A Hard Beginning Maketh a Good Ending
-John Heywood
Everyone loves a good comeback story, especially when it pertains to making money in the stock market. Many times a company’s story (or concept) sounds promising but still fails due to a host of different factors. These factors tend to be related to lack of cost cutting, digging too big of a hole with debt, or just poor execution from the CEO. Today, I am going to cover two speculative stocks I was originally attracted to because of their interesting stories and ultimately have become very bullish on for this year, if not longer. These long ideas could turn out to be diamonds in the rough when we look back years from now.
Cord Blood America, Inc (CBAI.OB) capitalizes on the fast growing stem cell market. In time, CBAI could be a household name when discussing the stem cell market as a whole. CBAI, through its wholly owned subsidiaries, CorCell Companies Inc., and Cord Partners, Inc., markets a service to preserve the umbilical cord blood through a patented process. In January 2010, CBAI had a grand opening for its new facility in Las Vegas. The facility is 17,000 square feet and includes a state-of-the-art laboratory for storage of multiple types of stem cells. To my knowledge, this is considered the largest cryogenic storage facility and stem cell lab in the nation. Not a bad start to the story for a company that currently trades on the pink sheets.
I want to focus on the new facility because this should be a strong revenue opportunity to acquire lucrative contracts. Not only will they be able to hold stem cells for individual families but now CBAI can acquire contracts from other companies to hold their stem cells, which would be a substantial source of revenue. In a recent interview, Matthew Schissler, co-founder and CEO, discussed how CBAI will focus on adding storage of additional types of stem cells such as adipose tissue, placenta, bone marrow and others in 2010. This should be a great way to enhance sales to a wider range of stem cell companies therefore increasing revenues. As the stem cell industry continues its growth, CBAI should see added demand for their storage.
The interview covered many more important tidbits of information which only add to the story of CBAI so I will try to briefly sum it up. Just prior to the interview, Schissler returned from a trip to China and hinted towards the need for CBAI to find ways to tap into this large market. Schissler also makes it a point to state that CBAI has invested more capital into their storage facilities than the competition in order to equip their facilities with the latest stem cell technology. This technology aids in creating a scientific advantage and reduces potential contamination. These enhancements help ensure CBAI stands out amongst the competition when a stem cell company seeks a storage facility. Recently, CBAI acquired a contract with a Latin American firm to store their stem cells which should be just the start of good things to come. Maybe CBAI will be able to work something out with various companies/families in China for stem cell storage in the near future but, more than likely they would have to build a facility there to keep the stem cells closer. Either way, I am anticipating more contracts in the near future.
A positive catalyst for growth is Schissler’s constant reiteration that CBAI is planning an acquisition to diversify revenue streams in the very near future. This acquisition would inflate the PPS from current levels. As you can see, CBAI has a very positive outlook for 2010 with many goals they plan to achieve.
However, no story is without concerns. Debt and decreased revenues have been a burden on this company. Per the last quarterly earnings release in November, the nine months ended September 2009, CBAI’s total revenue decreased about $0.7 million, or 22.1% to $2.6 million when compared to the same timeframe in 2008.
Cost of services decreased 36.5% or $0.6 million as a result of lower revenues, but Gross Profit increased from 54.3% of revenues to 62.7%. Management attributed this to a significantly higher proportion of revenues coming from the higher margin Cord business. CBAI anticipates that through the continued growth and expansion of its Cord business, they will benefit from economies of scale in that business segment.
Significant debt was accumulated in the startup of this company and dilution has been necessary to acquire the capital needed to pay down debt. Per a press release in January, Schissler stated CBAI retired more debt, making the running total since January 2009 at almost $11 million.
Around the same time, Schissler stated that he believes the minimal long term obligations left are immaterial in terms of standing in the way of future growth. This puts a more optimistic viewpoint on future earnings releases to counter the bearish tones last year. To fund future growth and avoid further dilution, CBAI announced that it has completed raising the capital totaling $16.8 million. This includes $3 million in financing focused primarily on avoiding further dilution. CBAI has access to a credit line when it is necessary rather than being loaded with debt all at once. This will help CBAI buy more time to clean up finances and become a cash flow positive company if done correctly.
