| 2006 | 2007 | ||||||
| Price: | 4.04 | EPS | |||||
| Shares Out. (in M): | 0 | P/E | |||||
| Market Cap (in $M): | 179 | P/FCF | |||||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 0 | TEV/EBIT | |||||
| Borrow Cost: | NA | ||||||
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Integral Technologies, Inc (Symbol: ITKG) is a stock that has appreciated to unrealistic highs, along with many other penny stocks over the last month, as a speculative fever has reared its head in the year end market run up. ITKG is a stock that I think can be shorted, and held long term, for it has all of the symptoms of a terminal short, each of which I will detail in the write up below. If you are comfortable shorting single digits stocks and holding long term as they regress toward zero, ITKG is a great short opportunity.
In this write up I plan to make the argument that the company’s product is neither new nor unique. The company has shown no ability to generate revenue in the past with this or any of its previous products. ITKG is not a new company but has simply “re-invented” itself many times; ElectriPlast being the newest iteration. The only thing that ITKG has successfully sold is stock. If the management team has a business model with the ability to generate earnings or cash flow, they are unable (or unwilling) to communicate it.
ITKG has a laundry list of symptoms that are typical of companies that are terminal shorts. I will go into much more detail below, but the symptoms include:
1) All product lines together have generated near zero revenue in the companies ten year history.
2) Management has a history of involvement in another penny stock promotion.
3) Rapidly growing share count caused by dilutive PIPE’s priced far in the hole.
4) No defined business model or asset levels to support the price.
5) Ridiculous valuation and no book value to provide downside protection.
I will begin by giving a quick overview of the business and recent business developments so the reader can understand a little bit about what ITKG is trying to achieve. I will then detail why I believe ITKG to be an excellent shorting opportunity.
Business Description
ITKG’s sole business at this time revolves around a conductive polymer that ITKG has trademarked with the name ElectriPlast. In essence, it is a plastic that has the conductive properties of copper. For a fuller description of the product, I quote from the company’s most recent 10-k,
“The
ElectriPlast(R) polymer is a compounded formulation of resin-based materials,
which are conductively loaded, or doped, with a proprietary-controlled,
balanced concentration of micron conductive materials, then pelletized. The
conductive loading or doping within this pellet is then homogenized using
conventional molding techniques and conventional molding equipment. The end
result is a product that can be molded into any of the infinite shapes and
sizes associated with plastics and rubbers, and is non-corrosive, but which is
as electrically conductive as if it were metal. Various examples of
applications for ElectriPlast(R) are shielding, lighting circuitry, switch
actuators, resistors, medical devices, thermal management and cable connector
bodies, to name just a few. We have been working to introduce these new
applications and the ElectriPlast(R) technology on a global scale.”
The company has filed for 109
Recent Business Developments
In April of 2006, ITKG made its first announcement about a company licensing the ElectriPlast intellectual property. Heatron, Inc, licensed the product for applications in the heating and LED lighting market. The initial upfront licensing fee to ITKG was $1.
In September 2006, ITKG reached
its second licensing agreement for ElectriPlast with Jasper Rubber. An 800
employee, $70mm revenue company, located in Jasper,
On
On
Short Story
In the above two sections, I have attempted to give an impartial description of what ITKG does, and to outline all of the announcements that the company has made in 2006. I am admittedly bearish on this company, but I attempted to be as neutral as possible in the above two sections. As of this point, that neutrality will change and I will outline to you why I believe that this company is a great short opportunity.
Management Background
Obviously, in any investment it is important to look at the quality of management. In a company “in the development stage” with zero revenue, a thorough inspection of management is critical. ITKG’s co-founder, chairman, and CEO is a gentleman by the name of William S. Robison. In addition to being CEO, he also has a past that should raise a red flag to any investor.
In every 10-k since 2003, Mr. Robinson’s work history has been described as follows:
“Mr. Robinson
brings many years of management experience in finance, banking and corporate
development. Previously, he acted as
director of a number of companies involved in natural resources, sales and
marketing, and computer technologies.”
