Pink Sheets

I sold the last of my BakBone Software (combined links) and put the money into Strathmore (combined links) and CXTI (combined links). It's not that anything's wrong with BakBone, but it's just that I like the other investments better. BakBone ended up being a slight gain.

UPDATE same day:
I guess the market overall went down today. No big surprise. I don't generally try to predict stock prices, but it seems to me that bull markets tend to rise slowly and fall fast while bear markets tend to fall slowly and rise fast. I see a lot of minor indicators that, to me, indicate a good future economy despite the hype about subprime, trade imbalances, global warming, or the lack of any good music for the first time since the 1950s. In fact, I get a sense that we're still in the middle of the same larger bull market that's been going on since the end of the 1970s, that historians might look back on 1980 to 2020 (or so) as the rise of the global middle class. That's just my guess. I don't put any money on it.

And while I'm predicting, I definitely see the Internet as causing all sorts of major revolutions in how things are done and the most of it hasn't happened yet.

Strathmore Minerals announced a big joint venture with a big player in the mining industry: Sumitomo. Presumably this is the SC Minerals America, Inc subsidiary or perhaps Sumitomo Metal Mining Co. This is for the Roca Honda venture which is to be an underground mine, if I understand correctly. After an initial investigation period, the two companies have the option to proceed. Sumitomo puts in "more than $50 million (US) in development costs of the Roca Honda Mine." They will also have the right to enter into new projects that Strathmore undertakes in New Mexico.

A National Instrument 43-101 compliant mineral resource report for the Roca Honda deposit reported a Measured and Indicated Resource total of 17,512,000 lbs. at an average grade of 0.23% U3O8, in addition to an Inferred Resource of 15,832,000 lbs. at an average grade of 0.17% U3O8 (See press release, April 4, 2006). In November 2006, Strathmore finalized the purchase of lands for a potential mill site for production from Roca Honda and other conventional mining projects in the area (See press release, Nov. 20, 2006). During 2006, the Company began the permitting application process to advance this project towards production and these efforts are ongoing.

That's around 30 million pounds of uranium oxide, perhaps 60% of it will be owned by Sumitomo. This is a core property of Strathmore's. There are 77 million shares of Strathmore.

In other news, Strathmore Minerals' spinoff company Fission Energy started trading and ended the day at 78 Canadian cents, down from a Canadian dollar. I still don't know if the spinoff was one share of FIS.V for each share of Strathmore.

There's also news of a joint venture up there in Canada with Tribune Resources Corp.

They found rock samples containing up to 1.39% uranium in addition to other indications of good stuff.

Under the terms of the Option Agreement, Tribune may earn a 60% undivided interest in the property by issuing 600,000 common shares, which will be subject to hold periods from four months to one year, and incurring expenditures of $10 million over six years.

I have no idea how big the news is about Sumitomo. It doesn't seem that big to me because it doesn't seem the least bit unexpected that Strathmore would do a joint venture on Roca Honda with a big player.

Here's another article on the deal from Sumitomo's side of things.

collected CXTI links

I just happened to noticed today that the CXTI CFO resigned. "Personal reasons". What happens if someone really does resign for personal reasons? Does the press announcement say "this time we really do mean personal reasons, unlike when it's usually a scandal or essentially a firing."

I've been following CXTI somewhat since selling it and I've been watching the price drop, waiting for a possible chance to get back in. I sold it earlier this year at a lower price, but still for an excellent gain.

I'm back in. I just finished buying about a third of what I'd normally buy for a full investment. Yes, there could be more bad stuff to follow, I don't know for certain. I expect to post more this weekend.

UPDATE 11:19 AM same day:
Just bought more, now I'm up to about a half-investment.

UPDATE Tues, July 24, 2007:
Bought more today. I'm wondering just how low the CXTI stock price can go. Perhaps back down to 85 cents? Here's an interesting thought: If you had bought 3/4 of a full position in a stock and you could wave a magic wand and make the price drop by 75% for say 4 months, would you do it?

I've been selling CVU, BKBO, and even a small amount of Strathmore in order to buy CXTI. But selling Strathmore for CXTI isn't very compelling at these prices.

UPDATE Wed, July 25, 2007:
Bought more again today. In terms of blogging, I've cheated on this one: going through the key parts of the financial statements and SEC docs without taking notes. That makes it unpleasant to go back and do it in detail here on the blog. Plus I'm going to have to re-install Linux on my machine. It's going to take a while before I post the notes on CXTI's recent SEC filings.

