Thursday, October 27, 2005 6:04:58 PM
NewMarket Technology Inc. Growing Up on the OTCBB Vol 2, the Transition from Transaction to Fundamental Capital Financing Supporting Continued High Growth
From $5 Million to $26 Million in Shareholder Equity in Just Over a Year with $60 Million in Annualized Revenue, CEO Addresses Transition to Fundamental Capital Financing
DALLAS Oct. 27, 2005-- NewMarket Technology Inc. (OTCBB:NMKT) today released an open letter from its CEO and Chairman, Philip Verges, continuing to chronicle the Company's experience on the Over the Counter Bulletin Board (OTCBB) exchange. This is a follow up to a letter from the CEO last week addressing the Company’s current challenge to transition from a company recognized for its next press release versus its underlying financial fundamentals. In this letter, the CEO discusses the related challenge of transitioning from transaction to fundamental capital financing.
The letter is included in its entirety below:
Dear fellow shareholders and investors in the emerging technology market,
This letter is a follow up to a letter published last week about NewMarket’s experience over the last three years on the Over the Counter Bulletin Board (OTCBB) exchange and the Company’s yet unrecognized “fundamental” financial progress. Last week’s letter addressed the ins and outs of the challenging transition from a share price and market value that reflects the latest press release into a share price and market value that represents a company’s overall financial fundamentals. This follow up will discuss the closely related subject of transitioning from transaction capital financing to fundamental capital financing.
NewMarket was recently recognized in the Deloitte Fast 500 as the 13th fastest growing technology company in North America. The Company has grown over 18,000% in the last five years to a profitable annualized revenue run rate today of over $60 million. Trading near a 52 week low, NewMarket has yet to be recognized by Wall Street for its respectable "fundamental" foundation highlighted by $26 million in shareholder equity.
Similarly, NewMarket has yet to be recognized for its “fundamental” direct investment prospects. NewMarket receives daily unsolicited proposals for “transaction” investments, where the return on investment comes more often than not from a negotiated discount to the common stock market price. NewMarket is cash flow positive and accordingly in a position to turn down “transaction” financing. However, NewMarket has not yet been able to close financing that completely reflects the Company’s financial “fundamentals”.
The share price of our OTCBB traded stock does not yet reflect the intrinsic business value or NewMarket's rapid growth, sustained profitability or growing shareholder equity. Undervalued companies do not remain unrecognized for long, but often become "discovered" after some positive catalysts. We expect the direct investment opportunity will also not remain unrecognized for long.
Transaction Leverage vs. Fundamental Leverage
Companies list publicly to leverage equity as a marketable security for forming capital to grow operations or to acquire other businesses. The stark reality of the OTC markets is that equity leveraged for capital formation or acquisition is often valued more for its transaction value rather than any value the equity may have in correlation to the fundamental value of the business. In other words, stock sold at a discount is purchased for the value of the discount -- a value created by the selling transaction itself. The discounted stock purchaser is probably taking very little of the stock issuer’s fundamental business value into consideration and otherwise concentrating on the discount to market.
Finding capital to start and grow new businesses is an age old challenge. Entrepreneurs do their best to sell their enthusiasm in exchange for early funding, but investors usually look for more tangible assets or marketable securities. The transaction valued capital available through the OTC markets can be a great tool for the entrepreneur. The challenge facing the entrepreneur is managing the eventual transition from leveraging transaction resources to leveraging fundamental resources. Companies that have raised capital on the value of the transaction coincidently are often valued by the market overall on a transaction basis. The transition from leveraging transaction to fundamental resources is mutually tied to migrating the overall market valuation of the company from a transaction to fundamental basis.
Transaction Investors; Transaction Traders and Preferred Convertible Securities
While the OTC provides entrepreneurs with a powerful tool for capitalizing early ventures in the form of transaction investments, the transaction investment environment is less than peril free.
Preferred convertible securities are the investment facility of choice for the transaction investor. A preferred security investment normally maintains the value of the original investment independent of the publicly traded common share price. Transaction investors purchase a non-publicly traded security at a fixed price that converts at a future date into a publicly traded security – usually the common stock of the company. Likewise, the value of the discount is protected through its inclusion in the non-publicly traded fixed price security.
Some transaction investors further mitigate risk by hedging or selling short against the value of the preferred security. This is a controversial practice as it can be implemented in a predatory fashion. If a transaction investor holds a $1 million preferred security that can convert into $1 million of common stock, the transaction investor could arguably sell short $1 million of common, demonstrating the ability to cover the short position with shares from the future conversion into common of the preferred security. A transaction investor with a preferred security could aggressively short sell and negatively impact the overall share price without creating any risk to his own investment.
Some transaction investors have been suspected of selling stock short against a planned preferred investment. For instance, if a transaction investor is considering a $1 million purchase of a preferred security, it is suspected that some transaction investors will sell short $1 million of common stock prior to the consummation of the preferred stock purchase. In this scenario, the transaction investor not only sourced the money for the preferred purchase from the illegal short sale of stock, but the transaction investor would also have already realized his profit (from the built-in discount) before ever making the contemplated investment.
The suspected predatory risk associated with preferred investments is not exclusive to the potential exploits of the transaction investor. Transaction traders are also suspected to exploit preferred investments. Most preferred investments are made by organizational investors such as Cornell Capital and Laurus Funds with template terms that include a registration of the underlying common stock. A transaction trader might watch for such registration statements and begin selling short in anticipation of a company’s share price going down once the organizational investor begins converting their preferred security into the underlying registered common stock and selling that stock into the open market.
The preceding are only some highlights of the risks associated with preferred security investments. Nonetheless, preferred security investments can be beneficial capital facilities for start up and small high growth companies. Ideally, preferred security investments are structured in a manner that excludes transaction investors from hedging or shorting against the preferred position. Hopefully, regulatory enforcement prevents transaction traders from potentially selling short in anticipation of illegally profiting from a reduced share price that might result after the registration of a preferred investment. On the other hand, companies issuing preferred securities might be advised to implement supporting strategies to guard against the potential risks associated with transaction investments.
NewMarket Preferred Securities: Summary and Strategy
NewMarket has utilized convertible preferred securities to access investment capital. NewMarket has also utilized convertible preferred securities to acquire operating assets and proprietary technologies. The Company has taken every measure possible to guard against the potential predatory risk associated with the use of convertible preferred securities.
NewMarket has not raised any money with an organizational investor in well over a year. The history of organizational investments in OTC firms is rich with share price collapses shortly following convertible preferred security investments. This history combined with NewMarket’s own courtship of organizational investors has made the Company shy away from the organizational investment community.
NewMarket has only ever entered into three investment transactions with organizational investors. The sum of all three investments is less than $3 million and none of the three transactions requires NewMarket to file a registration statement. In turn, none of the investors has the ability to sell for one year and none of the investors can sell prior to two years without publicly disclosing their intention to sell.
The majority of investment capital that NewMarket has received has been provided by VergeTech Inc. (VTI) in a related party transaction. VTI is a company founded by the Verges family in 1997. In 2002, VTI sold its assets to NewMarket in exchange for a convertible note that ultimately resulted in VergeTech’s ownership of 22 million shares of NewMarket stock. VTI still owns 22 million shares of stock and does not currently have any plans to sell stock. VTI has encumbered its 22 million shares of stock as collateral to borrow capital that has then been entirely invested in NewMarket. The money has been borrowed from friends and family. VTI’s investment in NewMarket is in the form of a loan secured by a note convertible into 40 million shares of stock. VTI’s related party transaction has been reviewed by the NewMarket board of directors with my abstention. VTI’s intention is to seek repayment of its loan in cash and to cancel or minimize any conversion into the 40 million shares.
