04/01/2007
VOLUME 293
Companies featured in the current edition of the newsletter: ADSX, ARGA, BSGC, EEEI, EMIS, GNBT, HSOA, HYTM, ISON, LANW, LFBG, NTRN, PCLI, POIG, RTK, SCLL, SFP, TAGS, USAT, VOII
The first quarter ended virtually where it began…unchanged, as the major indices fell last week as the uncertainty in the economy continues to hold stocks back. Data released last week weighed heavily on investors as inflationary concerns could prevent the Federal Reserve from lowering interest rates. The Dow fell 126 points and is now down 0.8% for the year. The Nasdaq lost 34 points, reducing its annual gains to 0.2%. The S&P dropped 15 points for the week, but is up 0.1% for the week. The Russell declined 8 points, but was still the best performing index for the first quarter, rising 1.6%.
The week began on a sour note as a 3.9% drop in new home sales raised further concerns about the strength of the housing sector. Rising inventories further exacerbated this report fueling concerns that such weak data would dampen consumer spending. Confirming such worries was the lower than expected consumer confidence report which came in at 107.2, significantly lower than the 112.5 figure reported just one month earlier. Business spending was also on the decline with February durable goods rising a weaker than expected 2.5%. The standoff in Iran continued to affect oil prices as crude oil eclipsed $63/bbl for the first time in 2007 and ended the week above $65/bbl. Not all news was negative on the economic front. The week ended with the release of encouraging news as February personal income and spending rose 0.6%, easily beating the expected 0.3% increase.
What should investors look for during this holiday shortened week? With few influential earnings reports other than Best Buy (NYSE: BBY) on Wednesday before the open and Micron (NYSE: MU) later that day after the bell, investors will turn their attention to economic data being released for further insight into future Fed policy actions. The March ISM Index will be reported at 10:00 on Monday. Tuesday afternoon Auto and Truck Sales will be announced. Shortly after the opening on Wednesday, February Factory Orders, March ISM Services and Weekly Crude Inventories will be released. Weekly Jobless claims will be reported prior to the opening on Thursday. Friday will be an active day despite most markets being closed, with the exception of a few financial markets, including bonds and currencies that have partial openings and will close at 10 a.m. At 8:30a.m., date for the March Average Workweek, Hourly Earnings, Nonfarm Payrolls and Unemployment Rate are scheduled to be released. At 10 a.m. February Wholesale Inventories will be released followed by February Consumer Credit later that day.
The conference schedule is light with the four-day Howard Weil Energy Conference starting Monday in New Orleans. Bank of America hosts its Mini Healthcare Conference on Wednesday in San Francisco. Globalcon 2007 is being held in Atlantic City beginning Wednesday and lasts for two days. Prudential Equity Group sponsors its Metals & Mining Conference in New York on Wednesday, with Morgan Stanley kicking off its two-day Automotive Conference in New York as well. Also on Wednesday PG&E holds its 2007 Analyst Conference.
While it was a disappointing quarter for investors in healthcare services company Hythiam (NASDAQ: HYTM), which has a new way to treat drug and alcohol addiction through the brain, we thought we would try to put the 26% quarterly decline in the company’s stock price into perspective. To be sure, some investors were disappointed by the company’s fourth quarter results (slightly missed analysts’ estimates) and there was some confusion about the company’s decision to acquire CompCare, but a significant portion of the decline can also be attributed to the sharp increase in short interest, which rose by 2.2 million shares during the quarter, representing approximately 8.6 days of trading activity alone. Sharp increases in short interest have been a contrarian indicator for the stock. Last time short interest rose to this level was in September, 2006 (7.3 million shares short versus 6.8 million in March, 2007). During the fourth quarter of 2006, shares rallied 27%. The company noted on its quarterly conference call three weeks ago that it shortly expects to announce another relationship with a Blue Cross Blue Shield plan and its first state-level relationship with built in reimbursement. In addition, with the company expecting Cedars Sinai to announce initial data from its study on PROMETA for alcohol dependence, there are ample catalysts to send shares higher. According to published data from Nasdaq last week, shares of Hythiam were the seventh most heavily shorted stock on the exchange based upon days to cover. The stock ended the week at $6.80, up 5 cents.