But in the 2002 10-k and in previous filings the company stated:
“During the
period 1988 to 1996, Mr. Robinson was president of Achieva Development
Corporation, a mining company which is publicly traded on the Canadian Venture
Exchange.”
Why did the company choose to no longer include Mr. Robinson’s history as president of Achieva in its SEC filings? I think the most likely answers are that Achieva’s stock (symbol AHE/H CN on Bloomberg) currently trades at 7 cents and the company was involved in a somewhat notable stock promotion while Mr. Robinson was the president of Achieva.
In 1996, under Mr. Robinson’s
tenure, Achieva purchased the rights to the “Argo Tunnel Corporation.” The Argo project was originally the brain
child of an ex-con and stock promoter named Chris Harper. The idea, in short, was to build a train through
an 1890’s era abandoned gold mining tunnel to connect two cities in
However, this didn’t stop Harper from raising money through a private placement so he could proceed with his project. Additionally, monies that were raised didn’t go to the tunnel project, they were instead pocketed by Harper; this ultimately lead to his indictment on two counts of securities fraud in October of 1996.
A very detailed description of the situation that I have outlined above can be read at the following link:
http://www.westword.com/issues/1996-11-28/feature2.html
Robinson and Achieva come into
the picture with the
“William S.
Robinson, President of Achieva Development Corp. announced the company has
negotiated the acquisition of certain mineral and other rights near Central
City, Colorado, with the principals of the Argo Tunnel Corporation (“Argo”), a
private Colorado company controlled by Chris Harper, of Denver, Colorado, and
Members of his family.”
And a few paragraphs later the release continues:
“Achieva will
be granted an option entitling it to acquire the rights to develop the Argo
Tunnel, a 4.2 mile long mining tunnel, which connected Argo mill in Idaho
Springs, Colorado, to the deep shaft mines of Central City Mining District,
Colorado.”
Achieva continued to promote the idea of the train through the mountain even after Harper’s indictment and the town had made it clear that they were not supporting the tunnel project. In the above referenced article, written at the end of November, 1996, the author states:
“But the vote
hasn’t stopped Achieva from promoting the idea of a monorail through the
mountain. . . In the promotional materials it’s now sending to would be
investors, Achieva touts the Argo Tunnel as a potential mass-transit corridor
and even includes pictures of a model of the renovated mill with a five story
parking structure and a gleaming monorail exiting the old tunnel.”
Prior to the announcement that Achieva was purchasing the rights to the Argo Tunnel Project , Achieva’s stock was trading for slightly more than a dollar. The excitement and promotion of the project propelled the stock to a more than 100% increase over the next four months, setting a high of approximately $2.50 at the end of August of 1996. Not long after the stock peaked, as it was becoming known that the Argo Tunnel project was little more than a pipe dream, the stock began to sell off. By December of that year, the stock had returned to trading at slightly over a dollar.
It should be pointed out that
Robinson resigned as president and director of Achieva on
Colin
Beveridge, Director of Achieva Development Corp. .announces that, due to environmental and
historical site concerns, the
I thought it was important to go into such detail about the Achieva situation because a) it is a complicated situation that can not be quickly described in an understandable way and b) because it raises a serious red flag about the founder and CEO of ITKG.
One of two conclusions must be reached. The first possibility is that Achieva and Robinson were complicit in this promotional activity originally started by a quick talking ex-con (Harper) and piggy backed the promotion to temporarily increase the value of their company by over 100%. Or secondly, Robinson was the “victim” of Harper as well and was similarly duped into buying (for stock of course) the rights to this sexy but ultimately fraudulent project. If the second is the case, it makes me seriously question the business judgment of the top executive at ITKG.
Though I don’t ultimately know which of the two conclusions is correct, the fact that the promotion of the Argo tunnel project was hyped by Achieva even after Harper was no longer involved, gives me a great suspicion as to which of the above choices is correct. Nevertheless, BOTH conclusions lead me to belief that ITKG is a short. It is certainly my experience that management teams of stock promotions often resurface. And having history of a relationship with the above referenced stock promotion, weather complicit or not, is the type of detail that I look for when attempting to find stocks to short.
