To OTC Journal Members:
 

Nighthawk (OTC BB: NIHK): Five Fold Growth This Year? Here's How

This past Wednesday Nighthawk put out its 10k annual report, and this massive, completely boring document, sets the stage for what could be a breakout year for the company. A wonderful read if you have insomnia. 5% of it is important.

A quick review: NIHK delivered $1.7 million in revenues- up from $900k the year before. About $1.2 million was from their legacy remote power management technology- the remaining $500k came from their new hi def set top box business.

There's lots of improvements to talk about on their balance sheet. For the first time in years they have positive shareholders equity. They have over $1 million in cash, inventory, and receivables, and $327k in payables. There is some accrued interest associated with their preferred issuance, but they have assets $4.5 million in new assets, the purchase of which was financed by the preferred issued in Q4 '07. All in all, some very nice improvements in the balance sheet. 

There is continued slow but steady growth in the legacy business of remote power disconnect, and some very compelling upside in the set top box division they acquired in Q4 of '07.

The set top box business- they bought this business from a failing company in Q4 of '07. It was the only component left with value. This is not the every day set top boxes for your local cable company- NIHK is now making hi-def set top boxes specifically for the hospitality industry, which has very special needs.

For example- your cable service set top box just has to deliver your television programming- hopefully, by now, you have converted to Hi-Def. Hotels are very different. Their TVs have to be able to serve up content flowing from a variety of different sources- not just television, but hotel specific programming, your bill and the check out functionality, and others as well.

NIHK's one big customer provides services for 500,000 hotel rooms. About 5,000 of the rooms have hi def set top boxes in them now. That leaves a potential market for this one customer of 495,000 more hotel rooms. That's big bucks, and would evolve NIHK up into a whole different company.

In a rather un NIHK way, the company forecasted the possibility of $10 million in sales in 2008 - that would be a more than five fold increase over 2007- where is that going to come from?

I have some candid information to share with you on that very issue which I explored in a conversation with CEO Doug Saathoff. He believes the company could hit the $10 million revenue mark this year, but it is predicated on two major developments- 1. They have to double sales in the legacy business again, which would represent $2 to $2.5 million in 2008, and 2. They have to land a second major customer in hotel hi def set top boxes.

To achieve the landing of this second customer, they have to perfect some aspects of the functionality of the box (mostly related to software integration with all the different TVs and individual hotel systems). Discussions are underway with potential second customers at present.

Their current customer is anxious to start taking delivery of 2,000 set top boxes each and every month. NIHK is close to being able to deliver, and to manufacture at a significant discount as compared to previous versions. Margins would be enhanced greatly.

So, what does all this mean to the stock price? Admit it- if you are still holding this stock, you are simply dying for another of its legendary meteoric runs wherein NIHK triple or quadruples in a relatively short period of time. It's happened twice in the last two years. It's now been 13 months since the last huge run.

What would the catalyst be for another such event? Hard to say, but I keep pointing out what I have been saying about NIHK for some time. NIHK has not blown the doors off the top line, but has delivered consistent growth over the last several years. This consistent moderate improvement mitigates your downside risk. This one is going to be around.

The company has lost money consistently over these years, and the shareholders have paid for these losses in the form off dilution. 2006 year end shares I&O were 85 million. By the end of 2008: 134 million.

There is a convertible preferred now- funds from which financed the purchase of the set top box business. It is not debt, which is why their balance sheet has improved so significantly. It is not nearly as toxic as past financings- you will be able to easily tell from quarter to quarter if the preferred is being converted- just look at the number of shares I&O, and look at the number of preferred shares. If the number of shares I&O goes up, and the number of shares of the Preferred B (currently 600,000) goes down, you know those shares have been liquidated into the open market.

Even if you figure the company eventually issues all 200 million authorized shares, you still only have a $10 million valuation. At the current price, this means the company is valued by the market at about $10 million fully diluted.

Based on last year's numbers, NIHK is probably fairly valued. Based on 2,000 set top boxes sold monthly, a new potential customer of equal size, and a significant bump in its legacy business, NIHK is probably worth 5 times the current price.

Technically the stock is stuck in a consolidation phase that has lasted nearly 3 months. A little blip of one million shares is not going to get this stock rocketing up the chart. If the stock pokes its nose up, there will be some sellers who say whew, and get out. One or two more volume surges could clean it up and send it higher.

A meteoric rise as in past years? There are some catalysts on the horizon. Set top box sales ramping up will help. Continued order flow out of the utility market will help. A second major customer in hotel set top boxes could do the trick.

Look for a lot more information flow out of the company from here forward.

My conclusion- not a lot of risk to continue to hold the stock, and lots of upside with this new line of business. Think of it as an option that doesn't expire. Will 2008 be their break out year? The set top box business has changed everything. If you are a mid to long term investor, there is every reason to hang in there and find out.
 

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