Speaking of heavily shorted stocks, we were surprised that when short interest was reported last week that the short position in shares of Home Solutions of America, Inc. (NASDAQ: HSOA) barely budged, despite the stock falling as much as 26.8% during the first quarter (ended the quarter down 18.9%). While it is hard to understand why the company waited as long as it did to warn that Q4 results would fall significantly short of expectations, Wall Street has virtually ignored the company’s current backlog from its restoration and construction services business and recently announced contracts, which already nearly exceed the total amount of the company’s 2006 full-year revenue (share count is higher due to several acquisitions). Note that from April 1st until May 31st last year, shares rose more than 50% even without the large short position which is currently more than 33% of the float, helped by a series of contract announcements, solid operating results and the expectation of a strong hurricane season (did not materialize as occurred in 2005). With reasonable first quarter expectations (company guidance of $35-40 million and EPS of 9-11 cents; analyst estimate of $38.6 million/10 cents) and modest comparisons (company earned 6 cents from continuing operations on $19.3 million in revenue in Q1 ’06), the stock, which trades for just 12 times trailing 12-month earnings, could be poised to rally. Shares ended the week at $4.75, down 24 cents.
Applied Digital (NASDAQ: ADSX), a leading provider of identification and security technology, said last week that its majority-owned subsidiary Digital Angel Corporation, was awarded a second contract from the U.S. Air Force to design and develop the Harness Activation System for the United States Air Force Jet Pilot Recovery Radio (URT 33). This agreement, worth $400,000, comes on the heels of the company being awarded the task of designing and developing a replacement radio for the URT 33 in December 2006 due to a frequency change for the related satellite system that is scheduled to be implemented in 2009. As a result, Digital Angel is able to combine the harness development with the radio development program in order to provide a complete system by June 2007. In addition to building brand awareness in the eyes of the government for potential future products, this opportunity is a huge milestone for the company as an estimated 15,000 systems will be needed following successful trial and testing of the system. Furthermore, Digital Angel also announced that its UK subsidiary, Signature Industries Ltd, was awarded a $1.5 million order to provide the Swedish Air Force with a quantity of 600 SARBE 6-406 Personal Location Beacons with an option to buy an additional 200 units valued at $500,000. Separately, Applied Digitals majority-owned VeriChip Corporation announced that it will be providing direct access to electronic advance directive documents stored at the U.S. Living Will Registry via the VeriMed Patient Identification System. This scalable service enables hospitals and health systems to easily view such pertinent documents and is the first completely digital link to a national Advance Directive document archive. In addition, Kaufman Brothers became the second brokerage firm to initiate coverage of VeriChip since the IPO, rating the shares a “Buy” and placing an $8 price target on them. Shares of ADSX gained 3 cents last week to end the week at $1.57.
Volume Alert: Shares of Tarrant Apparel Group (NASDAQ: TAGS), an innovative design and sourcing company for private label and private brand casual apparel, traded over 23 times average volume and soared through its 50-day moving average, after the company announced its fourth quarter and year-end results for the period ended December 31, 2006. Fourth quarter sales increased by15.5% to $57.4 million with gross margins jumping to an impressive 23.8% from 20% last year. Such strong margin improvement was a result of greater efficiency in sourcing and the company’s higher margin Private Brands business representing a greater percentage of overall sales. While growing its top-line, management was also able to effectively manage operating costs as SG&A represented 16.9% of total sales compared to 19.1% for the same quarter last year. Tarrant’s quarterly net profit totaled $1.7 million, or $0.06 per diluted share, compared to a net loss of $1.5 million, or $0.05 per share last year. Despite losing three key brands, year-end sales totaled $232.4 million, easily topping the higher end of the company’s guidance of $220-230 million as such increases reflect growth in new customers for the Private Label business. Gross margins improved to 21.8% from 20.9% in 2005 with net losses for the year totaling $22.2 million compared to net income of $1.0 million, attributable to a non-cash reserve of $27.1 million for certain notes receivable. The company’s return to profitability, increasing margins, and ability to replace old business with new are a model of continued and future success, and indicative of the company firing on all cylinders. Tarrant expects 2007 full-year revenue of $240 million to $250 million, excluding the proposed acquisition of The Buffalo Group. Separately, TAGS named David Burke as its Chief Financial Officer last week. Shares rose an impressive 31 cents to close the week at $1.86.