NewMarket has primarily utilized preferred securities to acquire operating assets and proprietary emerging technologies. NewMarket has six active issues of preferred stock. The preferred stock has been designated by letter and the active issues are designated as series C-H. All six series have been solely utilized to acquire operating assets and proprietary technology. NewMarket has acquired three additional operating and proprietary emerging technology assets using cash or notes payable solely in cash. No active preferred stock has been issued to raise capital. Series A and B were declared and issued in exchange for investment capital prior to the tenure of the existing management team and have since been retired. Out of the six issues of preferred stock only one is currently being converted into common stock for the benefit of the sellers. The terms of the original sale agreement restrict the preferred to incremental conversions over time. The other five preferred stock issues are restricted from converting and selling. However, two of the five have been provided in part as collateral in exchange for loans directly to two operating subsidiaries. The total of the loans is less than $1 million.
NewMarket’s future plans in regard to the existing preferred stock associated with the acquired operating asset and propriety technology properties is to mitigate, if not eliminate any conversions into NewMarket common stock. NewMarket is currently structuring a consolidation of its systems integration companies into a single systems integration subsidiary. The intention is to exchange NewMarket preferred stock issued to acquire systems integration assets for equity in the new subsidiary systems integration company. Furthermore, NewMarket intends to similarly exchange NewMarket preferred stock for equity in the eventual spin-off of proprietary technologies.
NewMarket has slowed the use of preferred stock in its ongoing acquisition campaign to expand operations and add to a proprietary technology portfolio. Recently, for instance, the Company announced the planned acquisition of UniOne in Brazil in an all cash transaction. NewMarket is further slowing its use of preferred stock by improving its ability to leverage subsidiary securities for funding and acquisitions specific to the subsidiary business operations. Last week, NewMarket China announced a $1 million direct investment.
In summary, the Company’s strategy has been to move away from organizational transaction investors. NewMarket has been able to make substantial progress in its goal to move away from the organizational transaction investment community by leveraging the assets of its own founders and management. The primary use of preferred securities has been to acquire operating assets and proprietary technologies that may never be paid for with the Company’s common stock given the planned spin-off strategy. If preferred stock issued to acquire operating assets and proprietary technologies is ultimately converted into common then ideally it will be less common than would have been required at the time of purchase. For instance, NewMarket’s share price was $0.17 at the time it acquired Infotel.
The Company is making deliberate strides toward the transition from leveraging transaction resources to leveraging fundamental resources. This transition will fuel the market valuation transition from a transaction basis to a fundamental basis and vice versa.
This is an exciting time for NewMarket. Though near a 52 week low, perhaps not an easy time. We are in a transition from being recognized for our transactional value to being recognized for the fundamental value we have quietly been building over the last three years. We have had no sustained market capitalization growth in 18 months while our shareholder equity has otherwise increased 500% to $26 million and our sales have grown over 18,000% over five years to a current annualized revenue run rate of $60 million. We are poised to be "discovered" by Wall Street and the institutional investment community as an undervalued company with basic financial fundamental strength greater than what the current share price reflects.
Best Regards,
Philip Verges
CEO and Chairman
NewMarket Technology Inc.
NewMarket Technology Inc. Growing Up on the OTCBB Vol 2, the Transition from Transaction to Fundamental Capital Financing Supporting Continued High Growth
From $5 Million to $26 Million in Shareholder Equity in Just Over a Year with $60 Million in Annualized Revenue, CEO Addresses Transition to Fundamental Capital Financing
DALLAS Oct. 27, 2005-- NewMarket Technology Inc. (OTCBB:NMKT) today released an open letter from its CEO and Chairman, Philip Verges, continuing to chronicle the Company's experience on the Over the Counter Bulletin Board (OTCBB) exchange. This is a follow up to a letter from the CEO last week addressing the Company’s current challenge to transition from a company recognized for its next press release versus its underlying financial fundamentals. In this letter, the CEO discusses the related challenge of transitioning from transaction to fundamental capital financing.
The letter is included in its entirety below:
Dear fellow shareholders and investors in the emerging technology market,
This letter is a follow up to a letter published last week about NewMarket’s experience over the last three years on the Over the Counter Bulletin Board (OTCBB) exchange and the Company’s yet unrecognized “fundamental” financial progress. Last week’s letter addressed the ins and outs of the challenging transition from a share price and market value that reflects the latest press release into a share price and market value that represents a company’s overall financial fundamentals. This follow up will discuss the closely related subject of transitioning from transaction capital financing to fundamental capital financing.
NewMarket was recently recognized in the Deloitte Fast 500 as the 13th fastest growing technology company in North America. The Company has grown over 18,000% in the last five years to a profitable annualized revenue run rate today of over $60 million. Trading near a 52 week low, NewMarket has yet to be recognized by Wall Street for its respectable "fundamental" foundation highlighted by $26 million in shareholder equity.
Similarly, NewMarket has yet to be recognized for its “fundamental” direct investment prospects. NewMarket receives daily unsolicited proposals for “transaction” investments, where the return on investment comes more often than not from a negotiated discount to the common stock market price. NewMarket is cash flow positive and accordingly in a position to turn down “transaction” financing. However, NewMarket has not yet been able to close financing that completely reflects the Company’s financial “fundamentals”.
The share price of our OTCBB traded stock does not yet reflect the intrinsic business value or NewMarket's rapid growth, sustained profitability or growing shareholder equity. Undervalued companies do not remain unrecognized for long, but often become "discovered" after some positive catalysts. We expect the direct investment opportunity will also not remain unrecognized for long.
Transaction Leverage vs. Fundamental Leverage
Companies list publicly to leverage equity as a marketable security for forming capital to grow operations or to acquire other businesses. The stark reality of the OTC markets is that equity leveraged for capital formation or acquisition is often valued more for its transaction value rather than any value the equity may have in correlation to the fundamental value of the business. In other words, stock sold at a discount is purchased for the value of the discount -- a value created by the selling transaction itself. The discounted stock purchaser is probably taking very little of the stock issuer’s fundamental business value into consideration and otherwise concentrating on the discount to market.
Finding capital to start and grow new businesses is an age old challenge. Entrepreneurs do their best to sell their enthusiasm in exchange for early funding, but investors usually look for more tangible assets or marketable securities. The transaction valued capital available through the OTC markets can be a great tool for the entrepreneur. The challenge facing the entrepreneur is managing the eventual transition from leveraging transaction resources to leveraging fundamental resources. Companies that have raised capital on the value of the transaction coincidently are often valued by the market overall on a transaction basis. The transition from leveraging transaction to fundamental resources is mutually tied to migrating the overall market valuation of the company from a transaction to fundamental basis.
Transaction Investors; Transaction Traders and Preferred Convertible Securities
While the OTC provides entrepreneurs with a powerful tool for capitalizing early ventures in the form of transaction investments, the transaction investment environment is less than peril free.
Preferred convertible securities are the investment facility of choice for the transaction investor. A preferred security investment normally maintains the value of the original investment independent of the publicly traded common share price. Transaction investors purchase a non-publicly traded security at a fixed price that converts at a future date into a publicly traded security – usually the common stock of the company. Likewise, the value of the discount is protected through its inclusion in the non-publicly traded fixed price security.
Some transaction investors further mitigate risk by hedging or selling short against the value of the preferred security. This is a controversial practice as it can be implemented in a predatory fashion. If a transaction investor holds a $1 million preferred security that can convert into $1 million of common stock, the transaction investor could arguably sell short $1 million of common, demonstrating the ability to cover the short position with shares from the future conversion into common of the preferred security. A transaction investor with a preferred security could aggressively short sell and negatively impact the overall share price without creating any risk to his own investment.
Some transaction investors have been suspected of selling stock short against a planned preferred investment. For instance, if a transaction investor is considering a $1 million purchase of a preferred security, it is suspected that some transaction investors will sell short $1 million of common stock prior to the consummation of the preferred stock purchase. In this scenario, the transaction investor not only sourced the money for the preferred purchase from the illegal short sale of stock, but the transaction investor would also have already realized his profit (from the built-in discount) before ever making the contemplated investment.
The suspected predatory risk associated with preferred investments is not exclusive to the potential exploits of the transaction investor. Transaction traders are also suspected to exploit preferred investments. Most preferred investments are made by organizational investors such as Cornell Capital and Laurus Funds with template terms that include a registration of the underlying common stock. A transaction trader might watch for such registration statements and begin selling short in anticipation of a company’s share price going down once the organizational investor begins converting their preferred security into the underlying registered common stock and selling that stock into the open market.
