Nick Hodge takes second place to pretty much nobody when it comes to teasing microcap stocks that he claims will have massive, massive market success and soar to “dizzying heights” … so when I first saw this pitch about a “new FDA mandate” and a machine that can stop every “life-threatening superbug,” I figured it was a repeat.
But nope, this is a new one. To me, at least. So what’s he pitching as he tries to corral subscribers for his fairly pricey ($1,299/year) Early Advantage?
The basics are in the top of his ad:
“A new device is emerging that’s promising to…
* Stop every pathogen from e. coli, salmonella, and bird flu… to life-threatening superbugs
* Unleash a $20 billion wave of wealth…
* Send the one tiny 75-cent stock with all the patents on it soaring to dizzying heights…
“All starting with a critical technology rollout on November 1”
So here’s the easy part — when someone promises you that a microcap stock is about to put a product into every single restaurant, or every single doctor’s office, or every single home, and that it’s going to happen quickly because of some hot new development… they’re almost certain to be wrong. You know that, logically — you know that government mandates that focus on one single solution from one single company are exceedingly rare, and that tiny companies don’t become dominant global manufacturers overnight (or over hundreds of nights)… but still, the temptation is there: what if this is the one?
That temptation is what every microcap stock newsletter relies on in its promos — the hope that you’ll find the one company that goes from pennies to billions. And it’s relatively harmless to sniff around at them and daydream, as long as you don’t think of it as real investing or put your retirement or your kids’ college tuition (or the mortgage payment) at risk. So let’s see what stock this is, and see what perspective we can give you… ready?
“A groundbreaking solution has just been developed in a mysterious facility 40 miles east of Silicon Valley.
“You’re looking at the Livermore Lawrence Laboratory, a top-secret military site — home to major inventions like Google Earth and the Human Genome Project…
“Where scientists have just pioneered what could prove to be the lab’s biggest breakthrough EVER.
“A next-generation device that can stop deadly epidemics in their tracks in just one hour.”
We’re shown a little photo of the device, which looks like a fairly standard lab test machine — like you might see on a table in the back room at your doctor’s office. Here’s what Hodge says about it:
“In a matter of minutes, it tells you how clean your water is. How clean your food is.
“If and what kind of bacteria is in it, how dangerous it is, and what to do about it.
“And it does so with undisputed, dead-on accuracy.
“Nothing else is capable of achieving virtually real-time biometric updates like this!
“In fact, it’s so impressive, so powerful, and so one-of-a-kind…
“That the FDA just mandated the testing this device goes into every restaurant supply chain in America…”
And that’s the real crux of the pitch from Hodge — that this little device is going to be forced upon every single restaurant, hospital, school, farm, cruise ship, etc., anywhere that pathogens might spread through food or water.
And the implication, of course, is that the FDA is requiring all these facilities to buy this particular device — by November 1 — and that’s obviously a huge deal for a tiny company. I hope you’re already skeptical about the specifics of that FDA requirement part, but let’s read on to see what else Hodge says:
“‘The Pentagon scientist behind this device just handed investors a massive opportunity …’
“Perhaps the biggest of 2017 or even the next decade.
“In order to fulfill the FDA’s mandate, and to get this device into the public’s hands…
“He founded a tiny company — holding all the patents — that just went IPO earlier this year.
“Since then, its share price already jumped 174%.”
What else? We’re told that this firm is valued “at a mere $20 million.”
And that November 1 will bring “a mandated rollout that will quickly disrupt a $20 billion market… in just a matter of months.”
He also notes that as the business quickly spreads, he thinks bigger companies will jump in with a “fierce buyout war” and drive the price up from the current 75 cents to “$5… $25… and beyond. Just in 2017.”
So that, along with the “there’s no time to waste” phraseology he uses, is the spur: This stock is going up maybe 3,000% this year, better get on it quick! Maybe it’ll be $122 this year, not just $25! Don’t stop to think! Just subscribe to the newsletter! Quick! You’re missing out!!!!
Sorry, got a little over-excited there. Perhaps because of the ridiculous and impossible to prove or disprove assertion from Hodge that “Every single time a technology or invention from Livermore goes to the private sector… It creates hundreds of millions, or even billions in wealth.”
So what’s the stock? This is, sez the Thinkolator, Lexagene Holdings (LGX.V, LXXGF), which is a tiny little company with a market cap of about C$45 million that is, as teased, trying to develop an easy-to-use testing machine aimed at the food safety industry.
And yes, in case you’re crossing those t’s and dotting those i’s on the clues, the company did go public within the past year, through a reverse merger on the Venture exchange in Canada (and it started trading on teh OTCQB in the US in March)… it is based on scientific work done by the founder, Dr. Jack Regan, who invented this “pathogen detection system” and was previously at Bio-Rad Laboratories doing similar things with blood testing, and at Quantalife and Life Technologies. He did, sez his bio, do his post-doctoral work at Lawrence livermore on automated testing of pathogens and bio-weapons — and the company has a “strategic relationship” with that lab and a couple defense-related board members.
If you need more, the background graphic of Hodge’s ad looks like it was taken from Lexagene’s website… and the basic pitch made is like an exaggerated version of the company’s investor presentation here.