Business Background
Even though ITKG has only had
$249,000 in revenue in its history, it is not a new company. In its filings, it lists its inception date
as
1) Contrawound Toroidal Helical Antenna
2) Plasma Ignition Systems
3) 2d Machine Vision Colorimetry
4) 3d Machine Vision Colorimetry
I am not going to pretend that I have any idea what any of those products are, but I do know that they never generated any significant revenue for the company. I also know that none of these products are currently being developed by the company.
In Decemebr of 1999, a
subsidiary of ITKG, called NextAntennas.com received a commercial order for a
“GP/LEOS Antenna” from a company called ARINC, an operator of communications
and processing systems for aviation and transportation markets. In the 10Q
filed for the period
According to the 10 K from 2000, the company had a total of 12 employees. Additionally, it had changed the name of the previously mentioned subsidiary Nextantennas.com to Antek Wireless. Antek Wireless was focusing on 6 technologies; all antenna technologies including GPS, LEO, GPS/LEO, CDPD, GPS/CDPD and a portable phone antenna. Once again, I am not sure what any of these things are, but I do know they generated no revenue for the company and that the company no longer is pursuing these business lines.
At this time ITKG also had subsidiary called Emergent Technologies which they purchased in 1996 for, yup you guess it, stock. Emergent Technologies had some type of antenna that was good for military applications. And again, it never generated revenue, and as of today, the company is not focusing on this subsidiary.
It was not until the 10-k filng
for the period of
Current Product – ElectriPlast
The company believes that with the signing of the manufacturing agreement with Jasper rubber, they are positioned for the product to enter the production stage. However, this is not the first time that they said products were near. In an article in Signal, the magazine of the Armed Forces Communications and Electronics Association, Tom Aisenbrey, the CTO of the company who is considered the brains behind the ElectriPlast product, indicated to the magazine the following:
“Aisenbrey
expects to have several products in consumer markets in early 2005.”
http://www.afcea.org/signal/articles/templates/SIGNAL_Article_Template.asp?articleid=589&zoneid=4
That appears to be another forecast that the company has
missed.
Currently the company only has 5
employees; 3 in
But the idea of a product line that can generate significant revenue and defend its positioning through its patents is not a strategy that is endorsed by knowledgeable people in the industry. In fact, an article in the New York Times had the following quote:
Dr. David M.
Pozar, professor of electrical and computer engineering at the University of
Massachusetts and a researcher in the school’s Antenna Laboratory, questioned
Integral’s emphasis on seeking to patent its technology.
“Patents in
the antenna area, by themselves, do not ensure the success of a product, and it
is usually very easy to circumvent patents” in this field, Dr. Pozar said. Performance and price rather than patents are
the keys to success, he added.
http://tech2.nytimes.com/mem/technology/techreview.html?res=9C00E0DF1530F934A35750C0A9649C8B63
So, even if the product has value, it is not clear that they will be able to protect there pantents, making the decision not to ramp the employee base a risky one.
More surprisingly, the company is unable or unwilling to talk about the business model which will eventually drive the company toward profitability. Currently Jasper Rubber has one machine that can make Electriplast. But ITKG was unable to tell me at what volume this machine will be able to manufacture the product. Additionally, they didn’t know how much it will cost for a customer to buy. They could only assure me that they would be able to price the product “at a price point below copper where we still have a nice profit margin.”
The newly manufactured product will be shipped to the “100’s of companies” that are currently testing the product. Who these companies are is anyone’s guess, but I do know a few of the companies they are not. Previous news items have said ElectriPlast was being tested by GE, Dupont and Motorola. When I specifically asked about these three companies I was told that ITKG had decided not to deal with them because those companies were only trying to “rip-off” ITKG. So, news items that state the possibility of relationships with those companies are stale and, by the companies own admission, not going to lead to revenue.
The product, though described by the company as a “break through” is far from being without competition. A search on Wikipedia or Google for Conductive Polymers will find you a slew of alternative products that are currently in the market.
