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Last week was one of the ugliest
October weeks I can remember. Stocks were trading down as if in a vacuum.
Energy stocks got hit the hardest, and microcaps took it on the chin as
well. We are coming to crux time- if the 4th quarter rally doesn't materialize
in November, 2005 will be remembered as a dismal year for stocks. It was
a good week to be away.
The "I" word has the market spooked.
Inflation- the market can put up with a lot, but perceived inflationary
pressures always leads to tough market conditions.
"Core Inflation" remains tame- that
is inflation taking out food and energy. There is little or no inflation
if you don't eat, fill your car with gas, travel, or heat your home. Other
than those four items, inflation is tame.
There are three new BLOG postings
for you to review. DSEN, BPTR, and KAL all got hit with one
day sell offs last week. This highly suspicious trading activity could
easily be linked to the Refco disaster. As the firms positions were unwound
there were massive trades in the energy sector- 10,000 million trades in
Exxon and Chevron. When liquidations like this occur, it can filter down
to even small stocks. All three stocks acted as if some large holder was
forced to sell.
To use the BLOG, simply go
to the home page at www.otcjournal.com
- the BLOG will scroll down automatically on the right side of your
screen. The most current journal entries appear in the middle of your screen.
Check back frequently for updates particularly when stocks are moving to
overbought or oversold levels or in volatile markets. Your questions and
postings do not automatically appear, so don't bother posting the same
question multiple times. I personally go through to moderate and respond
to every question.
In the last month one of the OTC
Journal's long term focus companies came off the canvas as their fortunes
appeared to improve. HDY, which had traded well below $1, rebounded
to about $2.50.
Shareholders of another beaten down
OTC
Journal idea, VirTra Systems (OTC BB: VTSI) are being treated
to an eye opening surprise today which could send this oversold micro right
back up to more reasonable levels. This appears to be a epiphanal moment
for the company- today's transaction should make all their long term problems
disappear.
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VirTra Systems
Pulls Rabbit Out of Hat |
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It's all smiles at VirTra Systems
today as the company has magically pulled a proverbial rabbit out of the
hat. This company and its shareholders have endured a very tough year,
but a new day appears to be just around the corner.
VTSI designs Judgemental-Use-Of-Force
simulators. They have the best in the business. Trainees which could include
either military or law enforcement are treated to a 270 degree hi-def environment
where they use their own actual weapons on the training process.
The company has been grinding along
on one or two orders monthly which arrive sporadically from a plethora
of sources. They have only been able to achieve $1 to $2 million in annual
sales, and have been bleeding red ink throughout their entire history.
This promised to be a turning point
year for the company, as many US Military purchasing agents had promised
massive multiple unit orders early in the year. Despite promised orders,
one by one they all fell by the wayside as purchasing agents were hammered
by budget constraints- all the DOD money is being spent in Iraq. The military
wanted to buy, but had no money.
The sell off in stocks of this nature
was not limited to VirTra- their two competitors and many other
publicly traded small military suppliers have made multi year lows in the
markets.
Today just before the market opened,
VTSI
announced it had entered into a letter of intent to acquire three different
electronic manufacturing companies in an all stock transaction.
In his letter to shareholders, CEO
Kelly Jones states "We think there's a real likelihood, based on
current projections and trends, for 2006 revenue in excess of $40,000,000,
with a significant level of 2006 profitability."
The transaction is currently in LOI
form- meaning there is no guarantee it will happen. However, both sides
appear to be willing, and since it is an all stock transaction, there shouldn't
be any external factors to prevent if from coming to fruition.
All said and done if and when - Struggling
little VTSI ends up annualizing at $40 million in sales a
turning a significant level of profitability in 2006.
Since the terms of the purchases
were not disclosed, it is impossible for me to forecast any information
on EPS since we don't know how profitable the combined entities will be,
and we don't know how many shares will end up being issued and outstanding.
One thing is clear from the chart-
there is a substantial amount of upside in the stock from these levels.
Here's some technical comments:
The stock appears ripe for a reversal
as displayed by a double repenetration of the 3x3 displaced moving average
in this weekly chart. In the last few weeks, the stock has broke above
the 3x3, back below and then back above and closed. This often signals
a longer term reversal in a stock's direction. A stop at $.10 is prudent,
but a move to $.24 (the .382 of the complete down move) would not surprise
if it can build some momentum off today's news. Additionally, the stock
has made a double bottom at $.10, which suggests good support there. Just
like stocks don't go up forever, they don't go down forever as well. At
least not without an exhaustion rally. Too many things point to this
stock going to $.24 before having to decide whether to hold or sell there.
This is clearly a bargain basement
opportunity and there is still plenty of upside. I believe the stock can
easily be bought right up to $.18 even just for a trade.
Rather than provide the news release
which has relatively little information, I have decided to include CEO
Jone's letter to shareholders on this event, which provides considerably
more detail. Click
Here if you wish to read the press release.
Here is a reprint of CEO Kelly Jone's
letter to shareholders:
| Friends and shareholders:
I am most pleased to
attach this morning's press release announcing VirTra Systems' execution
of a letter of intent to acquire three private high-technology companies
-- Altatron, Inc., Dynalyst, Inc., and Suntech, Inc.