The preceding are only some highlights of the risks associated with preferred security investments. Nonetheless, preferred security investments can be beneficial capital facilities for start up and small high growth companies. Ideally, preferred security investments are structured in a manner that excludes transaction investors from hedging or shorting against the preferred position. Hopefully, regulatory enforcement prevents transaction traders from potentially selling short in anticipation of illegally profiting from a reduced share price that might result after the registration of a preferred investment. On the other hand, companies issuing preferred securities might be advised to implement supporting strategies to guard against the potential risks associated with transaction investments.
NewMarket Preferred Securities: Summary and Strategy
NewMarket has utilized convertible preferred securities to access investment capital. NewMarket has also utilized convertible preferred securities to acquire operating assets and proprietary technologies. The Company has taken every measure possible to guard against the potential predatory risk associated with the use of convertible preferred securities.
NewMarket has not raised any money with an organizational investor in well over a year. The history of organizational investments in OTC firms is rich with share price collapses shortly following convertible preferred security investments. This history combined with NewMarket’s own courtship of organizational investors has made the Company shy away from the organizational investment community.
NewMarket has only ever entered into three investment transactions with organizational investors. The sum of all three investments is less than $3 million and none of the three transactions requires NewMarket to file a registration statement. In turn, none of the investors has the ability to sell for one year and none of the investors can sell prior to two years without publicly disclosing their intention to sell.
The majority of investment capital that NewMarket has received has been provided by VergeTech Inc. (VTI) in a related party transaction. VTI is a company founded by the Verges family in 1997. In 2002, VTI sold its assets to NewMarket in exchange for a convertible note that ultimately resulted in VergeTech’s ownership of 22 million shares of NewMarket stock. VTI still owns 22 million shares of stock and does not currently have any plans to sell stock. VTI has encumbered its 22 million shares of stock as collateral to borrow capital that has then been entirely invested in NewMarket. The money has been borrowed from friends and family. VTI’s investment in NewMarket is in the form of a loan secured by a note convertible into 40 million shares of stock. VTI’s related party transaction has been reviewed by the NewMarket board of directors with my abstention. VTI’s intention is to seek repayment of its loan in cash and to cancel or minimize any conversion into the 40 million shares.
NewMarket has primarily utilized preferred securities to acquire operating assets and proprietary emerging technologies. NewMarket has six active issues of preferred stock. The preferred stock has been designated by letter and the active issues are designated as series C-H. All six series have been solely utilized to acquire operating assets and proprietary technology. NewMarket has acquired three additional operating and proprietary emerging technology assets using cash or notes payable solely in cash. No active preferred stock has been issued to raise capital. Series A and B were declared and issued in exchange for investment capital prior to the tenure of the existing management team and have since been retired. Out of the six issues of preferred stock only one is currently being converted into common stock for the benefit of the sellers. The terms of the original sale agreement restrict the preferred to incremental conversions over time. The other five preferred stock issues are restricted from converting and selling. However, two of the five have been provided in part as collateral in exchange for loans directly to two operating subsidiaries. The total of the loans is less than $1 million.
NewMarket’s future plans in regard to the existing preferred stock associated with the acquired operating asset and propriety technology properties is to mitigate, if not eliminate any conversions into NewMarket common stock. NewMarket is currently structuring a consolidation of its systems integration companies into a single systems integration subsidiary. The intention is to exchange NewMarket preferred stock issued to acquire systems integration assets for equity in the new subsidiary systems integration company. Furthermore, NewMarket intends to similarly exchange NewMarket preferred stock for equity in the eventual spin-off of proprietary technologies.
NewMarket has slowed the use of preferred stock in its ongoing acquisition campaign to expand operations and add to a proprietary technology portfolio. Recently, for instance, the Company announced the planned acquisition of UniOne in Brazil in an all cash transaction. NewMarket is further slowing its use of preferred stock by improving its ability to leverage subsidiary securities for funding and acquisitions specific to the subsidiary business operations. Last week, NewMarket China announced a $1 million direct investment.
In summary, the Company’s strategy has been to move away from organizational transaction investors. NewMarket has been able to make substantial progress in its goal to move away from the organizational transaction investment community by leveraging the assets of its own founders and management. The primary use of preferred securities has been to acquire operating assets and proprietary technologies that may never be paid for with the Company’s common stock given the planned spin-off strategy. If preferred stock issued to acquire operating assets and proprietary technologies is ultimately converted into common then ideally it will be less common than would have been required at the time of purchase. For instance, NewMarket’s share price was $0.17 at the time it acquired Infotel.
The Company is making deliberate strides toward the transition from leveraging transaction resources to leveraging fundamental resources. This transition will fuel the market valuation transition from a transaction basis to a fundamental basis and vice versa.
This is an exciting time for NewMarket. Though near a 52 week low, perhaps not an easy time. We are in a transition from being recognized for our transactional value to being recognized for the fundamental value we have quietly been building over the last three years. We have had no sustained market capitalization growth in 18 months while our shareholder equity has otherwise increased 500% to $26 million and our sales have grown over 18,000% over five years to a current annualized revenue run rate of $60 million. We are poised to be "discovered" by Wall Street and the institutional investment community as an undervalued company with basic financial fundamental strength greater than what the current share price reflects.
Best Regards,
Philip Verges
CEO and Chairman
NewMarket Technology Inc.
NewMarket Technology Inc. Growing Up on the OTCBB Vol 2, the Transition from Transaction to Fundamental Capital Financing Supporting Continued High Growth
From $5 Million to $26 Million in Shareholder Equity in Just Over a Year with $60 Million in Annualized Revenue, CEO Addresses Transition to Fundamental Capital Financing
DALLAS Oct. 27, 2005-- NewMarket Technology Inc. (OTCBB:NMKT) today released an open letter from its CEO and Chairman, Philip Verges, continuing to chronicle the Company's experience on the Over the Counter Bulletin Board (OTCBB) exchange. This is a follow up to a letter from the CEO last week addressing the Company’s current challenge to transition from a company recognized for its next press release versus its underlying financial fundamentals. In this letter, the CEO discusses the related challenge of transitioning from transaction to fundamental capital financing.
The letter is included in its entirety below:
Dear fellow shareholders and investors in the emerging technology market,
This letter is a follow up to a letter published last week about NewMarket’s experience over the last three years on the Over the Counter Bulletin Board (OTCBB) exchange and the Company’s yet unrecognized “fundamental” financial progress. Last week’s letter addressed the ins and outs of the challenging transition from a share price and market value that reflects the latest press release into a share price and market value that represents a company’s overall financial fundamentals. This follow up will discuss the closely related subject of transitioning from transaction capital financing to fundamental capital financing.
NewMarket was recently recognized in the Deloitte Fast 500 as the 13th fastest growing technology company in North America. The Company has grown over 18,000% in the last five years to a profitable annualized revenue run rate today of over $60 million. Trading near a 52 week low, NewMarket has yet to be recognized by Wall Street for its respectable "fundamental" foundation highlighted by $26 million in shareholder equity.
Similarly, NewMarket has yet to be recognized for its “fundamental” direct investment prospects. NewMarket receives daily unsolicited proposals for “transaction” investments, where the return on investment comes more often than not from a negotiated discount to the common stock market price. NewMarket is cash flow positive and accordingly in a position to turn down “transaction” financing. However, NewMarket has not yet been able to close financing that completely reflects the Company’s financial “fundamentals”.
The share price of our OTCBB traded stock does not yet reflect the intrinsic business value or NewMarket's rapid growth, sustained profitability or growing shareholder equity. Undervalued companies do not remain unrecognized for long, but often become "discovered" after some positive catalysts. We expect the direct investment opportunity will also not remain unrecognized for long.
