by Travis Johnson, Stock Gumshoe | October 8, 2013 6:16 pm
This is a special bonus solution for the Irregulars, because the company is very, very small and probably quite foolish to trade — if you do buy it and the company doesn’t do well, it will be very hard to sell it quickly. Especially if you’re not willing to take substantial losses.
That goes for a fair number of tiny companies that I cover now and again, but this one is absurdly small — I don’t want to avoid covering it, because that just plays into the secret teasing campaigns by the newsletter publishers, but I also don’t want to spout it out for the whole world on our free website, let those who have drunk the Agora Kool-Ade and are convinced this company is unique and about to own the “fracking water” business buy the stock as soon as they learn the ticker symbol from us … I’d feel like I’m encouraging foolish trading behavior.
But when it comes to the Irregulars, I know you’re adults and I know you’re a smaller (and, of course, far wiser) group of investors — so I feel somewhat less guilty for exposing you to a little $15-million company that probably none of us should be looking at all that closely. Who knows, maybe you’ll see promise here where I see, well, risk.
Does that make me some kind of over-nervous den mother who makes her Cub Scouts whittle with plastic knives? Sorry, I rarely know where to come down on stocks with sub-$50 million market caps — they’re prone to manipulation, they’re fun to dream about, and they are the stock in trade of a few high-priced newsletters as well as the target of most pump and dump campaigns, so it’s usually hard to invest in them based on real fundamentals unless you know the company and industry really well and have a strong stomach. Sometimes I cover ’em, sometimes I don’t — I’m fickle. Today, enough of you are asking — and the publisher is so huge (Agora Financial) that I know I’ll get the same question from hundreds more of you, so I’ll do my best to check it out. And yes, I know you don’t care about my navel gazing, but I can’t help myself … sorry.
So … on to the tease!
The basic pitch is that there’s a super-tiny stock that sells, well, water, to the fracking firms (it’s a special kind of water, don’t worry — Agora calls it “Miracle Water”), and this is used to help kill the bacteria in the fracking fluid without causing a toxicity problem.
Part of the concern about fracking is not only that is uses huge amounts of water, but that it also could contaminate water supplies or pollute surface water because of the chemicals that are used in the fracking fluid … and some of those chemicals are intended to kill bacteria that would otherwise gum up the works. So this “green” fracking water is supposed to make us millions by solving the bacteria problem without being toxic.
Here’s some of the pitch from the Agora Financial folks — the ad’s from Thompson Clark for his Microcap Millionaires newsletter, which is another of those “tiny stocks” newsletters like Phase 1 Investor from Stansberry (and similarly priced, $5,000 but “on sale” for $3,000). This letter appears to be a “relaunch” of a letter that used to be called Penny Stock Fortunes under a different editor, so Clark and the letter won’t have much of a track record yet — looks like he started picking stocks for them in August.
And what is this one he’s picking now?
Well, since you’re one of my favorite people I can tell you up front: this is almost certainly (not enough clues to be 100% certain, but the evidence is nearly overwhelming): Integrated Environmental Technologies Ltd. (IEVM).
And yes, it’s teensy at about $18 million in market capitalization, it often trades only $10,000 worth of shares in a day (the average is a bit higher, but that’s because of a few high-volume days over the last few months — a hallmark of newsletter-pitched stocks).
How is this our match? Well, we’ll run down the clues for you … here’s a bit more of the tease first so you can understand where they’re coming from:
“… there’s a tiny company with a technology that could eliminate concerns about water quality.
“While at the same time helping oil companies put billions more dollars on the bottom line.
“And as a result, help the tiny $16 million dollar company earn a windfall that could be worth around a hundred million dollars.
“In the process, shareholders could make a very large sum of money. All because they knew the catalyst could be weeks away – and then positioned themselves to take advantage of it.
“So let me tell you the company’s story and you can judge for yourself if you would like to be one of the 25 newest people to get the complete details today.”
It probably won’t shock you to learn that there are quite a few companies — small and large — selling chemicals and water treatment supplies, both to the oil & gas industry and to other big customers (water treatment, factories, food companies, healthcare facilities, the list goes on). So how do I know they’re teasing this one?
The clues …
“…in the 1970’s an electrochemist working for the Soviet oil industry discovered a new process to help pump more oil out of wells.