CES Award
Electriplast was just awarded a “CES Innovations 2007 Design and Engineering Award” for Enabling Technologies by the Consumer Electronics Association. Though this, of course, certainly isn’t bad news for the company, I am not sure that it is as prestigious as the company would like you to believe.
The selection process for the CES award is as follows: Perhaps most importantly, you need to pay between $425 and $950 just to have your product considered. Along with you check you need to submit only a 250 word explanation of your product and a photo. The CEA stated that they received “over 1000” entries for consideration this year. By my count there are 30 categories where your product could be considered. In the enabling technology division, where ITKG won the award, 19 total products were recognized. If we assume that enabling technologies is a typical category that would imply that 570 products were recognized by CEA. Approximately 50% of the products submitted were chosen for the award. Of course, it is better that they were chosen than to have been omitted, but I think this award is more likely to be a money maker for the CEA than a prestigious award for the recipient.
As one last exhibit, I would like to direct you to the link of the product picture that ITKG submitted along with their application. I will let you make your own judgments about the product that is shown in the picture!
http://www.cesweb.org/shared_files/innovations/innovations_2004/5610/mainphoto5610.jpg
Excessively Growing Share Count
Another characteristic that many stock promotions have is a share count that is growing very quickly. Though ITKG has not been good at selling products that generate revenue, they have been good at selling shares of their common stock. The chart below details the rapidly growing share count.
Date Number of Shares Outstanding
6/96 6.0mm
6/97 11.8mm
6/98 12.6mm
6/99 22.1mm
6/00 26.0mm
6/01 26.9mm
6/02 30.8mm
6/03 32.9mm
6/04 40.2mm
6/05 42.4mm
6/06 44.2mm
The value that current shareholders may hold in ElectiPlast has clearly been diluted in a big way over the years and through the many product iterations of the company. Over $22 million has been raised, shares have been given away to consultants and management, and the company still has nothing more than missed expectations and promises of a future.
Dilutive Financings at Large
Discounts
The above chart shows how many
shares of this stock have been issued over the years. Financings that were very dilutive to the
existing shareholder base. One of the
ways the company was able to achieve this, is by doing such financings in ways that
were very advantageous to investors in the specific financings, but not good at
all to existing shareholders.
In the 10-k filing of 2000, there was mention of a financing with Swatz Equity, LLC where ITKG arranged to receive a $25mm equity line of credit. ITKG was allowed to put shares to Swatz at 80% of the closing bid price on the stock. At the time shares were put to Swatz, they were allowed to short shares once ITKG had given them notice. So essentially, they could lock in a 20% gain on $25mm each time ITKG needed cash. Swatz definitely did not need to be a believer in this company to agree to this sweetheart financing transaction.
The most recent financing is another example of a deal done way in the hole.
On September 15th of this year the company raised $2.3mm by issuing 1,180,537 units for $2 a piece. Each unit consisted of one share of stock and ½ of a warrant to purchase stock at $2.50 within two years. At the time of the private placement, ITKG stock was trading on the open market at $3.77. So, the price alone was 47% “in the hole.” But let’s not forget, they also got ½ of a warrant. The warrant at the time of issue already had intrinsic value of $1.27 (not to mention the time value). So since each unit got ½ of a warrant, the value of the warrant portion of the unit was at least 63 cents (1/2 of 3.77 – 2.50). So, that means the investors got over $4.40 of consideration for a $2.00 investment. That means the secondary was approximately 60% “in the hole”. This is great for investors in such PIPE’s, but horrible for existing shareholders.
Valuation
What I like best about short opportunities such as ITKG is that the valuation is completely out of line with any realistic standard. Even if the red flags that I have pointed out above should rightfully be ignored, the company’s business prospects do not justify the market capitalization at which it now trades.
I would like to do some quick calculations to show you just how out of line I believe the valuation to be:
Using the 44.2mm shares that are currently outstanding and multiply that number by the current share price of $4.04, we reach a market capitalization of approximately $180mm.