Transaction Leverage vs. Fundamental Leverage
Companies list publicly to leverage equity as a marketable security for forming capital to grow operations or to acquire other businesses. The stark reality of the OTC markets is that equity leveraged for capital formation or acquisition is often valued more for its transaction value rather than any value the equity may have in correlation to the fundamental value of the business. In other words, stock sold at a discount is purchased for the value of the discount -- a value created by the selling transaction itself. The discounted stock purchaser is probably taking very little of the stock issuer’s fundamental business value into consideration and otherwise concentrating on the discount to market.
Finding capital to start and grow new businesses is an age old challenge. Entrepreneurs do their best to sell their enthusiasm in exchange for early funding, but investors usually look for more tangible assets or marketable securities. The transaction valued capital available through the OTC markets can be a great tool for the entrepreneur. The challenge facing the entrepreneur is managing the eventual transition from leveraging transaction resources to leveraging fundamental resources. Companies that have raised capital on the value of the transaction coincidently are often valued by the market overall on a transaction basis. The transition from leveraging transaction to fundamental resources is mutually tied to migrating the overall market valuation of the company from a transaction to fundamental basis.
Transaction Investors; Transaction Traders and Preferred Convertible Securities
While the OTC provides entrepreneurs with a powerful tool for capitalizing early ventures in the form of transaction investments, the transaction investment environment is less than peril free.
Preferred convertible securities are the investment facility of choice for the transaction investor. A preferred security investment normally maintains the value of the original investment independent of the publicly traded common share price. Transaction investors purchase a non-publicly traded security at a fixed price that converts at a future date into a publicly traded security – usually the common stock of the company. Likewise, the value of the discount is protected through its inclusion in the non-publicly traded fixed price security.
Some transaction investors further mitigate risk by hedging or selling short against the value of the preferred security. This is a controversial practice as it can be implemented in a predatory fashion. If a transaction investor holds a $1 million preferred security that can convert into $1 million of common stock, the transaction investor could arguably sell short $1 million of common, demonstrating the ability to cover the short position with shares from the future conversion into common of the preferred security. A transaction investor with a preferred security could aggressively short sell and negatively impact the overall share price without creating any risk to his own investment.
Some transaction investors have been suspected of selling stock short against a planned preferred investment. For instance, if a transaction investor is considering a $1 million purchase of a preferred security, it is suspected that some transaction investors will sell short $1 million of common stock prior to the consummation of the preferred stock purchase. In this scenario, the transaction investor not only sourced the money for the preferred purchase from the illegal short sale of stock, but the transaction investor would also have already realized his profit (from the built-in discount) before ever making the contemplated investment.
The suspected predatory risk associated with preferred investments is not exclusive to the potential exploits of the transaction investor. Transaction traders are also suspected to exploit preferred investments. Most preferred investments are made by organizational investors such as Cornell Capital and Laurus Funds with template terms that include a registration of the underlying common stock. A transaction trader might watch for such registration statements and begin selling short in anticipation of a company’s share price going down once the organizational investor begins converting their preferred security into the underlying registered common stock and selling that stock into the open market.
The preceding are only some highlights of the risks associated with preferred security investments. Nonetheless, preferred security investments can be beneficial capital facilities for start up and small high growth companies. Ideally, preferred security investments are structured in a manner that excludes transaction investors from hedging or shorting against the preferred position. Hopefully, regulatory enforcement prevents transaction traders from potentially selling short in anticipation of illegally profiting from a reduced share price that might result after the registration of a preferred investment. On the other hand, companies issuing preferred securities might be advised to implement supporting strategies to guard against the potential risks associated with transaction investments.
NewMarket Preferred Securities: Summary and Strategy
NewMarket has utilized convertible preferred securities to access investment capital. NewMarket has also utilized convertible preferred securities to acquire operating assets and proprietary technologies. The Company has taken every measure possible to guard against the potential predatory risk associated with the use of convertible preferred securities.
NewMarket has not raised any money with an organizational investor in well over a year. The history of organizational investments in OTC firms is rich with share price collapses shortly following convertible preferred security investments. This history combined with NewMarket’s own courtship of organizational investors has made the Company shy away from the organizational investment community.
NewMarket has only ever entered into three investment transactions with organizational investors. The sum of all three investments is less than $3 million and none of the three transactions requires NewMarket to file a registration statement. In turn, none of the investors has the ability to sell for one year and none of the investors can sell prior to two years without publicly disclosing their intention to sell.
The majority of investment capital that NewMarket has received has been provided by VergeTech Inc. (VTI) in a related party transaction. VTI is a company founded by the Verges family in 1997. In 2002, VTI sold its assets to NewMarket in exchange for a convertible note that ultimately resulted in VergeTech’s ownership of 22 million shares of NewMarket stock. VTI still owns 22 million shares of stock and does not currently have any plans to sell stock. VTI has encumbered its 22 million shares of stock as collateral to borrow capital that has then been entirely invested in NewMarket. The money has been borrowed from friends and family. VTI’s investment in NewMarket is in the form of a loan secured by a note convertible into 40 million shares of stock. VTI’s related party transaction has been reviewed by the NewMarket board of directors with my abstention. VTI’s intention is to seek repayment of its loan in cash and to cancel or minimize any conversion into the 40 million shares.
NewMarket has primarily utilized preferred securities to acquire operating assets and proprietary emerging technologies. NewMarket has six active issues of preferred stock. The preferred stock has been designated by letter and the active issues are designated as series C-H. All six series have been solely utilized to acquire operating assets and proprietary technology. NewMarket has acquired three additional operating and proprietary emerging technology assets using cash or notes payable solely in cash. No active preferred stock has been issued to raise capital. Series A and B were declared and issued in exchange for investment capital prior to the tenure of the existing management team and have since been retired. Out of the six issues of preferred stock only one is currently being converted into common stock for the benefit of the sellers. The terms of the original sale agreement restrict the preferred to incremental conversions over time. The other five preferred stock issues are restricted from converting and selling. However, two of the five have been provided in part as collateral in exchange for loans directly to two operating subsidiaries. The total of the loans is less than $1 million.
NewMarket’s future plans in regard to the existing preferred stock associated with the acquired operating asset and propriety technology properties is to mitigate, if not eliminate any conversions into NewMarket common stock. NewMarket is currently structuring a consolidation of its systems integration companies into a single systems integration subsidiary. The intention is to exchange NewMarket preferred stock issued to acquire systems integration assets for equity in the new subsidiary systems integration company. Furthermore, NewMarket intends to similarly exchange NewMarket preferred stock for equity in the eventual spin-off of proprietary technologies.
NewMarket has slowed the use of preferred stock in its ongoing acquisition campaign to expand operations and add to a proprietary technology portfolio. Recently, for instance, the Company announced the planned acquisition of UniOne in Brazil in an all cash transaction. NewMarket is further slowing its use of preferred stock by improving its ability to leverage subsidiary securities for funding and acquisitions specific to the subsidiary business operations. Last week, NewMarket China announced a $1 million direct investment.
In summary, the Company’s strategy has been to move away from organizational transaction investors. NewMarket has been able to make substantial progress in its goal to move away from the organizational transaction investment community by leveraging the assets of its own founders and management. The primary use of preferred securities has been to acquire operating assets and proprietary technologies that may never be paid for with the Company’s common stock given the planned spin-off strategy. If preferred stock issued to acquire operating assets and proprietary technologies is ultimately converted into common then ideally it will be less common than would have been required at the time of purchase. For instance, NewMarket’s share price was $0.17 at the time it acquired Infotel.
The Company is making deliberate strides toward the transition from leveraging transaction resources to leveraging fundamental resources. This transition will fuel the market valuation transition from a transaction basis to a fundamental basis and vice versa.
This is an exciting time for NewMarket. Though near a 52 week low, perhaps not an easy time. We are in a transition from being recognized for our transactional value to being recognized for the fundamental value we have quietly been building over the last three years. We have had no sustained market capitalization growth in 18 months while our shareholder equity has otherwise increased 500% to $26 million and our sales have grown over 18,000% over five years to a current annualized revenue run rate of $60 million. We are poised to be "discovered" by Wall Street and the institutional investment community as an undervalued company with basic financial fundamental strength greater than what the current share price reflects.
