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The OTC Journal Wall of Shame

2005 is a year I would like to forget. In the microcap arena, with few exceptions, if it wasn't energy, it got killed. Pretty much regardless of corporate performance.

We had three ideas in the Energy Sector. Torrent Energy (OTC BB: TREN) was a big win- first introduced just under $1- a sell was suggested as the stock approached $3 last June. That's how they should all go. There was and still is HyperDynamics (AMEX: HDY). Was doing well, then floundered in the summer thanks to a corrupt Guinea politician. Appearing to get back on track, and still could be a huge win. World Water (OTC BB: WWAT) in the solar powered arena doubled during the year, but admittedly I didn't publish much content on that one.

In this year's wrap edition I have decided to give you a look into my world- I am going to share what some of the company's told me they would accomplish, and compare it to what actually happened. The companies will be presented in order of the most outrageous claims vs delivery. Some of the information included would have been considered "insider information" at the time it was provided. Long after the fact it has little value other than as a learning tool.

The OTC Journal's 2005 Wall Of Shame In Order of Most Outrageous Projections:

• Aegis Assessments (OTC BB: AGSI): AGSI has one of the most compelling homeland security devices I have ever seen, and I even attended a meeting of SPAWAR on a San Diego military base to watch a demonstration. Homeland Security experts loved the radio bridge, but for some reason the company cannot sell them. The management of AGSI presented me a pro forma on January 14th, 2004, stating they would achieve $35 million in sales in '04 and generate $22 million in gross profits. Net result- zero sales in '04 and minimal sales in '05. I figured if they achieved 25% of their projections they would make a profit. I don't know where they went wrong, but this management team is a complete disaster.
• American Water Star (AMEX: AMW): Roger Mohlman has to be one of the most delusional CEO's I have ever encountered. I visited the company in May of 2004 just prior to Wal Mart picking up their beverages. Management across the board told me they would do $100 million with Wal Mart. After about $1.5 million in orders, WalMart dropped them. Since he didn't have any orders, Mohlman did the logical thing and went out and acquired three bottling facilities. In late November of '04 in a publicly aired conference call, Mohlman predicted AMW would achieve $80 million in revs in 2005. Through the first 3 quarters of '05 the company has delivered about $2 million- only $78 million to go in the 4th quarter. Today, AMW is in default on about $6.5 million in debt, and has been notified by the AMEX of pending delisting status due to their inability to file their financial statements in a timely manner. If Mohlman is a cat with 9 lives, he has definitely used up 8.9 of them. Perhaps he can negotiate a settlement on the debt, but there is no excuse for not filing the financials on time.
• ZAP (ARCA: ZP): Looking back on the ZAP situation, I can't help but wonder if it really wasn't some sort of scam. The company bought the technology developed to convert the MB Smart Car to US standards. They went out and marketed the cars without knowing if they would be able to get them, and according to their press releases generated over $1 billion in orders. The stock went crazy for a while despite the company's poor corporate performance in electronic vehicles. Alas- MB was not willing to sell them cars, and actually bitch slapped them when they publicly disclosed they had presented MB with a billion dollar order. Complete failure. One for the record books. I wonder if they didn't know it all along.
• Family Room Entertainment (OTC BB: FMLY):  FMLY is a major source of frustration. The company really delivered this year in movie productions, but it was too little too late thanks to the third toxic financing in three years. If the stock had traded millions of shares everyday, there would have been enough demand to absorb the supply. When they have a hit movie and generate a windfall profit, CEO George Furla can right the ship if he so chooses. Until that time, the excess supply of stock originating with the $2 million note they signed a year ago will continue to create an imbalance in the market. They issued 6.4 million shares in October alone to pay the debt. As of the end of September, the company was still carrying $1.3 million in convertible debt. This debt would convert into about 100 million shares, all needing to be sold into the market. That's only if the price stays the same. If it falls, the company will have to issue more shares. Some day someone is going to make a lot of money on this stock. Unfortunately, it won't be this generation of shareholders. When the convertible debt is gone and the company does the inevitable reverse split, I might look at it again.

Here's a couple of honorable mentions:

• VirTra Systems (OTC BB: VTSI): VirTra is one of those stories where the company had the right product at the wrong time. VTSI makes a phenomenally effective Judgemental-use-of-force training simulator. Early in the year officials from the military gave them assurances big orders were on the way- it would have been $20 million in orders just for the marines. Thanks to all the money we are spending in Iraq, the purchasing agent's budgets were killed, and the orders never came in. They are now trying to buy about $30 million in annual revenues in an all stock deal. If they pull if off, they will have the luxury of waiting for the DOD to have money again.
• NeWave: (OTC BB: NWAV): After growing 400% from '03 to '04, NWWV hit the wall this year. A couple of subsidiaries they started early in the year proved complete failures. They ended up shutting them down at considerable expense to shareholders. Q3 numbers were just awful as they absorbed the brunt of the closed businesses. The long awaited informercial was tested in November, and it was back to the drawing board for a full roll out after the 1st of the year. I attended a conference at the company in the Spring- the formal projection was $18 million for the year- they delivered $1.7 million in Q3- therefore, they are on track to deliver about 2/5 of what they promised. On the plus side, they have righted the ship and recently turned cash flow positive for the first time in their history. The stock is very oversold and could be the best bottom fishing opportunity of all the stocks we cover.

• Callisto Pharmceuticals (AMEX: KAL)
• Teleplus (OTC BB: TLPE)
• Health Sciences Group (OTC BB: HESG)
• BrandPartners (OTC BB: BPTR)
• HyperDynamics (AMEX: HDY)
• DataScension (OTC BB: DSEN)
• UpSnap (OTC BB: UPSN)
• Dermisonics (OTC BB: DMSI)

• Global ePoint (NASDAQ: GEPT)
• Network Installation (OTC BB: NWKI)
• NeWave (OTC BB: NWWV)
• Virtra Systems (OTC BB: VTSI)

I will post year end commentaries on most of the unmentioned companies in their respective BLOGS. '05 will be remembered as the year of the energy bubble. Where will the bubble be in '06. I'm betting on biotech with a chaser of telecom, but time will tell.

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