CXTI is having a conference call on Friday morning EDT where they'll presumably claim the CFO is leaving due to not wanting to move out of Hong Kong. The real reason is possibly due to tectonic shifts between management and the hedge funds (I'd give that a 50% chance).

Meanwhile, the stock of Strathmore and the other uranium juniors continues falling. My thinking is that demand dried up because the hedge funds are loaning uranium to the buyers (we've already seen that from a company that claimed they were going to increase their uranium loans). The spot price dropped and will probably continue dropping, but it was ridiculously high anyway. The market has a bad case of anchoring. When the spot price jumped up to $75 at the end of January, the crowd went wild and uranium stocks took off (Strathmore jumped up above C$4). When the spot price drops to $120, the crowd goes into a panic and Strathmore falls to C$3.33. Hehe. I doubt it has much to do with the Fission Energy shares that spun off. I'd be surprised if they trade above 30 cents.

Charlie Munger argues that investors should always be looking for mental models that apply to businesses and markets and situations in general. Mental models are models of real systems which are accurate for key parts of those systems. I've mentioned before about how I viewed the stock market of the late 1990s to be like the physics of the inside of a thundercloud when people started viewing an "overpriced stock" as a main criteria for a good investment.

One danger in mental models is that people tend to take them too literally or not recognize what parts of the model are similar between the two systems and which parts are not. It's very difficult to separate out the relevant part of the model and figure out whether or not the model is actually valid for the other system in question. You need to forget about the orignal complex system and understand the model of it, why it behaves the way it does, whether the new system in question meets enough of the criteria, and how it differs from the model.

For uranium at this particular point in time, the analogy that strikes me as being most interesting is that of a tsunami from the perspective of someone standing on the beach. But don't read too much into that.

A tsunami has an extremely long wavelength and the very long destructive peak of the wave is preceded by a very long trough. If you ignore the bigger picture and just focus on the area from the beach going out a few miles out to sea, what happens first is that the water level drops by say 10 feet as the trough of the wave reaches the shore*. It's common for people to go wandering out toward the receding water due to curiosity to look at what had been the ocean floor just a few minutes prior. But anyone who is thinking in terms of physics will see the danger immediately. It takes an enormous amount of force to "push" the water level down by 10 feet (imagine carrying even a narrow 10 foot tall barrel of water). Because water moves around very freely, when the water stops being pushed down by 10 feet, it won't simply return to its previous level. All that energy that went into pushing the water down (caused by the unseen wave approaching) is going to cause the water to be pushed up above the normal level by probably 10 feet. And if the water was 10 feet low for 15 minutes time, then the water is likely to be 10 feet higher than normal for roughly 15 minutes.

What makes the tsunami so destructive is the length of time that the water remains at a high level. Even a very large wind-driven wave has a short wavelength and the water goes up for just a matter of seconds at any given spot as the wave travels forward. The wave breaks and rolls back. With a 10 foot tsunami, it's like sea level rises by 10 feet for a very long time and all that insanely heavy water flows very fast, carrying all sorts of dangerous objects with it.

Now let's take a look at the uranium situation. For nearly twenty years, the price of uranium has been very low. For all that time there has been almost no exploration, almost no new investment, almost no new mines, and very little activity beyond simply maintaining the mining of low cost sources of uranium. An enormous amount of attrition and "industry decay" has taken place in the supply chains, organizational knowledge, etc. Compared to the actual demand for uranium, there is only a small core of people remaining who know all the complexities of uranium mining, the "stories around the campfire", the trade knowledge that doesn't show up in books. You have this tiny industry right now that's only a fraction of how big it needs to be.

It took a great deal of "force" to keep the prices so low for so long and to keep the supply industry undersized. A huge amount of excess uranium was mined in earlier years (much of it went into nuclear weapons) and it was dumped back into the market during the long price slump. Meanwhile, the actual usage steadily increased over these years and all indicators are pointing to a huge acceleration of demand going forward. If you don't think it's possible, just look at the demand curve in that chart from 1970 to 1988.

In addition to the force that had kept the prices low, there are very big new forces driving up demand. China is sick of all the pollution. The Chinese people will only tolerate so much and the leaders know it. India is sick of both pollution and a lack of electricity. All over the world, countries are moving toward nuclear power. The industry has matured enormously since Three Mile Island (and even a big accident today is unlikely to deter countries like China). Of course the nuclear reactor supply industry also has limits to how much it can ramp up. But I suspect it's easier to scale that up than to create new uranium supplies.