As I said above, the management team gives next to no information about their business model or at what price or volume the products are likely to sell. But the company previously had research by a firm called Capstone Investments. This firm has since dropped coverage, but while they were publishing on ITKG they made the following assumption:
“On a
licensing-only model, which appears to be its preference, Integral would
receive royalty payments, likely between 5-8%, for use of its patented
technology.”
So let’s assume that ITKG can charge at the high end of the range, or the 8% royalty level when the product is shipped by their lone manufacturer, Jasper Rubber. Jasper has an annual revenue run rate of approximately $70mm. Now let’s make the ridiculously aggressive assumption that Jasper is able to double their company revenue on sales of ElectriPlast in 2007. This is obviously a much too aggressive assumption, but one that will point out the ridiculousness of ITKG’s valuation. Thirdly, let’s assume that ITKG’s total Expenses next year are constant with what they were last year, which was $2.1mm. When all these numbers are plugged in, along with the share count, what do we get for an EPS estimate next year?
$70mm Revenue to Jasper Rubber for their sale of ElectriPlast assuming the above
x 8% Royalty percent paid to ITKG
$5.6mm Royalty revenue received by ITKG
Less:
$2.1mm Expense run rate as of 2006
$3.5mm Hypothetical net Income to ITKG
Divided by
44.2mm ITKG Shares Outstanding
$0.079 or Just under 8 cents per share
So using these ridiculously aggressive assumptions for revenue for next year, the earnings per share that owners of ITKG stock can expect is just under 8 cents. This EPS number translates into a forward P/E of 50 times hypothetical earnings; earnings that are predicated on estimates that are far too aggressive to even be conceivable. In other words, ITKG is illogically expensive based on revenue estimates that are absurdly high.
At this point I also think it is important to point out that ITKG has no property, plant, and equipment on their balance sheet. ALL PP&E has been fully depreciated. Do you know of any other “growth” companies that haven’t needed to expend dollars on CapEx to fund their growth?
Catalysts
The timeliest catalyst for this idea is that the company can be forced to file a registration statement for the PIPE that took place on September 15. Quoting from the most recent 10-Q.
“At any time
commencing sixty days after the close of the offering, the investors can
require that the Company prepare and file a registration statement to register
the shares of common stock (including shares underlying the warrants) for
resale by the investors.”
That 60 day window has expired, and no doubt the PIPE investors have made this request. I think the filing of the registration statement, along with the shares that will no doubt hit the market, will pressure the stock.
Secondly, since the company has
stated that the Jasper manufacturing agreement has allowed them to move out of
the development stage, it will be necessary for them to actually generate revenue. And if, as I suspect, little material revenue
is generated, this could discourage those who may be believers.
Other Considerations
ITKG is a bulletin board stock. Inasmuch, at times the borrow can be difficult. However I have found that there are small amounts available to borrow almost on a daily basis. I think that if you try for a locate frequently; a full position can be reached in a relatively short time.
Conclusion
In ITKG you have the opportunity to short a company that:
a) Has been unsuccessful at numerous different product iterations during its ten year history.
b) Has generated under $250,000 in revenue in its total corporate history.
c) Has only been successful at selling stock, often times at supreme discounts.
d) Has a CEO and co-founder that was president of a publicly traded company that now trades at 7 cents that was involved in a stock promotion while he was president of that company.
e) Has an unproven product with an unclear business model which depends on its ability to defend its patents instead of building an infrastructure; a strategy questioned by people knowledgeable about the industry.
f) Competes in an industry with many alternative products and against much larger companies with existing product lines.
g) And most importantly, trades at a valuation that is ridiculous even using most aggressive revenue and expense assumptions.
Obviously, if you are not
comfortable shorting a $4 stock than this is not a good idea for you. But I believe this is the type of stock that
you can short with the intention of holding long term. As the luster wears off the story, you are
simply left with a many times failed company with no revenue, a management team
with an unsuccessful past, and hopefully a stock that more reflects its
inherent value, which I estimate at close to zero.
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