Earnings Preview: Electro Energy, Inc. (NASDAQ: EEEI), a developer and manufacturer of high-powered, rechargeable bipolar nickel-metal hydride batteries, will release its fourth quarter and year-end results for the period ended December 31, 2006 on Monday, April 2nd after the market closes. As the company continues to further develop its product-line of battery products, it is in the enviable position of receiving revenue for such development from various U.S. government branches. Investors should look for commentary pertaining to continued funding from such sources, as well as indications of when actual sales may begin for its lithium-ion batteries to the U.S. Army for use in battery packs. Revenues from Electro Energy’s relationship with Eagle Picher should be on the rise as Eagle Picher, a key customer, appears to have overcome their financial problems. Perhaps the biggest catalyst for the stock, however, will be what the company says about when its state-of-the-art Gainesville manufacturing facility in Florida will be able to produce commercial quantities of batteries. A conference call will be held shortly after the release to discuss the results. The stock ended the week at $1.20, up 2 cents.
Emisphere Technologies, Inc. (NASDAQ: EMIS), a biopharmaceutical company pioneering the oral delivery of otherwise injectable drugs, reported that two early stage clinical trials showed its drug delivery technology allows hormones to be taken orally to potentially treat diabetes and obesity. Such studies were conducted in collaboration with Professor Christoph Beglinger of the University Hospital in Basel, Switzerland where results showed that Emisphere’s eligen technology can orally deliver the incretin hormones GLP-1 and PYY and induce a rapid, statistically significant increase in plasma drug concentrations at all doses tested versus placebo. These results indicate that oral GLP-1 could be an effective treatment in diabetes, and indicated that both oral GLP-1 and oral PYY could also be an effective treatment for other diseases such as obesity. Without eligen, these hormones cannot be absorbed in the body. Such progress could be very lucrative for the company as world-wide sales of insulin alone were approximately $5.6 billion in 2004. The company also plans to initiate a proof-of-concept efficacy study on the reduction of food intake using its oral incretin products with Dr. Beglinger sometime later this year. Shares fell 3 cents for the week to close at $3.20.
Salton, Inc. (NYSE: SFP), a leading designer, marketer and distributor of branded, high-quality small appliances, home decor and personal care products, received Board approval for the financing commitment letters by APN Holding Company, Inc., bringing the company one step closer to finalizing the merger of SFP Merger Sub, a wholly-owned subsidiary of Salton, and APN Holding Company which acquired all outstanding Applica Inc. Following the merger, Applica will become Salton’s subsidiary, where the combined company is estimated to generate sales of roughly $1 billion. Realizing the potential of this merger, Harbinger Capital Partners decided to invest an additional $100 million in the proposed merger which will strengthen the balance sheet by decreasing the total debt of the combined company by $75 million to $325 million. Salton also announced that it has entered into a cross-licensing agreement with Applica Incorporated enabling both parties the right to use certain brand names and other intellectual property in certain markets in exchange for specified royalties. The stock rose 9 cents for the week to close at $2.40.
USA Technologies, Inc. (NASDAQ: USAT), a developer of cashless vending and energy management products, announced the launch of vending machines equipped with Near Field Communications (NFC) capable e-Ports last week at the CTIA Wireless conference, the world’s largest technology exposition dedicated exclusively to the $500 billion global wireless industry. NFC is the next wave of cashless payment solutions, encrypting credit and debit card information using short distance radio waves and transmits the data directly to a payment device to enable purchases with cellular phones. USA Technologies’ e-Port G6 NFC readers are the first, proven cashless transaction device in vending that accepts all forms of cashless payment. With 6,000 e-Port G6 PayPass-enabled vending machines being deployed by MasterCard and USA Technologies in over a dozen cities nationwide, and over 190 million cellular phones in use in the U.S. alone, the opportunity for significant growth seems inevitable. With the added exposure of its recent listing on NASDAQ Capital Market, look for USAT to take out the resistance around the $8-9 range near-term. Shares lost 12 cents to close the week at $8.28.
Drug delivery company Generex Biotechnology Corporation (NASDAQ: GNBT), reported that its Antigen Express subsidiary has entered into an agreement with Beijing Daopei Hospital in China to conduct clinical trials that will involve immunotherapies and the company’s RNAi stimulation methods. Antigen Express’ groundbreaking technology modifies a patient’s cancer cells to increase their ability to fight cancerous cells without destroying healthy cells in the process. Trials will be conducted under the direction of Dr. Daopei Lu, the first to doctor to perform bone marrow transplantations in China. RNAi therapy has become an invaluable tool for biomedical research as it offers an alternative strategy over classical cancer treatments as it can be tailor-made to target the different tumor types. Note that RNAi technology has generated strong interest among the investment community. Sirna was acquired by Merck for more than $1 billion, and shares of CytRx Corporation (NASDAQ: CYTR), a Special Situation Stock, rose 145% during the first quarter. GNBT closed at $1.71, up 3 cents.