I am excited about this
transaction, as the combination of companies will produce a synergy that
ultimately makes one very strong and healthy technology company.
Moving forward, the collective company will be known as VirTra Systems,
and I will remain as the chief executive officer.
As I mentioned in the
press release, this merger effectively completes this stage of VirTra Systems'
reorganization into a viable public company for the reasons set forth briefly
below, and sets the stage for a tremendous increase in the company's assets,
revenue, shareholders' equity, paving the way for positive cash flow,
net revenue, and huge upside potential for future growth.
Before I comment further
on the new companies, let me reassure you that VirTra Systems remains on
track, and has recently enjoyed increased sales activity, both this quarter
and last. In that light, under the current VTSI configuration we
anticipate a profitable fourth quarter. However, we also believe
the emerging profitability of the current company creates an opportune
time to not only successfully execute our business plan with VirTra Systems'
current opportunities, but also to add other corporate opportunities --
other emerging companies at a similar strategic "tipping point" -- so as
to amalgamate all the companies into an emerging, lucrative, and cohesive
organization.
Altatron is an ISO 9001:2000
certified manufacturer with production facilities in Moonpark, California,
is a provider of advanced electronics manufacturing services to original
equipment manufacturers in the telecommunications, networking, computer,
consumer electronics, and medical device industries. Altatron offers
a complete range of services including printed circuit board assembly and
testing, materials procurement, inventory management, final system assembly
and testing, packaging, and distribution. This company has a strong
customer base which has grown even larger during our pre-LOI due-diligence
period. This bodes extremely well both for the near future
and beyond. Altatron is an ideal takeover/merger candidate due to
its impressive technologically-advanced plant, but even more importantly
because of its impressive 2005 revenue growth, leading to even more impressive
2006 revenue projections. Like VirTra Systems, Altatron appears headed
for black numbers in the fourth quarter of 2005, with great upside for
2006.
Dynalyst is an internal
printed circuit board design engineering and fabrication company headquartered
in Taylor, Texas, and specializes in providing solutions for the testing
of semiconductors, and serves its customers with industry-leading design
tools and manufacturing processes providing rapid design and fabrication.
This is an extremely high-quality manufacturing company producing, as an
example, circuit boards for the Bradley fighting vehicle. It brings
an impressive physical facility just outside of the Austin technology center,
with a fair market value well in excess of its book value. Dynalyst
is already profitable.
Suntech, of Tempe, Arizona,
provides efficient and reliable offshore outsourcing of custom electronic
component manufacture, chiefly in Asia, and brings a steady flow of positive
cash flow. With over 150 years of combined experience in the design
and manufacture of printed circuit boards, Suntech performs technical reviews
and process capabilities analysis on each of its approved suppliers to
ensure products meet or exceed customers’ quality requirements. Suntech’s
approved suppliers are also ISO certified. Suntech is projected for
seven-digit profitability in 2005.
As you may have already
perceived, the ISO certification is very important as we pursue military
and other public tenders, as it simply means our facilities meet very exacting
third-party-assured manufacturing standards, which may be relied upon by
our customers.
As you will see, these
companies are high-tech manufacturing operations that will not only provide
VirTra Systems with world class, ISO-certified, design and manufacturing
capabilities for components used in our unique line of virtual reality
products, but they also individually operate in lucrative markets as well.
Outsourcing the manufacture of electronics is a mainstream method for companies
to manufacture and deliver their products to market, and helps explain
why many companies in the EMS and offshore manufacturing industries are
experiencing strong growth.
What does this acquisition
mean to VirTra Systems? In addition to these acquisitions, the "deal"
brings in some $3.5 million of new investment capital. Thus, after
the contemplated retirement of debt, in very rounded numbers the anticipated
net result is a nine-fold increase in company assets (at book value), a
six-fold increase in currently-projected 2006 revenue, while only doubling
our debt. By any standards, that's a great corporate opportunity.
We think there's a real likelihood, based on current projections and trends,
for 2006 revenue in excess of $40,000,000, with a significant level of
2006 profitability.
There is an enormous
amount of work remaining, including negotiation and execution of the contemplated
definitive agreement, a more thorough contractual due-diligence period,
followed by binding obligations, issuance of a shareholders' proxy statement,
and a subsequent shareholders' meeting. Our aggressive timeline for
merger effectiveness is January 1, 2006.
I expect a large number
of shareholder questions, so I anticipate hosting a shareholders' conference
call shortly after successful conclusion of the contractual due diligence
period, in mid-to-late November, to discuss the pending merger, VTSI and
the target companies, and to answer your questions in this area.
I will be communicating
more in the coming weeks with you regarding the pending acquisition, and
will make every effort to provide the necessary information for you to
make an informed decision. Having already conducted considerable
due-diligence on the three companies, we very much like what we see.
I am confident that, after reviewing these companies, and the terms of
the deal, you will strongly agree.
These are simply my personal
comments, and should not be relied upon in your investment decisions. I
strongly urge you to conduct your own due diligence with regard to any
investment in VirTra Systems. I respectfully refer you to VirTra Systems'
filings with the United States Securities and Exchange Commission.
--L. Kelly Jones, VirTra
Systems CEO
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