“He developed a reactor that rearranged salt and water into a completely different chemical solution using electricity.
“And the solution the reactor created happened to be one of the most potent germ-killing agents known to man.
“Let’s call it ‘miracle water’ ….
“At the end of the Cold-War, the new Russian government decided to commercialize the reactor. So they brought it to the United States.
“The Russians entered into a licensing agreement with the chemical giant Monsanto.
“But soon after, Monsanto killed R&D on the reactors….
“Months later, an American micro-cap company licensed the Russian’s reactor technology.
“But even after improving the design of the reactor, the little American company made a strategic mistake.
“And for a while, they made little progress in commercializing the reactor.
“A Turnaround Artist Made A Bold Move… “
Sounds like an exciting story, right? Stories are what sell stocks, particularly microcap stocks (if you’re dying to buy this one, for God’s sake don’t read their income statement — I’m afraid it might discourage you).
Who’s that “turnaround artist” and what was the strategic mistake he corrected?
“A little over two years ago, a venture capitalist (we’ll call him “Mister V”) spotted the tiny American “miracle water” company.
“He was also a turnaround veteran who had an especially noteworthy success with a small medical company.
“In short, he joined the medical company’s board, “Mister V” took them from a market cap of $80 million to over $5 billion dollars in about a decade.
“Which meant the company grew over 6000 percent.
“‘Mister V’ became fascinated by the tiny “miracle water” company. And to make a long story short, he was invited to join the board.
“Soon after, he made a bold move.
“You see, while ‘Mister V’ was a fan of the technology, however the marketing plan was a different story.
“So ‘Mister V’ shifted the company’s marketing strategy from selling reactors… to selling ‘miracle water.’
“Which essentially meant he shifted the firm from selling razors to selling blades.”
That “Mr. V” is David LaVance, who was on the board of Hologic (HOLX) while it went from a sub-$100 million market cap to over $5 billion, and he’s still on the board today. Hologic is a diagnostics, imaging and surgical products company in women’s health, and LaVance has been the lead independent director, but other than that I know nothing about them or whether LaVance was a critical contributor to their success. He’s also CEO of a tiny cardiac tech company, market cap less than $1 million called Scivanta, and has run a bioscience-focused investment banking firm — just in case you’re curious.
And we’re also told that there’s a catalyst upcoming for the stock:
“The Catalyst That Could Cause the Company’s Stock to Soar in a Matter of Weeks
“Recently, the company has been successfully testing “Miracle Water” in a Rocky Mountain state with several oil fracking operations.
“And according to the company, a full production facility for “Miracle Water” water will be complete in just a matter of weeks….
“… drillers are using a different solution which sells for between $13-$35 a gallon.
“But ‘Miracle Water’ is much cheaper. Plus it’s a more effective bacterial killing agent.
“When this new Rocky Mountain facility hits mass production, ‘Miracle Water’ will be priced at between $5 and $6 per gallon.”
And then they tell us how big the company could get just from this “test area” …
“There are approximately 9000 active wells in the test area. Each of them would require about 400 gallons of ‘Miracle Water’ every week.
“In a perfect world, assuming 50 production weeks a year… that’s a potential for 80 million gallons at a cost of $5 per gallon… which could increase the “miracle water” company’s revenue up to $400 million dollars.
“Now, I’m sure you’re able to spot the opportunity in buying a company worth a total of just $16 million… that has the potential for $400 million in sales….
“‘Miracle Water’ is so cheap to produce; mass production should bring the company the gross margins found in the pharmaceutical industry.
“In fact we believe it’s reasonable that margins could be around 90%.
“Assuming 25% market penetration, just this one small fracking opportunity could generate profit margins that could put earnings per share around 25 cents.
“Using a price to earnings ratio of 19 like the S&P 500, that would be well over $4 a share.”
You can see the “big picture” plans of the company in their Spring “letter to shareholders” here, or there’s an older presentation here that goes into the product and end markets in more detail.
The reason they’re starting in the Rocky Mountain region is the high sulfur typically found in those wells, and apparently their product is able to cut down on sulfur and reduce the presence of dangerous sulfur gas … but this product, which they’re marketing under the trade names Excelyte and EcaFlo (apparently Excelyte is the fluid, EcaFlo is the machine), has been tested for many years in fracking fluid — they did it in the Marcellus back in 2010 as well, though that was when this company was selling the machines and the actual fluid was sold by their customers (largely, a Texas chemical company formerly run by E. Wayne Kinsey, IEVM’s largest shareholder, and since taken over by a larger oilfield services firm).