These are enormous forces at play in the uranium industry and they're going to be pushing up against a number of things that are slow to react, regardless of the forces against them. New mines take a very long time to get from exploration to productivity. It takes a long time for industry workers to gain sufficient industry knowledge to be competitive with those who already have it.

And an interesting thing to consider is this: uranium buyers are showing a great unwillingness to pay high prices for uranium. Basic economics tells us that when supply and demand out totally out of whack, prices will rise to bring them back into equalibrium. But if the prices are kept down for whatever reason, the signal going out into industry to increase supply is muted. So the weaker players who might eventually gain enough industry capability to succeed fall by the wayside. Stock prices drop and it gets harder to raise the huge amount of capital needed to increase the supply. So interestingly enough, the investment case for uranium is only increased by lower uranium prices. It merely pushes out the inevitable and increases the resulting impact.

With a tsunami, the longer the water remains at a low level, the worse the oncoming wave is going to be. With uranium, the longer the slump, the more the industry has atrophied. And that makes the imbalance far worse because the demand shows every sign of accelerating going forward. If the currently-incompetent WildEyedExploring Inc. is not supported by a sustained stock market "bubble" in uranium stocks to allow them (or at least some of their workers) to reach competence, then the industry expansion is going to be slowed down and the demand/supply imbalance will be worse and longer.



What I'm really trying to say here is that there are very large forces operating on a slow time scale that dwarf the monthly happenings in the industry. It's those longer term forces that I believe are easier to predict and to rely on as an investor. Yet most investors usually don't look at the bigger picture either because they're impatient or else they just don't see it.


* Actually, it's not as simple as that, as smaller peaks and troughs typically arrive beforehand in a very complex pattern depending on shoreline geography and water depths. But typically there ends up being a big trough followed by a big peak.

UPDATE Monday July 16: Speak of a nuclear accident and one happens.

About 1.5 liters of slightly radioactive water spilled out of the cooling pool for spent fuel rods, leaked into another supply of water, and 315 gallons of that water were pumped into the sea, said Hiro Hasegawa, the manager of corporate communications at Tokyo Electric Power....

They didn't report the event until hours after it happened. If this is all that happened, then that would seem normal (but I don't know their procedures which are probably fairly convoluted about how much information you need before reporting the event).

The media will play this up regardless of how serious it is. Well, at least we'll get to see who screams how loud about nuclear power.

UPDATE Friday July 20, 2007:
I think the story right now with uranium might be that hedge funds are loaning it out to utilities in large quantities, which has removed the panic buying pressure, but definitely would do nothing to ease the supply/demand situation. I could be wrong.

Time to think about uranium. The news is funny. The spot price was at $29 when I first started buying Strathmore Minerals and it shot all the way up to $138 without a single down week. Now it drops twice in a row to $133 and everyone is pronouncing the uranium bull market over. The funny thing is that if the price had simply hovered at $72 where it started the year, it would still be a serious bull market for the metal. My guess is that the spot market jumped the shark this year by going all the way to $138 and industry people on both sides know it. I figure anything could happen in the near term from here, but it will signify nothing.

SeekingAlpha has an interesting article from Boris Sobolev: Uranium Bull Market Far From Over. The key argument is that uranium investors are generally paying about 12% of the spot price for resources in the ground. Of course this is a dangerous way to view things because the cost of mining varies enormously. The gold mining industry stocks are generally selling for a much higher percentage of the spot price.

Neal Froneman of Uranium one says:

"There is a bit of poker being played between the utilities and producers," said Froneman, suggesting the development of a standoff price wise.

The spot price for uranium is $134 a pound but "I would suggest that utilities are willing to pay $60 a pound at the moment," he said.

However, he believes the long term price will be substantially higher.

My approach to uranium investing is to look at the really big picture and the long term story. The supply/demand imbalance will play out over a long term. I believe it will be far bigger than what people are thinking today. It's extremely likely that nuclear energy (i.e. demand) will not only continue to grow, but will accelerate more rapidly than what is being predicted. On the supply side, it's true that uranium is not rare, but it's difficult to increase supply very fast because the places which have roads and utilities and property rights don't want big uranium mines in the neighborhood, and places which welcome uranium mines either don't have access and utilities and property rights and political stability.