Best Regards,
Philip Verges
CEO and Chairman
NewMarket Technology Inc.
From $5 Million to $26 Million in Shareholder Equity in Just Over a Year with $60 Million in Annualized Revenue, CEO Addresses Transition to Fundamental Capital Financing
DALLAS Oct. 27, 2005-- NewMarket Technology Inc. (OTCBB:NMKT) today released an open letter from its CEO and Chairman, Philip Verges, continuing to chronicle the Company's experience on the Over the Counter Bulletin Board (OTCBB) exchange. This is a follow up to a letter from the CEO last week addressing the Company’s current challenge to transition from a company recognized for its next press release versus its underlying financial fundamentals. In this letter, the CEO discusses the related challenge of transitioning from transaction to fundamental capital financing.
The letter is included in its entirety below:
Dear fellow shareholders and investors in the emerging technology market,
This letter is a follow up to a letter published last week about NewMarket’s experience over the last three years on the Over the Counter Bulletin Board (OTCBB) exchange and the Company’s yet unrecognized “fundamental” financial progress. Last week’s letter addressed the ins and outs of the challenging transition from a share price and market value that reflects the latest press release into a share price and market value that represents a company’s overall financial fundamentals. This follow up will discuss the closely related subject of transitioning from transaction capital financing to fundamental capital financing.
NewMarket was recently recognized in the Deloitte Fast 500 as the 13th fastest growing technology company in North America. The Company has grown over 18,000% in the last five years to a profitable annualized revenue run rate today of over $60 million. Trading near a 52 week low, NewMarket has yet to be recognized by Wall Street for its respectable "fundamental" foundation highlighted by $26 million in shareholder equity.
Similarly, NewMarket has yet to be recognized for its “fundamental” direct investment prospects. NewMarket receives daily unsolicited proposals for “transaction” investments, where the return on investment comes more often than not from a negotiated discount to the common stock market price. NewMarket is cash flow positive and accordingly in a position to turn down “transaction” financing. However, NewMarket has not yet been able to close financing that completely reflects the Company’s financial “fundamentals”.
The share price of our OTCBB traded stock does not yet reflect the intrinsic business value or NewMarket's rapid growth, sustained profitability or growing shareholder equity. Undervalued companies do not remain unrecognized for long, but often become "discovered" after some positive catalysts. We expect the direct investment opportunity will also not remain unrecognized for long.
Transaction Leverage vs. Fundamental Leverage
Companies list publicly to leverage equity as a marketable security for forming capital to grow operations or to acquire other businesses. The stark reality of the OTC markets is that equity leveraged for capital formation or acquisition is often valued more for its transaction value rather than any value the equity may have in correlation to the fundamental value of the business. In other words, stock sold at a discount is purchased for the value of the discount -- a value created by the selling transaction itself. The discounted stock purchaser is probably taking very little of the stock issuer’s fundamental business value into consideration and otherwise concentrating on the discount to market.
Finding capital to start and grow new businesses is an age old challenge. Entrepreneurs do their best to sell their enthusiasm in exchange for early funding, but investors usually look for more tangible assets or marketable securities. The transaction valued capital available through the OTC markets can be a great tool for the entrepreneur. The challenge facing the entrepreneur is managing the eventual transition from leveraging transaction resources to leveraging fundamental resources. Companies that have raised capital on the value of the transaction coincidently are often valued by the market overall on a transaction basis. The transition from leveraging transaction to fundamental resources is mutually tied to migrating the overall market valuation of the company from a transaction to fundamental basis.
Transaction Investors; Transaction Traders and Preferred Convertible Securities
While the OTC provides entrepreneurs with a powerful tool for capitalizing early ventures in the form of transaction investments, the transaction investment environment is less than peril free.
Preferred convertible securities are the investment facility of choice for the transaction investor. A preferred security investment normally maintains the value of the original investment independent of the publicly traded common share price. Transaction investors purchase a non-publicly traded security at a fixed price that converts at a future date into a publicly traded security – usually the common stock of the company. Likewise, the value of the discount is protected through its inclusion in the non-publicly traded fixed price security.
Some transaction investors further mitigate risk by hedging or selling short against the value of the preferred security. This is a controversial practice as it can be implemented in a predatory fashion. If a transaction investor holds a $1 million preferred security that can convert into $1 million of common stock, the transaction investor could arguably sell short $1 million of common, demonstrating the ability to cover the short position with shares from the future conversion into common of the preferred security. A transaction investor with a preferred security could aggressively short sell and negatively impact the overall share price without creating any risk to his own investment.
Some transaction investors have been suspected of selling stock short against a planned preferred investment. For instance, if a transaction investor is considering a $1 million purchase of a preferred security, it is suspected that some transaction investors will sell short $1 million of common stock prior to the consummation of the preferred stock purchase. In this scenario, the transaction investor not only sourced the money for the preferred purchase from the illegal short sale of stock, but the transaction investor would also have already realized his profit (from the built-in discount) before ever making the contemplated investment.
The suspected predatory risk associated with preferred investments is not exclusive to the potential exploits of the transaction investor. Transaction traders are also suspected to exploit preferred investments. Most preferred investments are made by organizational investors such as Cornell Capital and Laurus Funds with template terms that include a registration of the underlying common stock. A transaction trader might watch for such registration statements and begin selling short in anticipation of a company’s share price going down once the organizational investor begins converting their preferred security into the underlying registered common stock and selling that stock into the open market.
The preceding are only some highlights of the risks associated with preferred security investments. Nonetheless, preferred security investments can be beneficial capital facilities for start up and small high growth companies. Ideally, preferred security investments are structured in a manner that excludes transaction investors from hedging or shorting against the preferred position. Hopefully, regulatory enforcement prevents transaction traders from potentially selling short in anticipation of illegally profiting from a reduced share price that might result after the registration of a preferred investment. On the other hand, companies issuing preferred securities might be advised to implement supporting strategies to guard against the potential risks associated with transaction investments.
NewMarket Preferred Securities: Summary and Strategy
NewMarket has utilized convertible preferred securities to access investment capital. NewMarket has also utilized convertible preferred securities to acquire operating assets and proprietary technologies. The Company has taken every measure possible to guard against the potential predatory risk associated with the use of convertible preferred securities.
NewMarket has not raised any money with an organizational investor in well over a year. The history of organizational investments in OTC firms is rich with share price collapses shortly following convertible preferred security investments. This history combined with NewMarket’s own courtship of organizational investors has made the Company shy away from the organizational investment community.
NewMarket has only ever entered into three investment transactions with organizational investors. The sum of all three investments is less than $3 million and none of the three transactions requires NewMarket to file a registration statement. In turn, none of the investors has the ability to sell for one year and none of the investors can sell prior to two years without publicly disclosing their intention to sell.
The majority of investment capital that NewMarket has received has been provided by VergeTech Inc. (VTI) in a related party transaction. VTI is a company founded by the Verges family in 1997. In 2002, VTI sold its assets to NewMarket in exchange for a convertible note that ultimately resulted in VergeTech’s ownership of 22 million shares of NewMarket stock. VTI still owns 22 million shares of stock and does not currently have any plans to sell stock. VTI has encumbered its 22 million shares of stock as collateral to borrow capital that has then been entirely invested in NewMarket. The money has been borrowed from friends and family. VTI’s investment in NewMarket is in the form of a loan secured by a note convertible into 40 million shares of stock. VTI’s related party transaction has been reviewed by the NewMarket board of directors with my abstention. VTI’s intention is to seek repayment of its loan in cash and to cancel or minimize any conversion into the 40 million shares.
NewMarket has primarily utilized preferred securities to acquire operating assets and proprietary emerging technologies. NewMarket has six active issues of preferred stock. The preferred stock has been designated by letter and the active issues are designated as series C-H. All six series have been solely utilized to acquire operating assets and proprietary technology. NewMarket has acquired three additional operating and proprietary emerging technology assets using cash or notes payable solely in cash. No active preferred stock has been issued to raise capital. Series A and B were declared and issued in exchange for investment capital prior to the tenure of the existing management team and have since been retired. Out of the six issues of preferred stock only one is currently being converted into common stock for the benefit of the sellers. The terms of the original sale agreement restrict the preferred to incremental conversions over time. The other five preferred stock issues are restricted from converting and selling. However, two of the five have been provided in part as collateral in exchange for loans directly to two operating subsidiaries. The total of the loans is less than $1 million.