Now they’ve built a new production facility in Utah and are expanding capacity, so they say they can produce 100,000 gallons a month of Excelyte, and they’re continuing to test the product with oil and gas companies — the latest update on their foray into fracking fluid is here.
The system they use to create this fluid, electro-chemical activation (ECA), did start as a Russian idea — about 40 years ago. And it does basically do what the teaser says, it uses electricity to turn water and brine (saltwater) into an anolyte that is 100X more powerful than chlorine bleach without the toxicity problems and a catholyte that can be used as a degreasing detergent.
Similar products are marketed by other companies, and I’ve seen several other tiny companies make PR claims that are very similar to this, and sell similar-sounding “electrolyzer” systems for sanitizing hotels and restaurants, though I don’t know if IEVM’s system is proprietary or unique enough to make their end product stand out — it seems that the end product of any similar machine of this type would be similar (it’s a pretty simple electrochemical process, it appears, and I don’t know what might be proprietary about IEVM’s design), but presumably they could gain some advantage if they can produce it more efficiently or with greater purity or something. I nearly failed Chemistry in High School, so you can make your own call on that part of it.
But a look at the finances will tell you just why this is a penny stock with an $18 million market cap — or, perhaps more accurately, will make you wonder why the market cap is as high as $18 million. They are in a strategic turnaround, so that’s clearly the only reason to consider the stock — if you believe that the problem was not their technology or their ability to break into the industry in general, but the fact that they were trying to sell machines instead of trying to sell the end product. Selling the machines, clearly, was unsuccessful — they’ve accumulated a deficit of about $18 million now, and they are still, as of their last 10-Q, on pace to lose about $2 million per year.
That means the sales volume needed to turn this into a viable company is incredibly high. The gross margins on their product do look very high — something like 75% at the moment — but gross margins are just the start (to oversimplify, gross profit comes from taking the revenue and subtracting the actual cost of making the product), you also need to actually pay for the overhead of the company, the sales force who are trying to sell the product, their financing costs, etc. If we extrapolate from the first six months of this year, which showed numbers that were very similar to last year, we get a company that is on pace for annual sales of $160,000 and a gross profit of about $130,000. On the cost side they’re on pace for annual general and administrative costs of $1.3 million, selling costs of $430,000, and R&D costs of $200,000. So that’s how you get a loss of roughly $2 million per year. Of that loss, about $1.4 million is actual cash flow out the door (as opposed to non-cash stuff like depreciation).
Unfortunately, I have no idea what they charge for their Excelyte biocide so I don’t know if 100,000 gallons a month (if they can sell what they say is their full production capacity) will get them to a reasonable revenue level. If we make the generous assumption that gross margins will improve with capacity and expenses will not rise with increased sales (they won’t need more salespeople and staff, etc.), their income statement indicates to me that they need to increase sales by about 10X to get to cash break-even. If they really hit 100,000 gallons and the teaser is accurate in saying that it will sell at about $5 a gallon, that’s $6 million a year in sales and could easily make them profitable, but those do seem like assumptions out of left field and I don’t know what general bulk biocide costs are.
As of early August they said they had about $500,000 in liquidity available, which they thought was enough to last them six months (that would mean they’re being far more parsimonious now than they’ve been over the past two years — or that they think revenues will grow, in the past that’s been enough to get them through roughly one quarter). They last raised a bit less than a million dollars over the Summer by selling shares at three cents a share, and presumably they’ll be raising more money soon.
So … they seem to have a genuine operating business, but I have genuinely no idea whether or not their product will be a hit or is competitive with (or distinct enough from) the many biocides, including “green” biocides, sold by dozens of dramatically larger multi-billion-dollar companies like EcoLab or AkzoNobel or Dow (to say nothing of their competitors in the healthcare and agriculture space, where they’re trying to sell their product by the bottle and case), and the safe assumption is probably that they are going to lose a lot more money before (if) they start making money. Which is kind of what you expect from a teensy little microcap startup. Not something I’m particularly interested in, but your mileage may vary.
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