There has been an extremely long period of neglect in the supply industry. Those who have experience and have spent years doing the right things before this boom started will do well. StockInterview has a great article on the troubles with milling uranium in Colorado. "He who owns the uranium mill makes the rules."

Although [operating the only uranium mill within a 500-mile radius] could become a cash cow for Denison Mines, two junior uranium mining companies we interviewed sounded like they had been smacked between the eyes with the back end of a billiard stick.

and worth noting:

In June 2006, Strathmore Minerals began the process to develop its proposed uranium mill near Grants, New Mexico, less than 300 miles from Blanding. This past November, the company announced the purchase of land for the mill site and initiated the first step required by the U.S. Nuclear Regulatory Commission as part of the license application package.

Seems to me that the most salient fact is how little the uranium stock prices actually dropped so far. They might drop more, I don't know. But this chart of Strathmore says something about how much this stock normally wiggles around.

The price of uranium has gone up an amazing amount since $29. People seem to be way too obsessed with relative changes rather than absolute numbers. And they're focused on the spot prices and long term prices (roughly $95) today rather than the forces that would be needed to keep the prices at these extremely high levels. You figure that Strathmore realistically intends to ramp up to 8 million pounds per year and their costs of mining are probably down in the mid 30s range and lower. If the long term uranium price held at $75, that would result in perhaps US$2 per share per year after adjusting for joint venture interests and the stock closed at US$4.05 today.

UPDATE same day: A potential new investment blog, valuevista.

UPDATE Friday July 13: I see that the Cigar Lake mine won't be coming online until 2011. No surprise there. They also need to get regulatory approval to dewater the mine (the water would need to go somewhere and the stuff is going to be polluted with all sorts of nasty stuff). Here's another view.

AJAY, AJAY SPORTS, INC., no website, sec, yahoo, chart
[note: now AJAYQ].

Pro Golf of America, Inc. is the world’s largest franchisor of “golf only” retail stores, with over 110 stores in the United States, Canada, Europe and Puerto Rico, as of September 30, 2006.

I opened the most recent 10-Q and glanced at the balance sheet and literally sprayed my monitor with cranberry juice. Let's tally up the assets as a percentage of total assets:

• Cash: 1%
• Accounts Receivable: 7%
• PP&E, net: more or less 0%
• Trademarks: 91%

If your trademarks are 91% of your assets, then you've either got a profoundly great business or a profoundly bad business. I'm guessing it's not the first one. My first clue was the fact that the current liabilities are greater than all of the assets, including the prized trademarks. Needless to say, the shareholder deficit is pretty...
frightening.

Revenues for the past 3 months and 9 months actually increased slightly.

With total net revenues of $582K, the cost of sales is only $1K, so they have gross margins of 99.8%. Not bad.

Operating income is $74K. So good, so far. But interest expense is $242K. There's a gain on extinguishments of debts, definitely not a good thing.

Operations provided $17K of cash over 9 months. No financing. No investment.

Next we look at an 8-K file ominously named "f8kajaybankruptcydec2006.htm". I'm guessing this isn't going to be good news.

Back in Dec 2006, a jury awarded a prior employee (CFO and Chief Admin Officer), Ronald N. Silberstein, $1.3 million. Ajay filed an apeal and "expects a positive result upon Appeal." The only people who expect to lose on appeal are those who can afford to.

Due to the adverse decision reached in the wrongful termination case and the resulting $1,320,168 award, Ajay Sports, Inc. and its affiliates have filed a Chapter 11 Reorganization....

Well. That, and the fact that the business sucks [I'm guessing]. That was Jan 3, 2007 and there have been no SEC filings since then.

The 10-K shows the CEO owns 77% of the company. Poor guy. He must be pretty pissed off at Ronald.

The 10-K also shows the same killer interest expense.

Ok, so let's look at the stock price. Looks like a life-support signal that flatlined.

obviously not interested

AIDA, AIDA PHARMACEUTICALS, INC., website, sec, yahoo, chart

This company is all about etimicin sulfate, the first and only antibiotic developed in China. They have an exclusive patent until 2013, which isn't very long. But they have other drugs as well, shown here, including one in development to treat immunity diseases (hopefully they'll find a replacement for the $15,000 per year drug that I take for this).

Aida, in operation since March 1999, is headquartered in Hangzhou, China with manufacturing, distribution and sales points throughout mainland China. Aida is GMP and ISO9002 certified for global quality assurance and ISO14000 certified for ecologically-friendly practices.