NewMarket’s future plans in regard to the existing preferred stock associated with the acquired operating asset and propriety technology properties is to mitigate, if not eliminate any conversions into NewMarket common stock. NewMarket is currently structuring a consolidation of its systems integration companies into a single systems integration subsidiary. The intention is to exchange NewMarket preferred stock issued to acquire systems integration assets for equity in the new subsidiary systems integration company. Furthermore, NewMarket intends to similarly exchange NewMarket preferred stock for equity in the eventual spin-off of proprietary technologies.
NewMarket has slowed the use of preferred stock in its ongoing acquisition campaign to expand operations and add to a proprietary technology portfolio. Recently, for instance, the Company announced the planned acquisition of UniOne in Brazil in an all cash transaction. NewMarket is further slowing its use of preferred stock by improving its ability to leverage subsidiary securities for funding and acquisitions specific to the subsidiary business operations. Last week, NewMarket China announced a $1 million direct investment.
In summary, the Company’s strategy has been to move away from organizational transaction investors. NewMarket has been able to make substantial progress in its goal to move away from the organizational transaction investment community by leveraging the assets of its own founders and management. The primary use of preferred securities has been to acquire operating assets and proprietary technologies that may never be paid for with the Company’s common stock given the planned spin-off strategy. If preferred stock issued to acquire operating assets and proprietary technologies is ultimately converted into common then ideally it will be less common than would have been required at the time of purchase. For instance, NewMarket’s share price was $0.17 at the time it acquired Infotel.
The Company is making deliberate strides toward the transition from leveraging transaction resources to leveraging fundamental resources. This transition will fuel the market valuation transition from a transaction basis to a fundamental basis and vice versa.
This is an exciting time for NewMarket. Though near a 52 week low, perhaps not an easy time. We are in a transition from being recognized for our transactional value to being recognized for the fundamental value we have quietly been building over the last three years. We have had no sustained market capitalization growth in 18 months while our shareholder equity has otherwise increased 500% to $26 million and our sales have grown over 18,000% over five years to a current annualized revenue run rate of $60 million. We are poised to be "discovered" by Wall Street and the institutional investment community as an undervalued company with basic financial fundamental strength greater than what the current share price reflects.
Best Regards,
Philip Verges
CEO and Chairman
NewMarket Technology Inc.
NewMarket Technology Inc. Growing Up on the OTCBB Vol 2, the Transition from Transaction to Fundamental Capital Financing Supporting Continued High Growth
From $5 Million to $26 Million in Shareholder Equity in Just Over a Year with $60 Million in Annualized Revenue, CEO Addresses Transition to Fundamental Capital Financing
DALLAS Oct. 27, 2005-- NewMarket Technology Inc. (OTCBB:NMKT) today released an open letter from its CEO and Chairman, Philip Verges, continuing to chronicle the Company's experience on the Over the Counter Bulletin Board (OTCBB) exchange. This is a follow up to a letter from the CEO last week addressing the Company’s current challenge to transition from a company recognized for its next press release versus its underlying financial fundamentals. In this letter, the CEO discusses the related challenge of transitioning from transaction to fundamental capital financing.
The letter is included in its entirety below:
Dear fellow shareholders and investors in the emerging technology market,
This letter is a follow up to a letter published last week about NewMarket’s experience over the last three years on the Over the Counter Bulletin Board (OTCBB) exchange and the Company’s yet unrecognized “fundamental” financial progress. Last week’s letter addressed the ins and outs of the challenging transition from a share price and market value that reflects the latest press release into a share price and market value that represents a company’s overall financial fundamentals. This follow up will discuss the closely related subject of transitioning from transaction capital financing to fundamental capital financing.
NewMarket was recently recognized in the Deloitte Fast 500 as the 13th fastest growing technology company in North America. The Company has grown over 18,000% in the last five years to a profitable annualized revenue run rate today of over $60 million. Trading near a 52 week low, NewMarket has yet to be recognized by Wall Street for its respectable "fundamental" foundation highlighted by $26 million in shareholder equity.
Similarly, NewMarket has yet to be recognized for its “fundamental” direct investment prospects. NewMarket receives daily unsolicited proposals for “transaction” investments, where the return on investment comes more often than not from a negotiated discount to the common stock market price. NewMarket is cash flow positive and accordingly in a position to turn down “transaction” financing. However, NewMarket has not yet been able to close financing that completely reflects the Company’s financial “fundamentals”.
The share price of our OTCBB traded stock does not yet reflect the intrinsic business value or NewMarket's rapid growth, sustained profitability or growing shareholder equity. Undervalued companies do not remain unrecognized for long, but often become "discovered" after some positive catalysts. We expect the direct investment opportunity will also not remain unrecognized for long.
Transaction Leverage vs. Fundamental Leverage
Companies list publicly to leverage equity as a marketable security for forming capital to grow operations or to acquire other businesses. The stark reality of the OTC markets is that equity leveraged for capital formation or acquisition is often valued more for its transaction value rather than any value the equity may have in correlation to the fundamental value of the business. In other words, stock sold at a discount is purchased for the value of the discount -- a value created by the selling transaction itself. The discounted stock purchaser is probably taking very little of the stock issuer’s fundamental business value into consideration and otherwise concentrating on the discount to market.
Finding capital to start and grow new businesses is an age old challenge. Entrepreneurs do their best to sell their enthusiasm in exchange for early funding, but investors usually look for more tangible assets or marketable securities. The transaction valued capital available through the OTC markets can be a great tool for the entrepreneur. The challenge facing the entrepreneur is managing the eventual transition from leveraging transaction resources to leveraging fundamental resources. Companies that have raised capital on the value of the transaction coincidently are often valued by the market overall on a transaction basis. The transition from leveraging transaction to fundamental resources is mutually tied to migrating the overall market valuation of the company from a transaction to fundamental basis.
Transaction Investors; Transaction Traders and Preferred Convertible Securities
While the OTC provides entrepreneurs with a powerful tool for capitalizing early ventures in the form of transaction investments, the transaction investment environment is less than peril free.
Preferred convertible securities are the investment facility of choice for the transaction investor. A preferred security investment normally maintains the value of the original investment independent of the publicly traded common share price. Transaction investors purchase a non-publicly traded security at a fixed price that converts at a future date into a publicly traded security – usually the common stock of the company. Likewise, the value of the discount is protected through its inclusion in the non-publicly traded fixed price security.
Some transaction investors further mitigate risk by hedging or selling short against the value of the preferred security. This is a controversial practice as it can be implemented in a predatory fashion. If a transaction investor holds a $1 million preferred security that can convert into $1 million of common stock, the transaction investor could arguably sell short $1 million of common, demonstrating the ability to cover the short position with shares from the future conversion into common of the preferred security. A transaction investor with a preferred security could aggressively short sell and negatively impact the overall share price without creating any risk to his own investment.
Some transaction investors have been suspected of selling stock short against a planned preferred investment. For instance, if a transaction investor is considering a $1 million purchase of a preferred security, it is suspected that some transaction investors will sell short $1 million of common stock prior to the consummation of the preferred stock purchase. In this scenario, the transaction investor not only sourced the money for the preferred purchase from the illegal short sale of stock, but the transaction investor would also have already realized his profit (from the built-in discount) before ever making the contemplated investment.
The suspected predatory risk associated with preferred investments is not exclusive to the potential exploits of the transaction investor. Transaction traders are also suspected to exploit preferred investments. Most preferred investments are made by organizational investors such as Cornell Capital and Laurus Funds with template terms that include a registration of the underlying common stock. A transaction trader might watch for such registration statements and begin selling short in anticipation of a company’s share price going down once the organizational investor begins converting their preferred security into the underlying registered common stock and selling that stock into the open market.
