Gene Inger's latest(and fairly In depth )write up on INKSURE
Advanced Photonix (API) found earnings reported in the middle of the afternoon as it turns out; though the 'official' press release wasn't provided until just after the close.
On a minor note, there is some debate about securing 'tax abatements' in Ann Arbor; a prerequisite to obtaining certain incentives from the State of Michigan. We suspect it is presumed this issue will not be a stumbling block, as the company may have had the opportunity to imply that certain movements from other locales are contingent on these incentives being provided. We suspect the State senator lobbying for API to do this consolidation in Ann Arbor, presumed cooperation from the City before the issue came to debate, or had certain implied assurances the City wouldn't be an obstacle.
Revenue for the third quarter of fiscal year '06 and nine months ended December 25, 2005 were $6,511,000 and $16,782,000, respectively. Fiscal Q3 revenue increased by $2,659,000 or 69% over revenue of $3,852,000 for the third quarter of fiscal year 2005. The Company recorded increases in four of its principal markets during Q3 06 (and four during YTD '06) with most significant revenue increases coming from the telecommunications, industrial sensing and homeland security markets. Revenue for the third quarter to the industrial sensing markets rose to $2,739,000 in Q3 06, an increase of $699,000 or 34% over the prior year due to the additional revenue from the recent acquisitions and organic growth. The acquisition of Picometrix provided the Company entry into the homeland security market with its Terahertz products and contracts and significantly extended its reach in the telecommunication markets with optical receiver products (though revenues from the Cisco router, if applicable, aren't really visible as yet, and no formal contract has yet been announced if forthcoming).
All in all it's pretty good, because there were (and will be) certain notable expenses in regards to the move from (and upgrades in) Camarillo, as well as for the acquisition of Picometrix. These generally were non-recurring so would have meant a decent Q4 anyway. That said, the consolidation to Michigan has expenses, so it's helpful that all the robust increases in various sectors are contributing to offsetting those costs in the course of transforming this company into what we think will be a not-so-small player.
In the very short-run (and the 'official' PR release was posted after the close), there is little doubt that some of the large 'sale' blocks showing up around 3 were likely -as in the prior Quarter's case- from Highbridge, the venture capital group that tends to use rallies to feed out their remaining holdings (acquired by financing Picometrix prior to a deal to be acquired by API). If for some reason they don't compel API to take money in the second traunch (phase), you could see their remaining shares absorbed rapidly as the stock gains a greater following. Over time, 2 million shares later supply or not, it is likely that reported progressive accomplishments of the company absorb that and likely engender more institutional interest, though much of that will increase (we think logically) particularly when and if it moves over 5. So from a 'coverage' or as regards broader institutional interest, we think moving from 2 to 5 is tougher than maybe 5 to 10 down the line. I'm sure there are players that would be thrilled to get 5; but maybe they don't understand that about that time it's an affirmation that the company finally is hitting critical mass, and that's when institutions (even those already nibbling) tend to buy into strength, rather than merely on palpable price concessions. It's also why in our assessment, we were not early, but thought the (current) absolute low would be in 2005, with pullbacks of course, but with the shares possibly doubling or so with the affirmation of business development in 2006, and then 'in-play' ideally in 2007.
In our view 'in-play' did not refer to a move from 2.50 to 5, but maybe from 5 to 10+. So that's why while we have held it consistently since our first write-up, and are not disappointed by the periodic 'blocks' that greet rallies (because these were known as well as discussed venture capital share and warrant obstacles for price appreciation short-term, but become irrelevant in the fullness of time in our view). It's also why we tend to think API referred to their entry in certain areas like 'homeland security' as an 'incremental' addition to revenues for the next few quarters. Our suspicion is that they are absolutely optimistic about these growth areas (including telecom and the military applications for optical devices), but realistic on (without saying it) working-through a couple million (more or less) of overhead shares before the stock moves potentially a bit more dynamically. So we think it's sort of a 'grind' near-term, but eventually breaks free of the hobbling shares from the Pico venture deal, and/or reflects interim news.
It's our thinking that if volume increases with attention, or institutional nibbling grows, then it won't take several quarters for API's pioneering THz work to be recognized. In a nutshell that's why we selected it for 'small-cap' pick of the year, with patience that's hard to assess with respect to how long that takes. If we thought it would take 'till '07, we wouldn't have picked it until then. We think this year is a reasonable move, and by next year (if things progress reasonably) we'll look to API to get much wider attention. Do note that they managed to eek-out a profit, so unless they're playing to Ann Arbor and Michigan politicians for the tax breaks, this looks better than 'incremental' gains.
As the year progresses we are optimistic that both API and INKS will be similar in this regard, though there's no doubt that API has the larger profile (and is already listed). In the long-run though, INKS too becomes interesting, as 'supply chain management' is an enormous field, where no single player will control any key sector, but there will be lots of room for true innovative low-cost authentication/anti-counterfeiting/chipless RFID players to potentially have a sufficient share of the business to be rewarding to the companies and shareholders. We even see API indirectly in this, as Picometrix is positioned to contribute to product manufacturing consistency, and while a stretch; is an area that also can be inventory-controlled (as in 'A' versus 'B' stock for example) by use of 'chipless RFID' and other inexpensive digital imprinting solutions expected.
In our view this report was very solid with all areas of the business slowly growing organically and company gradually expanding also. The market for this super high-tech beast is great and this is just the beginning. Love the management. The PR will stimulate much more interest in the stock and hopefully we can get some institutional buying. We should add these levels of growth historically attract funds that have cash available to put to work; so thus their interest will be increasingly visible (we suspect).