Hangzhou is 180km southwest of Shanghai.

Let's look at their latest 10-K:
Period ending Dec 31, 2006.
Reverse merger in mid 2006.
27 million shares exactly on March 15, 2007.

Subsidiaries:

1. Earjoy Group Limited, (“Earjoy”). An investment holding company.
2. Hangzhou Aida Pharmaceutical Co., Ltd (“Hangzhou Aida”). fully integrated pharm company. 9 product lines (including Etimicin) sold mainly in hospitals.
   
3. Hangzhou Boda Medical Research and Development Co., Ltd. (“Boda”). A subsidiary of Hangzhou Aida. Does R&D only.
   
4. Hainan Aike Pharmaceutical Co., Ltd. (“Aike”). Was 50% owned by Hangzhou Aida until Aug 2006 increased to 60.61%. Production of the transfusion type of Etimicin.
   
5. Changzhou Fangyuan Pharmaceutical Co., Ltd. (“Fangyuan”). 66% owned by Hangzhou Aida. Sole supplier of a raw material for Etimicin. Also produces liquid type of Etimicin.
   
6. Shanghai Qiaer Bio-technology Co., Ltd (“Qiaer”). 77.5% owned by AIDA. Shanghai. Produces rh-Apo21, "a pioneering potential biopharmaceutical therapy with genetic engineering techniques used for cancers." Applied for 3 Chinese patents: 1 granted so far, none rejected. Phase II clinical trial started.
   

Etimicin is patent protected in 6 other countries including US, Russia, UK. The drug is good for respiratory infection (bronchitis and lung infections), kidney and urinogenital infection, soft tissue infection, trauma and operations.

Other major drugs are in development that look pretty good as far as I can tell.

5-Deoxy-Flourordine. anticancer drug based on 5-fluroruacil but with fewer side effects. In clinical testing since 1998.

Test results showed that it has only nominal side effects, a broad spectrum and is highly effective. The Company will supplement clinical trials according to the instruction from State Food and Drug Administration in the PRC.

Apoptotic Factor (rh-Apo21). anticancer drug. In Phase II trial. Phase I finished June 2006. 3 patent applications (see above). Phase II and III should finish in 2H 2007. Production approval expected (hoped) in 1H 2008.

Etc. etc.

Etimicin is 88% of 2006 revenues. They admit that they need additional financing for the planned expansion: could be equity or debt or both.

Union Zone Management Ltd in Hangzhou (controlled by AIDA insiders) owns 51.9% of the stock.

Let's check the financials now.

	Year Ended December 31, 2006	Year Ended December 31, 2005
Revenues	100.00%	100.00%
Cost of goods sold	(47.50)%	(33.98)%
Gross margin	52.50%	66.02%
Research and development	(1.10)%	(0.16)%
Selling and distribution	(18.56)%	(41.10)%
General and administrative	(19.29)%	(16.12)%
Other income (expense)	(5.71)%	(2.49)%
Income taxes	(0.59)%	(0.59)%
Minority interests	(2.35)%	(0.34)%
Gain from discontinued operation	0.00%	0.76%
Net income	4.90%	5.99%

Overall revenues increased 21% in 2006. Hangzhou Aida actually decreased somewhat due to "new implementations of government regulations that imposed an adverse effect on the distribution to some of our distributors" and that reduced orders. Hainan Aike increased 30% due to intense marketing and promotion of the Etimicin transfusion product and new sales offices, but COGS increased 208% due to much lower margin mix. Fangyuan increased 87% due to intense marketing and promotion of the injection Etimicin.

Etimicin price decreased 5%. Margins are dropping.

R&D costs were $324,835 for 2006: this was the cost of the Rh-Apo21 clinical trials.

Selling and distribution costs dropped almost by half mostly due to lower travel expenses. But also other expenses dropped.

G&A increased 45%, but most of this was bad debt provision (does this go in G&A?) and stock based compensation.

2 million shares issued on July 5, 2006 to employees and consultants.

Balance sheet:
Current ratio is below 1 due to huge short term bank debt due.
Half the assets are current.
AR increased by $4.4 million (the revenue increase was only $5.1 million).
Not much inventory.
Moderate PP&E.
$5.7 million in patent assets
$54 million in total assets ($10.4 million equity)
Most of the liabilities are current

Income statement:
Net income is 5.4 cents per share.

