Circuit City, generating $2.2 million in gross revenue despite lacking many of the features that a Gold Version of the game, scheduled for release in September, will include. The September launch, targeted for release for the PC plaform, will provide the company with larger margins than console games because of the absence of royalties to hardware manfuacturers. The company is also focused on international expansion, recently shipping the first games to a large chain of Christian booksellers in Australia and taking steps to build distribution in Asia.
In addition to bulding a video game franchise, the company is also developing a social networking site, Dreamwebspace, an alternative to MySpace and other popular social sites for those who want language filtering, more security and live monitoring, to make certain unwanted photos and content are cleaned regularly from the site. The company believes that it can cost-effectively acquire users through its marketing efforts to the Christian community and those who support a family friendly alternative to MySpace. Although the majority of marketing activities to date have been targeted at mass market retailers, the company plans to target Christian bookstores, ministry sponsorships, church outreaches, Christian conferences and in-game advertising in the coming months.
The stock, which hit an intra-day high in late October of $7.44 has fallen sharply over the last few months, as investors have expected faster sales results to LEFT BEHIND readers. The company expects to reach 5% of the 26 million readers over the next two years. This appears like a realistic projection as the introduction of Christian music and more than one film (beyond the Passion of the Christ) have required approximately two years from their significant financial launches.
Just four months later, the stock trades at a 52-week low, little more than 5% of its previous price. With the book series so popular, however, it appears to merely be a matter of time before fans of the novels become customers for the game. Certainly, if Mr. Lyndon is able to replicate here the success he had in turning Madden Football into a wildly profitable franchise for Electronic Arts, shares of Left Behind Games could rise sharply in value, well beyond its current market capitalization of less than $15 million.
