ElectriPlast -- The Upcoming "Proxy Vote"

100 Million

New Shares


Inside the Numbers


By Craig Q.


Special to the ElectriPlast
Blog


On April 28th, 2006, ITKG shareholders will determine by proxy vote whether or not to authorize 100 million new shares into the Integral treasury till. The current authorized share count is 50 million common and 20 million preferred. What are the pros and cons to this proposal? Is this just what the doctor ordered, the precursor to increased liquidity, visibility, dividends, splits? Or is it a harbinger of dark days, excessive stock placement resulting in dilution, dwindling stock price, and dissolution of investor confidence? The company has given several reasons for needing the new shares. These reasons are listed and examined below. Considering where you fall on these issues may help in deciding if, in your opinion, the new proposal is for the best.

Stock Splits

There are roughly two million shares and change left in the treasury.

Mathematically, about the best they could do if they were to offer a split would be a 20:19 deal. At that level, why bother? That would leave their till empty and for very little effect. They essentially need 50 million more for the standard 2-1 split. Buying stock back into treasury to accommodate a split right now is cost prohibitive and not good business anyway. Buy backs are typically used to retire stock, not hand it back out as part of a split.

At what price would it split?

The historical high across a seven year time span is under ten dollars. Stock splits are general indicators of good health for a company provided the split is not forced. Is there compelling evidence to suggest that enough upward pressure will occur to put the stock price in a position to split? There is a methodology called CANSLIM used for discovering ‘hidden gem’ companies before they hit their stride. One of the requirements is that the outstanding share count be at or below 25 million. MSN Money shows (as of 4/10/2006) 12 companies that pass CANSLIM muster. None of these companies have over 25 million shares outstanding and all have share prices between 20 and 80 dollars. While ITKG is nowhere *near* that share price, it is worth noting that they fail the stock requirement and are looking to triple the current authorized amount. The CANSLIM filter is here:

http://www.investors.com/learn/c.asp

While not out of the realm of possibility, there is nothing historical to suggest that ITKG can achieve this, but they are a start-up company. Innovation disdains history, and if this product is what it claims, $50 a share may well be a bargain price in a few years.

Placements

The downside is that any new shares issued as a placement represent instant dilution of current ownership. What those placements bring to the table determine whether it is a worthwhile transaction. Shares placed to financing operations represent the worst scenario possible. The company would be selling shares at a discount to get cash for day-to-day expenses, employee compensation and the like. While there is a need to have money to keep the lights on and allow your employees to pay their bills, if done often enough, these deals are classically termed ‘toxic financing’ as the dilutive effect intensifies with each stock placement. This generally typifies a company that is having trouble selling its product but can also be the saving grace that tides them over to profitability.

The best case scenario might be where shares are placed to an investment house looking to add the stock to a mutual fund or something. Rather than test their fate on the open market, a firm could obtain a placement with a sale restriction of a year or two as Wellington already has done with ITKG. That ought to be sufficient time for the company to hit their stride and the stock would be held past the restriction expiry date. Having institutional ownership is often a bellwether of company success, but it needs to be surrounded by a solid business plan as well.

Acquisitions (Company or Product)

ITKG owns Intellectual Property (patents) at this time and little else. They have repeatedly made clear that they have no interest in a production facility, so unless they have had a momentous change of heart, I’d say this mention is included to cover the bases and nothing more. Should they start selling 100,000 pounds of product a month, however, you never know. Funny things happen on the way to the bank and if the opportunity avails itself, they would be ready, but for the moment this is not a factor.

Prevent hostile takeover

A fledgling company with what may or may not be a product that heralds a paradigm shift in the electrical, heating, and lighting industries. A stock price below three dollars. Rumored interest of some deep pockets like DuPont and GE. And an upfront statement that they know of no one that is looking to come in and take over the company. Perhaps they are covering the bases here the same as for acquisitions. At the very least, it addresses a situation before it occurs. That’s why there are vaccines. Preventative medicine. In the light of revenue projections in the hundreds of millions of dollars, I can see them wanting the added layer of security even if they explicitly say they don’t necessarily need it.

There is a matter of trust involved in how you make your decision.

100 million is an awfully large number. They have been incorporated for ten years, working with the original 50 million. Their track record to date has included some placements but nothing that would indicate abuse. Their current situation would suggest that they are in better position now to make money without placements than they have ever been. At the end it comes down to this - do you trust them enough to put, at today’s stock price, 150 million dollars into their company account?

It could be the beginning of the end, or it could be the beginning of the next Microsoft story.