Institutions 'in the know' interested in buying, either will wait for the presumed (though doesn't have to occur) pullback after a post-news rally on good news, or already have started buying (our hunch about underlying blocks of recent days) and will add on the pullbacks along the way that occur. Further, once the stock (eventually) moves over a key level (5) we'll anticipate broader mainstream coverage and professional interest.
InkSure (INKS) is relatively light-volume; but holding shy of 3 (as is logical really, and pending more developments and maybe the Q4 report being out of the way). Sure it's sensitive to buying or selling efforts in-size, as is common for most such OTC stocks. Now, let's explore some additional tidbits that while certainly not assured to result in a particular share of a very enormous 'supply chain management' or anti-counterfeiting authentication business, point that way. To us the shares are reminiscent of maybe a level that API was at a year or more ago, or IOTN a couple years back. However, we suspect there is pressure for anti-counterfeiting in so many venues now, that with so many focusing on the sector, it's likely to invite serious commercial interest. And we'll be the first to say that procurement decisions in industry are faster than governments tend to move; though in this case, there is both potential in the commercial and public sectors, since one reason for incorporation in the U.S. was to be able to deal with the state and Federal agencies that require vendors to be U.S. firms prior to contracting.
Recently there has been some favorable press for the sector of authentication and/or the RFID area, but none exactly 'chipless RFID' competitors. One getting exposure in this regard was Document Security Systems (DMC) and that underscores the large potential market for authentication solutions overall. It is not at all a mature market at this point, and there is plenty of room for many providers of quality solutions as noted in the past. DMC was organized in 1984, yet after so much time its current financial position is only similar to INKS, even though INKS just began direct sales in 2002. It got publicity in a Business Week piece that INKS didn't. INKS is still below their radar screens we believe. And we suspect the March Boston conference may change that. (Meanwhile we'll be delighted if the percentage move in INKS replicates what DMC in the past experienced, though it's defensive just now. Again; not really competitive.)
INKS and DMC are only competitors in that both provide authentication solutions for industry. InkSure's actual product lines and end-applications are quite different as per discussions with INKS management. Most of DMC’s products, including 'stamping' on components document forms that verify authenticity; not the same as digital ink that's stamped directly on the product in question (direct stamping is harder to circumvent). The rest of what they do is mostly focused on prevention or detection of unauthorized photocopying/scanning. This is fine for protection of certain type documents but does little to protect branded goods themselves; again only the attachment's are stamped.
Please understand; most counterfeit products do not simply involve merely the use of photocopied or scanned information; instead, the packaging, labels and the products themselves are being produced by the counterfeiter. InkSure provides products that allow for more definitive identification of authentic products. InkSure materials are in a sense added into the normal production course of the packaging, labels or products themselves; thus providing forensic-level authentication, but in handheld field readers which can typically give definitive indications of authenticity in less than two seconds.
Using DMC as a comparison again (versus what we're more interested in) does offer alternative methods of marking products and using readers to determine authenticity. However, other 'reader' (such as DMC's) are simply a plastic lens; that requires user interpretation to determine whether a hidden pattern or image can actually be seen when using the lens (a layman's way of saying this would be like checking for a fake ID or driver's license by looking at the hologram; most people won't easily realize if it is real or fake). InkSure's readers on the hand, require no user interpretation thinking: the reader preprogrammed to make the decision, presumably without frequent error.
The DMC lens technology is similar to other, common plastic lens applications, such as those offered by GSSC ('Scrambled Indicia') and Paradigm Solutions (a 'Hidden Image'). Nothing wrong with those, as far as they go; but they cost more and are not leading edge technology, which is what we're focused on. INKS, on the other hand, provides a unique, leading-edge covert machine-readable technology ('CMRT'), by which each end-user (such as a retailer or warehouse or pharmacy or auto parts or other distributor, which are the main market fors now) is afforded in its own exclusive SmartInk formulation (or 'code'), for the highest level of security technically available.
Now sure, this is a competitive landscape; but we're primarily interested in both this, as well as 'chipless RFID', which moves this along in terms of versatility and serious innovation, while at the same time most conventionally scanned products need only the basic current CMRT (scanned) barcode authentication technology. Hence they are viewed as complimentary, and the interest by a customer in the existing product can readily lead to excitement about incorporating the forthcoming technology, it is anticipated. INKS revenues continue to grow at a 50%+ rate, evidencing the growing acceptance of InkSure solutions, due to their accuracy, security and ease of use.
I hope this clears things up a little for those worried about competition. What's out for now is already generally less advanced than what InkSure offers. Because there was a period of time involved in structuring the company, getting incorporation in America, and necessary patent protection for the forthcoming products, this is all fairly nascent as regards the understanding of how this can stop pharmaceutical, parts, software or entertainment (not to forget official document incorporated) authentication protection.
We haven’t missed the boat, and are not late (quite the opposite we think). But it is a large ocean of opportunity, and there is room for more than one vessel to sail. Hence we think the financial press and much of the industry is barely (if at all) aware of INKS as of yet, and we believe that the core of the SensorMatic (original RFID pioneers) is already at, or has just joined, InkSure, to spread the word and grow the business. So while current prices look good to early penny investors (mostly in Israel), this is entry-level in the U.S. (in our opinion), and basically does not yet even touch the potential in this Country, or worldwide, with respect to the penetration of European and Asian markets (where counterfeiting is basically epidemic). 'Chipless RFID' isn't factored-in yet (that we can see); so we tend to think this stock is basically working through exit of the now-registered early-holders (rather than new dilution as previously discussed) and after whatever reaction occurs to the upcoming Quarterly report, we suspect the interested parties will be looking for any pullback (if that occurs) for buying purposes, with expectations of increased attention to the stock after the 'chipless' presentation.
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