Volume Alert: Shares of Auriga Laboratories, Inc. (OTCBB: ARGA), a specialty pharmaceutical company with products for the treatment of acute respiratory diseases and dermatological conditions, surged 32% last week on three times average volume. The company filed its 10-K for the period ended December 31, 2006 last week. The company is currently transitioning to a December 31 year-end, but sales for the nine months ended December 31, 2006 totaled $3.1 million with gross margins equaling 52.2%. The year to come looks very bright as the company continues to grow its sales force to place its strong product-line. By the end of 2007 Auriga now expects to have a total of 275 commission-based sales representatives to promote its Extendryl, Levall, Zinx and Aquoral product lines, and plans to launch seven newly-branded prescription dermatology products in the coming months. Since major pharmaceutical companies have been reducing their sales force, ARGA is well positioned to attract talented pharmaceutical reps, without having to incur the expense of large salaries. The company expects revenue of $26 million in 2007. The stock soared 52 cents for the week to close at $2.14.
Volume Alert: Shares of VoIP, Inc. (OTCBB: VOII), a leading provider of Voice over Internet Protocol (VoIP) communications solutions for service providers, resellers and consumers, rallied 13% on Friday on twice average volume after the company reported that its wholly-owned subsidiary VoiceOne had signed a two-year network agreement with Vonage Network for its domestic customer base. This contract is a significant milestone for the company as it continues to sign on large, brand-name customers for use of its IP-based telephone network. Such an agreement could result in significant revenue growth for VoIP Inc.’s telecommunications services as Vonage looks to partner with different network service providers as it continues to battle against charges brought against it by Verizon regarding patent infringement. Shares ended the week at $0.255, up 1 cent.
BigString Corporation (OTCBB: BSGC), a provider of user-controllable email services, was named the “Best Emerging Technology Company” by the New Jersey Technology Council (NJTC) last week. Such recognition is significant as the NJTC hosts a number of premier financing conferences throughout the year that target a large audience of entrepreneurs and investors in various market segments. The stock closed at $0.35, down 1 cent.
Language Access Network (OTC: LANW), a leader in video interpretation services, announced that the Children’s Medical Center Dallas will utilize the company’s MARTTI audio/video interpreter services to aid medical staff and employees in communicating with patients. Children’s Medical Center will be the first hospital in the Dallas/Fort Worth Metroplex to employ this cutting-edge technology to supplement its human capabilities in bridging the ever-increasing language gap. This agreement significantly increases patient-care as translation services were needed in more than 110,000 encounters over the past year at Children’s Medical Center Dallas. Shares lost 30 cents for the week to close at $1.10.
Volume Alert: Shares of Left Behind Games, Inc. (OTCBB: LFBG), a leader in the inspirational video game market, traded approximately four times average volume again last week as interest continues to build around the company’s growing distribution for its LEFT BEHIND: Eternal Forces PC game. After generating over $2 million in gross revenue within the first six weeks of its release, LEFT BEHIND: Eternal Forces could turn out to become a popular video game, despite the stock trading close to its 52-week low and less than 10% of where shares traded late last year. The stock gained 2 cents for the week to close at $0.33.
Volume Alert: Shares of Neutron Enterprises, Inc. (OTCBB: NTRN), a developer of digital media solutions, traded over 3 times average volume, as investors awaited news regarding the integration of the company’s recent purchase of Stock-Trak, Inc., a leading provider of stock portfolio simulations for the educational and corporate markets and the launch of its new fantasy stock market competition. Shares rose 3cents to close at $1.85 for the week.
Independent energy exploration and development company Petrol Oil and Gas, Inc. (OTCBB: POIG), said last week that it expects to report revenue of $6.8 million for the year ended December 31, 2006, a 12.5% increase from last year. This increase stems from the company’s successful developmental efforts in its Coal Creek Project that should position the company for significant expansion going forward. Year-end results are expected to be filed with the SEC during the middle of April as the company filed for a 15-day extension due to complexity of disclosure requirements. The stock ended the week at $0.45, down 2 cents.
Stem Cell Innovations, Inc. (OTCBB: SCLL), a provider of toxicology testing and discovery systems, continues to confirm the broad uses of its C3A compound as this in vitro technology was chosen by Circomed AG to study and validate some of Circomed’s compounds for certain cardiovascular indications. A key selling point of C3A to the customer was its ability to allow Circomed to rapidly study results in a reproducible manner which are crucial in the progression of molecule development. Shares rose 1 penny for the week to close at $0.0465.