The company does say that they are hoping to address a near-$20 billion market — that’s the combination of food safety, water quality testing, veterinary diagnostics, and aquaculture testing, and their selling proposition seems to be that their machine will make it easier and faster to do this kind of pathogen testing on site, using any kind of liquids and testing for a couple dozen different pathogens, starting with Salmonella and e. coli.
The presentation is fairly compelling in describing their opportunity — but, well, it’s an investor presentation, they’re supposed to be compelling. I have no idea how their machine will do when it’s in competition with all the other protocols and devices for food safety testing that are out there — it sounds like their machine will be faster and more accurate than some, it’s basically a microfluidics genetic testing machine, from what I can gather, and I don’t know if that’s really a better or more accurate or more cost-effective way of sampling the runoff from your lettuce farm for e. coli (or whatever).
How about that promise that this $20 billion market just lands in their lap on November 1? That’s pretty much hooey. The FDA does have a new food safety and testing regime that’s being gradually phased in — the regulatory implementation of a law that Congress passed back in 2010 to try to clean up the food supply. If you don’t remember, that followed on a few years of near-panic in some industries — there was an e. coli outbreak in 2006 thanks to spinach tainted with manure, then similar outbreaks tied to cheese and dairy products over a couple years, then a big salmonella outbreak in eggs. Congress acted to try to make the food safety and testing regime of the FDA a bit more proactive, requiring more testing and specific safety protocols, and, thanks to the complexity and cost of our national food supply, it has taken a very long time to actually implement those rules (which are still changing). Most of the rules apply first to the largest businesses — huge farms, big food distributors, retailers or restaurant chains, starting early next year, and it rolls downhill to the smaller players in subsequent years. There’s a pretty good rundown of the FSMA and its implementation on the FDA website here.
November 1 is not an important regulatory date for this Food Safety Modernization Act (FSMA), but it could be an important date for Lexagene — sometime in November is when they say they’ll have their prototype finished (the machine is being developed by a contractor, Boston Engineering). The “Pre-Alpha Prototype” was unveiled at a food safety conference in July (you can see the video from that here), and they’ve not announced any delays — from what I can tell they still plan to be testing the prototype(s) in November. This is what they said in their last earnings release:
“In early October, we anticipate progressing onto Phase IV of product development, when we will test the two alpha prototypes to ensure they meet all the pre-defined specifications. By the end of Phase IV, which is scheduled for the end of November, we expect to be able to successfully demonstrate the functionality of our fully integrated sample-to-answer pathogen detection instrument.
“Soon after Phase IV is completed, the Company will be looking to close another financing round to secure sufficient capital to sustain the Company through commercialization.”
That’s probably going to be fairly tight, as of last month they said they had about US$1.6 million in cash, and they have a loss of roughly $1 million over the past six months, so there’s not necessarily a lot of extra cash in there to get them through prototyping if costs are higher than expected.
And, of course, going from a prototype to actually building a machine is going to have a pretty dramatic impact on the cash flow situation, so I would assume that they are really hoping to drive the stock price up into the prototyping news releases so that they can raise a larger chunk of money at a relatively high price. They do have some “financial projection assumptions” in their presentation, which is probably a lot of guesswork since they don’t even have a prototype yet and we have no idea what their commercial production volume might be, assuming it ever becomes a commercial product… but the projections sound compelling — a selling price of $115,000 for the machine and $55 per sample for the disposable cartridge and testing reagents, which could provide a huge gross profit margin at a $40,000 cost of manufacturing the instrument and a $1.50 “cost of goods” per test, so gross profit could be pretty big if they can hit those projections (I have no idea whether those are rational or not) and produce a meaningful volume of machines… though that doesn’t incorporate the meaningful costs of operating the company and selling these machines.
Getting Nick Hodge on board to spread the news seems to have helped the stock a bit already, getting the price back to its highs around C$0.90 (the stock shot up sharply in the Spring when they were starting trading and getting more press attention and doing private placements to raise cash, and has gradually dwindled over the past few months in the absence of any real news). I found it particularly notable that their actual unveiling of the prototype, roughly a month ago, didn’t have any impact on the stock price… but Nick Hodge’s wild promises have certainly helped the shares so far.
My assumption, not being an expert on food safety or testing or the development of scientific instruments, is that the process of going from a pre-prototype to meaningful sales is going to be a lot longer than investors would prefer, and cost a lot more money. That leads me to not be particularly interested about a R&D firm, even if they seem, to a layman, to have an interesting device — my guess is that if this does eventually turn into a valuable product with real potential, there will be plenty of opportunities to buy it when it has grown up a bit, gotten some real-world exposure, and after the marketplace has a chance to embrace or reject the idea of an on-site microfluidics testing machine like the LexaGene LX6. And they’ll have to raise a lot of money to move the ball further down the field on this, so as you wait for the situation to be “de-risked” there may even be chances to buy it cheaper… but, of course, every now and then there is that exciting penny stock that seems to go up forever and become a real company or get bought out by a large firm, so waiting does always fight the “fear of missing out.” If you do decide to jump aboard, please get some additional perspective beyond Nick Hodge’s sales pitch so you can moderate your expectations accordingly.
So feel free to look into it — research the company, try to understand their competitive position in the emerging on-site testing marketplace, and think about the development timeline and their cash flow, and then let us know with a comment below whether you’d be interested in buying the stock. It’s not sounding compelling for me right now, but it’s your money — what matters is what you think, and how much risk you’re willing to take.