The preceding are only some highlights of the risks associated with preferred security investments. Nonetheless, preferred security investments can be beneficial capital facilities for start up and small high growth companies. Ideally, preferred security investments are structured in a manner that excludes transaction investors from hedging or shorting against the preferred position. Hopefully, regulatory enforcement prevents transaction traders from potentially selling short in anticipation of illegally profiting from a reduced share price that might result after the registration of a preferred investment. On the other hand, companies issuing preferred securities might be advised to implement supporting strategies to guard against the potential risks associated with transaction investments.
NewMarket Preferred Securities: Summary and Strategy
NewMarket has utilized convertible preferred securities to access investment capital. NewMarket has also utilized convertible preferred securities to acquire operating assets and proprietary technologies. The Company has taken every measure possible to guard against the potential predatory risk associated with the use of convertible preferred securities.
NewMarket has not raised any money with an organizational investor in well over a year. The history of organizational investments in OTC firms is rich with share price collapses shortly following convertible preferred security investments. This history combined with NewMarket’s own courtship of organizational investors has made the Company shy away from the organizational investment community.
NewMarket has only ever entered into three investment transactions with organizational investors. The sum of all three investments is less than $3 million and none of the three transactions requires NewMarket to file a registration statement. In turn, none of the investors has the ability to sell for one year and none of the investors can sell prior to two years without publicly disclosing their intention to sell.
The majority of investment capital that NewMarket has received has been provided by VergeTech Inc. (VTI) in a related party transaction. VTI is a company founded by the Verges family in 1997. In 2002, VTI sold its assets to NewMarket in exchange for a convertible note that ultimately resulted in VergeTech’s ownership of 22 million shares of NewMarket stock. VTI still owns 22 million shares of stock and does not currently have any plans to sell stock. VTI has encumbered its 22 million shares of stock as collateral to borrow capital that has then been entirely invested in NewMarket. The money has been borrowed from friends and family. VTI’s investment in NewMarket is in the form of a loan secured by a note convertible into 40 million shares of stock. VTI’s related party transaction has been reviewed by the NewMarket board of directors with my abstention. VTI’s intention is to seek repayment of its loan in cash and to cancel or minimize any conversion into the 40 million shares.
NewMarket has primarily utilized preferred securities to acquire operating assets and proprietary emerging technologies. NewMarket has six active issues of preferred stock. The preferred stock has been designated by letter and the active issues are designated as series C-H. All six series have been solely utilized to acquire operating assets and proprietary technology. NewMarket has acquired three additional operating and proprietary emerging technology assets using cash or notes payable solely in cash. No active preferred stock has been issued to raise capital. Series A and B were declared and issued in exchange for investment capital prior to the tenure of the existing management team and have since been retired. Out of the six issues of preferred stock only one is currently being converted into common stock for the benefit of the sellers. The terms of the original sale agreement restrict the preferred to incremental conversions over time. The other five preferred stock issues are restricted from converting and selling. However, two of the five have been provided in part as collateral in exchange for loans directly to two operating subsidiaries. The total of the loans is less than $1 million.
NewMarket’s future plans in regard to the existing preferred stock associated with the acquired operating asset and propriety technology properties is to mitigate, if not eliminate any conversions into NewMarket common stock. NewMarket is currently structuring a consolidation of its systems integration companies into a single systems integration subsidiary. The intention is to exchange NewMarket preferred stock issued to acquire systems integration assets for equity in the new subsidiary systems integration company. Furthermore, NewMarket intends to similarly exchange NewMarket preferred stock for equity in the eventual spin-off of proprietary technologies.
NewMarket has slowed the use of preferred stock in its ongoing acquisition campaign to expand operations and add to a proprietary technology portfolio. Recently, for instance, the Company announced the planned acquisition of UniOne in Brazil in an all cash transaction. NewMarket is further slowing its use of preferred stock by improving its ability to leverage subsidiary securities for funding and acquisitions specific to the subsidiary business operations. Last week, NewMarket China announced a $1 million direct investment.
In summary, the Company’s strategy has been to move away from organizational transaction investors. NewMarket has been able to make substantial progress in its goal to move away from the organizational transaction investment community by leveraging the assets of its own founders and management. The primary use of preferred securities has been to acquire operating assets and proprietary technologies that may never be paid for with the Company’s common stock given the planned spin-off strategy. If preferred stock issued to acquire operating assets and proprietary technologies is ultimately converted into common then ideally it will be less common than would have been required at the time of purchase. For instance, NewMarket’s share price was $0.17 at the time it acquired Infotel.
The Company is making deliberate strides toward the transition from leveraging transaction resources to leveraging fundamental resources. This transition will fuel the market valuation transition from a transaction basis to a fundamental basis and vice versa.
This is an exciting time for NewMarket. Though near a 52 week low, perhaps not an easy time. We are in a transition from being recognized for our transactional value to being recognized for the fundamental value we have quietly been building over the last three years. We have had no sustained market capitalization growth in 18 months while our shareholder equity has otherwise increased 500% to $26 million and our sales have grown over 18,000% over five years to a current annualized revenue run rate of $60 million. We are poised to be "discovered" by Wall Street and the institutional investment community as an undervalued company with basic financial fundamental strength greater than what the current share price reflects.
Best Regards,
Philip Verges
CEO and Chairman
NewMarket Technology Inc.
NewMarket Technology Inc. Growing Up on the OTCBB Vol 2, the Transition from Transaction to Fundamental Capital Financing Supporting Continued High Growth
From $5 Million to $26 Million in Shareholder Equity in Just Over a Year with $60 Million in Annualized Revenue, CEO Addresses Transition to Fundamental Capital Financing
DALLAS Oct. 27, 2005-- NewMarket Technology Inc. (OTCBB:NMKT) today released an open letter from its CEO and Chairman, Philip Verges, continuing to chronicle the Company's experience on the Over the Counter Bulletin Board (OTCBB) exchange. This is a follow up to a letter from the CEO last week addressing the Company’s current challenge to transition from a company recognized for its next press release versus its underlying financial fundamentals. In this letter, the CEO discusses the related challenge of transitioning from transaction to fundamental capital financing.
The letter is included in its entirety below:
Dear fellow shareholders and investors in the emerging technology market,
This letter is a follow up to a letter published last week about NewMarket’s experience over the last three years on the Over the Counter Bulletin Board (OTCBB) exchange and the Company’s yet unrecognized “fundamental” financial progress. Last week’s letter addressed the ins and outs of the challenging transition from a share price and market value that reflects the latest press release into a share price and market value that represents a company’s overall financial fundamentals. This follow up will discuss the closely related subject of transitioning from transaction capital financing to fundamental capital financing.
NewMarket was recently recognized in the Deloitte Fast 500 as the 13th fastest growing technology company in North America. The Company has grown over 18,000% in the last five years to a profitable annualized revenue run rate today of over $60 million. Trading near a 52 week low, NewMarket has yet to be recognized by Wall Street for its respectable "fundamental" foundation highlighted by $26 million in shareholder equity.
Similarly, NewMarket has yet to be recognized for its “fundamental” direct investment prospects. NewMarket receives daily unsolicited proposals for “transaction” investments, where the return on investment comes more often than not from a negotiated discount to the common stock market price. NewMarket is cash flow positive and accordingly in a position to turn down “transaction” financing. However, NewMarket has not yet been able to close financing that completely reflects the Company’s financial “fundamentals”.
The share price of our OTCBB traded stock does not yet reflect the intrinsic business value or NewMarket's rapid growth, sustained profitability or growing shareholder equity. Undervalued companies do not remain unrecognized for long, but often become "discovered" after some positive catalysts. We expect the direct investment opportunity will also not remain unrecognized for long.
Transaction Leverage vs. Fundamental Leverage
Companies list publicly to leverage equity as a marketable security for forming capital to grow operations or to acquire other businesses. The stark reality of the OTC markets is that equity leveraged for capital formation or acquisition is often valued more for its transaction value rather than any value the equity may have in correlation to the fundamental value of the business. In other words, stock sold at a discount is purchased for the value of the discount -- a value created by the selling transaction itself. The discounted stock purchaser is probably taking very little of the stock issuer’s fundamental business value into consideration and otherwise concentrating on the discount to market.