On the Wires: Rentech, Inc. (AMEX: RTK), announced results from its Annual Meeting in late-March where shareholders approved Michael R. Ray and Edward M. Stern to serve on the Board of Directors. Approval was also given for the potential issuance of 20% or more of Rentech’s outstanding common stock and an increase to the number of shares reserved for issuance under the 2006 Incentive Award Plan. Isonics Corporation (NASDAQ: ISON) received notification from the NASDAQ stock exchange stating that it does not meet requirements for continued listing. Isonics will submit a plan to achieve compliance with Nasdaq Capital Market listing requirements by April 5, 2007. VeriChip Corporation, a majority-owned subsidiary of Applied Digital (NASDAQ: ADSX), presented at the American Medical Directors Association 30th Annual Symposium last week, with the goal of expanding the number of physicians in its VeriMed Patient Identification System network. Presenting on behalf of VeriChip was AMDA Foundation Chair and former AMDA President Jonathan Musher, MD, CMD. Generex Biotechnology Corporation (NASDAQ: GNBT), made two poster presentations at the 4th International Symposium on Diabetes and Pregnancy last week in Turkey as it continues to build brand awareness for its Generex Oral-lyn and Metformin gum products.
SPECIAL SITUATIONS:
Protocall Technologies, Inc. (OTCBB: PCLI) $0.11
Many consumers today enjoy the benefits of pay-per-view entertainment. From the convenience of our living room, many of us enjoy the ability to choose from hundreds of popular movies. Already, through the Internet, innovative companies are beginning to offer video-on-demand services, allowing consumers to order a wide range of entertainment choices. Protocall Technologies Incorporated has taken this concept even further. Its TitleMatch DVD on-demand system, which is marketed exclusively through Protocall’s wholly owned TitleMatch Entertainment Group division, allows retailers to burn brand name CD and DVD products at their stores and website distribution centers, significantly reducing costly inventory that retailers need to carry, expanding their selection of products, eliminating shrinkage and out-of-stock situations and allowing consumers to enjoy new products faster.
Of course, in today’s highly competitive retail environment, retailers are under unrelenting pressure to improve operating margins by lowering costs. Protocall’s system allows retailers to physically produce fully packaged software, movie and television titles on demand at their stores and website distribution centers. Since rent is often one of the biggest expenses for a retail operation, retailers are always looking for smaller, cheaper ways to manage inventory. TitleMatch, about the size of an ATM machine, can store thousands of products in a virtual electronic inventory until they are needed. Customers can see which products are available at store locations and an Order Fulfillment Station for store and distribution center employees produces the products the customer chooses onto a CD or DVD along with all the printed packaging within minutes. The result is a greater selection of immediately available products for the consumer and virtual inventory for the retailer. Through this system, it is possible to imagine going to any retailer in a few years, which is located in a store no larger than a drive-through bank office, and being able to choose from thousands of CDs and DVDs.
Protocall did not develop this system overnight. After five years of development and three years of field testing, a commercial rollout of Protocall’s system started in 2004 at CompUSA stores in Dallas, San Francisco and Seattle. In August of 2004, TigerDirect.com started using Protocall’s system to fulfill software orders from its Internet website. With the increase in demand for digital media products, it now appears that PCLI’s products could experience widespread adoption. Revenue for the company’s fourth quarter ended December 31, 2006 was approximately $500,000, more than triple what it was for the same period in 2005.
With over 20,000 software titles and 45,000 movie and television titles available today, the opportunity for the company is significant. The company has already secured licensing agreements with over 200 software publishers for distribution of products, including Atari, Avanquest, IBM, McAfee, and Vivendi Universal. Those agreements cover over 1,000 software titles. The company is also in discussions with several major motion picture studios to include DVD movies and television programs on the system. With more than $32 billion dollars spent on movies last year, including $23 billion through sales and rentals of DVDs, the opportunity is substantial. Large sellers of DVDs such as Wal-Mart, Costco, Sam’s Club, Target and Best Buy appear to be natural candidates for TitleMatch.
Despite the opportunity and meaningful revenue growth, the company has a market capitalization of just approximately $15 million on a fully-diluted basis. Shares, which were $4 30 months ago, are currently closer to their 52-week low than those lofty highs. The stock’s 52-week high is 28 cents. Last month, the company inked a deal with online retailer Overstock.com which allows OverStock to offer 100% in-stock availability on an even wider assortment of entertainment products using TitleMatch, representing PCLI’s first agreement with an online retailer. With the “digital age” now here, it appears that the company has the right technology to capitalize on the growing need for on demand content.
