To OTC Journal Members:
 

Time To Limbo- How Low Will You Go?

In last weekend's edition on the Sneak Peak at July, I alluded to sharing a few penny stock ideas throughout the remainder of the month. I believe the larger caps are overextended. The risk/reward ratios at current entry levels are too high right now. However, I also believe there is some easy money to be made over the next several months as a number of penny stocks simply rise with the tide and regain reasonable levels. Witness AMNM up from $.07 to $.14 since June 6- nearly a net double in five weeks.

Also, in last weekend's edition I mentioned that I had uncovered a stock trading at $.015 (yes- that's a penny and a half), and the company was now achieving about $200,000 per quarter in positive cash flow. I received about 200 emails asking for more information. At your request- here is the idea. A turnaround situation that Darwin would be proud of. A company which should have gone bankrupt, avoided extinction, and mutated into an entirely newly evolved species. There is baggage, but it seems to be manageable. Even if the stock only goes to $.10 (one dime), the percentage return on investment is outstanding.

Moreover, you can play fund manager with this stock. Ever wonder what it would be like to buy one million shares of stock in the open market?- here's your chance. This idea is risky- just by virtue of the price you can make that assumption.

For your consideration:
 

Trading Alert- Imaging Technologies (OTC BB: IMTO)

Imaging Technologies used to sell digital imaging solutions. It was one of the high flyers in the last bull market. The company's fortunes took a turn for the worse when they shipped a $4 million order to a Japanese company that filed for bankruptcy shortly after taking receipt of the merchandise. IMTO took the loss on the order and subsequently defaulted on some bank loans. 

High flying IMTO immediately began spiraling towards the ground. Chairman Brian Bonar got control of the stick just prior to impact by creating an entirely new business. The plane is now climbing out slowly. Inside of one year this company could regain high altitude and just flip on the autopilot and cruise. According to Mr. Bonar, this turn around is being fueled by positive cash flow from the new business. I'm writing about it now because I'd rather give you the facts and let you make up your own mind while the stock is still trading under 2 cents.
 

IMTO is Now A PEO

Do you know what a PEO is? The market for PEO's was $5 billion in 1992. By 2000 it had grown to $26 billion. 

If you are a PEO you provide an outsourced service for small companies. PEO stands for Profession Employee Organization. Rather than have the extreme cost of a human resources department and all the effort and expenses associated with payroll, workmen's comp, insurance benefits, and pension plans, you can simply pay your labor expenses in one payment to a PEO. They take if from there.

35 million Americans work for companies with less than 100 employees. That is the size of the potential market.

Once you retain a PEO to replace your Human Resources Department, your employees formally become employees of the PEO. They just show up for work at your place of business.

Through the power of numbers the PEO has the ability to negotiate better pricing on many employee related costs like health insurance, pension plans and 401K's, workmen's comp, etc.

The business model is beautiful, which attracted me to the idea. PEO's have very high and consistent cash flow, which allows for simplistic evaluation. 

IMTO made a few mistakes in the early going, but the business has stabilized, and according to Chairman Brian Bonar performs as follows:

• IMTO generates nearly all its revenues from the PEO business.
• Currently, there are about 4,500 employees managed by IMTO.
• Each employee creates cash flow of about $70 per day- this equates to $315,000 in daily revenue flow.
• IMTO makes about 8% gross margins on daily revenue- hence $25,000 in gross profits per day.
• At 20 working days per month- this equates to $500,000 in gross profits per month.
• Hard costs to run the company are about $350,000 per month.
• Therefore, the company is now generating $150,000 in positive cash flow per month, or $1.8 million annually. Not bad for a stock trading at $.015.

The Negative

In a phrase- $12 million in debt- nearly all of it in default. Much of it with judgments against the company. They should have gone bankrupt several years ago.

However, the senior lender holds a $3 million note. No one can collect until the senior lender gets paid, and IMTO has negotiated an indefinite, interest free extension.

Most of the debt is nearing the statute of limitations. If not collected it becomes uncollectable, and the company skates. Chairman Bonar believes he can eradicate the entire amount of debt over the course of the next year through low ball settlement offers and expiring statutes. He now has the platform to achieve this goal.
 

Today's News

Today, just after the market closed, IMTO announced the acquisition of all the managed employees of Joint Employers Group. The acquisition adds 1700 more employees under management, bringing the total to about 6,200. 

This means the company will now have about $435,000 in daily cash flow, $35,800 in gross profits, and about $200,000 in monthly free cash flow. This equates to $2.4 million in annual positive cash flow.

From here forward the company will only be reporting the gross profit as revenue, not the amount of money it collects from the company for its employees. This will bring revenues down considerably, but bring gross margins up substantially. You end up with a low revenue/high profit margin company as opposed to high revenues/low profits. In either case, the positive cash flow remains the same.

A look at trailing financials does not reveal this performance. A good deal of new business was added near the end of March, and some unprofitable businesses were ejected. 

All of the figures were provided to me by Brian Bonar, Chairman of the company. I have actually trimmed his estimates considerably. You wouldn't believe the actual numbers if I told you.

The June quarterly performance will not be reported for some time as it is the company's fiscal year end, but they will show a dramatic turnaround. 

There is an advantage to writing a newsletter as opposed to being an analyst. I don't have to wait for the audited numbers. I can give you this information while the stock is still under $.02. There are 180 million shares issued and outstanding at this time. Therefore, the entire market value of the company is only $3.8 million. From these levels, I think there could be a triple in the stock.

So, for you risk minded readers who want a lot of bang for the buck, here are my thoughts:

• Buy up to $.03 (yes, that's 3 cents)
• Stop Loss: $.015
• Price Target: Short Term (60 days)- $.05. This is just a stab at a number- there is no telling where this one could go.

The company has been extremely quiet about its progress. We are the first source to feature the turnaround situation. This gives you a competitive advantage over other potential market participants.

Here is the complete text of today's news release for your review:
 

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