Finding capital to start and grow new businesses is an age old challenge. Entrepreneurs do their best to sell their enthusiasm in exchange for early funding, but investors usually look for more tangible assets or marketable securities. The transaction valued capital available through the OTC markets can be a great tool for the entrepreneur. The challenge facing the entrepreneur is managing the eventual transition from leveraging transaction resources to leveraging fundamental resources. Companies that have raised capital on the value of the transaction coincidently are often valued by the market overall on a transaction basis. The transition from leveraging transaction to fundamental resources is mutually tied to migrating the overall market valuation of the company from a transaction to fundamental basis.
Transaction Investors; Transaction Traders and Preferred Convertible Securities
While the OTC provides entrepreneurs with a powerful tool for capitalizing early ventures in the form of transaction investments, the transaction investment environment is less than peril free.
Preferred convertible securities are the investment facility of choice for the transaction investor. A preferred security investment normally maintains the value of the original investment independent of the publicly traded common share price. Transaction investors purchase a non-publicly traded security at a fixed price that converts at a future date into a publicly traded security – usually the common stock of the company. Likewise, the value of the discount is protected through its inclusion in the non-publicly traded fixed price security.
Some transaction investors further mitigate risk by hedging or selling short against the value of the preferred security. This is a controversial practice as it can be implemented in a predatory fashion. If a transaction investor holds a $1 million preferred security that can convert into $1 million of common stock, the transaction investor could arguably sell short $1 million of common, demonstrating the ability to cover the short position with shares from the future conversion into common of the preferred security. A transaction investor with a preferred security could aggressively short sell and negatively impact the overall share price without creating any risk to his own investment.
Some transaction investors have been suspected of selling stock short against a planned preferred investment. For instance, if a transaction investor is considering a $1 million purchase of a preferred security, it is suspected that some transaction investors will sell short $1 million of common stock prior to the consummation of the preferred stock purchase. In this scenario, the transaction investor not only sourced the money for the preferred purchase from the illegal short sale of stock, but the transaction investor would also have already realized his profit (from the built-in discount) before ever making the contemplated investment.
The suspected predatory risk associated with preferred investments is not exclusive to the potential exploits of the transaction investor. Transaction traders are also suspected to exploit preferred investments. Most preferred investments are made by organizational investors such as Cornell Capital and Laurus Funds with template terms that include a registration of the underlying common stock. A transaction trader might watch for such registration statements and begin selling short in anticipation of a company’s share price going down once the organizational investor begins converting their preferred security into the underlying registered common stock and selling that stock into the open market.
The preceding are only some highlights of the risks associated with preferred security investments. Nonetheless, preferred security investments can be beneficial capital facilities for start up and small high growth companies. Ideally, preferred security investments are structured in a manner that excludes transaction investors from hedging or shorting against the preferred position. Hopefully, regulatory enforcement prevents transaction traders from potentially selling short in anticipation of illegally profiting from a reduced share price that might result after the registration of a preferred investment. On the other hand, companies issuing preferred securities might be advised to implement supporting strategies to guard against the potential risks associated with transaction investments.
NewMarket Preferred Securities: Summary and Strategy
NewMarket has utilized convertible preferred securities to access investment capital. NewMarket has also utilized convertible preferred securities to acquire operating assets and proprietary technologies. The Company has taken every measure possible to guard against the potential predatory risk associated with the use of convertible preferred securities.
NewMarket has not raised any money with an organizational investor in well over a year. The history of organizational investments in OTC firms is rich with share price collapses shortly following convertible preferred security investments. This history combined with NewMarket’s own courtship of organizational investors has made the Company shy away from the organizational investment community.
NewMarket has only ever entered into three investment transactions with organizational investors. The sum of all three investments is less than $3 million and none of the three transactions requires NewMarket to file a registration statement. In turn, none of the investors has the ability to sell for one year and none of the investors can sell prior to two years without publicly disclosing their intention to sell.
The majority of investment capital that NewMarket has received has been provided by VergeTech Inc. (VTI) in a related party transaction. VTI is a company founded by the Verges family in 1997. In 2002, VTI sold its assets to NewMarket in exchange for a convertible note that ultimately resulted in VergeTech’s ownership of 22 million shares of NewMarket stock. VTI still owns 22 million shares of stock and does not currently have any plans to sell stock. VTI has encumbered its 22 million shares of stock as collateral to borrow capital that has then been entirely invested in NewMarket. The money has been borrowed from friends and family. VTI’s investment in NewMarket is in the form of a loan secured by a note convertible into 40 million shares of stock. VTI’s related party transaction has been reviewed by the NewMarket board of directors with my abstention. VTI’s intention is to seek repayment of its loan in cash and to cancel or minimize any conversion into the 40 million shares.
NewMarket has primarily utilized preferred securities to acquire operating assets and proprietary emerging technologies. NewMarket has six active issues of preferred stock. The preferred stock has been designated by letter and the active issues are designated as series C-H. All six series have been solely utilized to acquire operating assets and proprietary technology. NewMarket has acquired three additional operating and proprietary emerging technology assets using cash or notes payable solely in cash. No active preferred stock has been issued to raise capital. Series A and B were declared and issued in exchange for investment capital prior to the tenure of the existing management team and have since been retired. Out of the six issues of preferred stock only one is currently being converted into common stock for the benefit of the sellers. The terms of the original sale agreement restrict the preferred to incremental conversions over time. The other five preferred stock issues are restricted from converting and selling. However, two of the five have been provided in part as collateral in exchange for loans directly to two operating subsidiaries. The total of the loans is less than $1 million.
NewMarket’s future plans in regard to the existing preferred stock associated with the acquired operating asset and propriety technology properties is to mitigate, if not eliminate any conversions into NewMarket common stock. NewMarket is currently structuring a consolidation of its systems integration companies into a single systems integration subsidiary. The intention is to exchange NewMarket preferred stock issued to acquire systems integration assets for equity in the new subsidiary systems integration company. Furthermore, NewMarket intends to similarly exchange NewMarket preferred stock for equity in the eventual spin-off of proprietary technologies.
NewMarket has slowed the use of preferred stock in its ongoing acquisition campaign to expand operations and add to a proprietary technology portfolio. Recently, for instance, the Company announced the planned acquisition of UniOne in Brazil in an all cash transaction. NewMarket is further slowing its use of preferred stock by improving its ability to leverage subsidiary securities for funding and acquisitions specific to the subsidiary business operations. Last week, NewMarket China announced a $1 million direct investment.
In summary, the Company’s strategy has been to move away from organizational transaction investors. NewMarket has been able to make substantial progress in its goal to move away from the organizational transaction investment community by leveraging the assets of its own founders and management. The primary use of preferred securities has been to acquire operating assets and proprietary technologies that may never be paid for with the Company’s common stock given the planned spin-off strategy. If preferred stock issued to acquire operating assets and proprietary technologies is ultimately converted into common then ideally it will be less common than would have been required at the time of purchase. For instance, NewMarket’s share price was $0.17 at the time it acquired Infotel.
The Company is making deliberate strides toward the transition from leveraging transaction resources to leveraging fundamental resources. This transition will fuel the market valuation transition from a transaction basis to a fundamental basis and vice versa.
This is an exciting time for NewMarket. Though near a 52 week low, perhaps not an easy time. We are in a transition from being recognized for our transactional value to being recognized for the fundamental value we have quietly been building over the last three years. We have had no sustained market capitalization growth in 18 months while our shareholder equity has otherwise increased 500% to $26 million and our sales have grown over 18,000% over five years to a current annualized revenue run rate of $60 million. We are poised to be "discovered" by Wall Street and the institutional investment community as an undervalued company with basic financial fundamental strength greater than what the current share price reflects.
Best Regards,
Philip Verges
CEO and Chairman
NewMarket Technology Inc.
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