The stock has been stagnant for most of the past 30 days but, has found a new home at current levels. I would expect this stock to double quickly on any of the positive catalysts above coming to fruition combined with continued positive guidance from Schissler on controlling debt and costs. While CBAI is currently valued as a micro cap (nano cap to some), I am expecting a higher value to be unlocked if Schissler can continue making the right moves. Now is the time for Schissler to really turn this company around and show its true potential. 2010 is the make or break year for CBAI it seems and I am a believer.
Quite possibly a more exciting story which is already moving with momentum is that of GoIP Global (GOIG.PK). I have informed my loyal readers about GOIG a month ago and we have already seen a 400% increase since. GOIG is a company which capitalizes on the mobile advertising (texting) trend with a new patent pending service. Imagine being able to text a specific keyword such as “movie” and instantaneously receive a phone call from an automated service connecting you directly to the popular Movie Fone service. Instead of having to remember a 1-800 number, or in this example trying to remember that you need to dial your area code + 777-FILM, you can prompt them to call you instead within seconds of texting that memorable keyword.
Say you are out of town on work or hopefully vacation because you made some great investments. You do not have your car with you and need to take a taxi everywhere. Would you prefer to pay extra for 411 to find a local taxi or would you rather text Go800 the keyword “taxi” and be called within seconds from a local taxi company which is geographically based upon where you called from? The convenience and potential demand are obvious.
Fundamentally speaking, GOIG has come a long way and is expected to officially launch the Go800 service this month to finally gain much needed revenues. Many sacrifices have been made to get this system to the point of launch. Per the last annual report ending September 2009, GOIG has a working capital deficiency of $656,897 and has accumulated a deficit of $3,552,581. That significant chunk makes GOIG a risky play. GOIG would need strong revenues to ensure they can survive. Ike Sutton, CEO of GOIG, has recently stated in an interview that there is already demand as companies are ready to reserve keywords in anticipation of the launch. Strong demand from day one could be essential to the survival of GOIG.
In February, GOIG launched their keyword reservation website. Currently, companies need only pay a reasonable monthly fee to reserve a keyword plus a small per minute fee. Prices are subject to change at any time and could be tweaked this year to reflect changes in demand. The website does not have a simple table to explain pricing so you must view each individual area code separately, which can be time consuming to inspect. After comparing some area codes, I have seen keywords in Brooklyn, area code 718, priced at about $700. In Chicago, area code 312, the price is around $300. At 10,000 keywords, which Sutton hinted could be the number reserved by the end of 2011, GOIG would have monthly revenues of $5 million if the average price was $500 per keyword. GOIG also makes $.04 per minute on connected calls so that would be revenue in addition to the keyword cost. Long-term, I expect this pricing would turn more auction-based, similar to Google AdWords, where the highest bidder is able to reserve the keyword. Short-term, it seems GOIG expects strong revenues from day one to help offset some of the debt and costs it took to get to this point. If strong day one revenues are achieved, the path to becoming a blockbuster company will be that much easier for GOIG.
I expect costs to be minimal and a significant profit for each reserved keyword. Per GOIG’s last annual earnings report year ending September 2009, the company expects to be cash flow positive by 2nd quarter 2010. If the high demand is real, and I expect it to be, GOIG should easily be able to fulfill that goal which would reflect very positively on the PPS. I also expect GOIG to be on the radars of many larger organizations, some being competitors, who will look into buying them out.
The stock has been on a run as of late even though I expected consolidation by now. I will be adding to my position on a healthy pullback but the way this stock has been moving lately, I would not be surprised if it continues its rise. I will continue to trade around my core position to lock in realized profits while I am anxiously awaiting news pertaining to how much documented demand this service has garnered.
If you want to test out this service to see how convenient it is, text Go800 the keyword “movie” and you should receive an automated call connecting you to the Movie Fone service. I tested this out myself on Friday as I am speculating the service is being tested for bugs before the official launch. Remember, not all interesting stories end happy so make sure you do your own homework to see if you agree with me. Good luck out there.
Mike
At the time of publication, Kudrna was Long CBAI and GOIG but positions can change at any time.