Cash flow:
Operations generated $2.7 million against a huge headwind of $4.6 million increase in AR. Depreciation, increases in AP, and stock based compensation helped a great deal, also the $1.3 million government grant.
Capex was $712K. Other investments were big and chewed up a lot of cash. They deal in a lot of notes receivable in investment activities.
$21 million in new short term debt to pay off $19 million in old short term debt. $1.9 million in new notes payable.

New accountants on Jan 24, 2006.
Looks like no stock options, just 2 million shares granted.
a 17% single supplier concentration
a 30% single customer concentration (46% of AR)
$1.3 million government grant received in 2006 which will reduce R&D costs in the future.
There was some "badwill" applied in the mergers. Hehe.

Let's look at Q1 2007:
Still 27 million shares on May 8, 2007.
Period ending March 31, 2007.

AR decreased to $9.4 million from $13.8 million.
They own bunch of notes receivable as an investment. Let's go back to the 10-K and see what that's about. There are a lot of these and they've been getting settled.

In 2006, interest-free notes were provided to companies for their assistance in developing distribution channels and new markets for the Company. The Company recorded selling and distribution expense and a discount on the notes receivable of $80,095 based on the present value of the notes receivable using a 6% rate. In 2006, $9,378 of interest income was recognized in the accompanying consolidated statements of income from the amortization of the discount.

Needs more investigation. This is interesting to consider (not "good" interesting, just interesting).

Back to the 10-Q.
So these notes receivable increased to $6.1 million from $2.7 million!

Current ratio is still below 1, same reason.

Revenues for Q1 are down slightly from the prior year. Gross margins are nearly the same.
R&D costs are up, but selling and distribution costs are down far more. G&A is up a huge amount.

Net loss of ($160K) vs net income of $15K (Q1 must be seasonably lousy).

Operations generated a lot of cash due to the decrease in AR, but all of that went into a note receivable Sept 15, 2007 under investments. More cycling of short term debt.

69% of revenue was due to Etimicin (vs 47%).

Hangzhou Aida revenues dropped 8% yoy (no real explanation). Aike was essentially flat. Fangyuan was up 12%.

Ok, I'm ready to look at the stock price now. I'd expect the price to be around a dollar. The last sale was $1.04. Over the past year, the price has been over two dollars, but not much below one dollar.

If something were to stink about this company, I figure it would be in the receivables issued and maybe in the revolving short term debt which consists of lots of tiny loans. I haven't looked into this or even given it much thought, so I may be missing something. I figure this is probably a good company in the sense that the future is likely to be good, but it's a gamble. If I were a mutual fund manager who had to buy lots of stocks, I'd investigate any weirdness here, then buy it and hold it for a long time as some tiny percentage of the fund.

I don't see this as being screamingly cheap.

worth following

AHOM, AMERICAN HOMEPATIENT, INC., website, sec, yahoo, chart

We start with a press release for the results for Q1 (period ending Mar 31, 2007). Revenues are down 2.7% to $76.9 million, but the reasons are interesting.

A significant portion of this revenue decrease is due to a decrease in revenues associated with non-focus product lines, such as durable medical equipment and infusion therapy. Also contributing to the decrease in revenues was the effect of Company initiatives implemented in late 2006 to improve patient co-pay collections and provide appropriate service levels to patients. The Company believes most of the revenue lost as a result of these initiatives was unprofitable. In addition, Medicare reimbursement reductions implemented in 2007 associated with the Deficit Reduction Act of 2005 resulted in a decrease in revenues in the first quarter of 2007 of approximately $0.2 million.

The proof is in the Q1 net income: $1.1 million vs a $700K loss.

Operating expenses are down by 8.2% due to improved efficiencies and reduced costs.

The company subsequently sold a Florida nursing home business (accepting mostly cash, but also a promissory note). Proceeds will pay down debt. This is the last of the nursing home business.

We skip now to the 10-Q for Q1.
17.6 million shares on May 2, 2007. Roughly 3 million options on March 31, 2007. Figure 21 million totally diluted shares.

Balance sheet shows they're capital intensive and they have a huge amount of goodwill.
cash is 4.4% of assets
AR is 18% of assets
inventories are 4.3% of assets
total current assets are 30% of assets
huge amount of PP&E which is nearly all depreciated (total depreciation is about half of assets)
PP&E (net) is down to 17% of assets
goodwill is 44% of assets!

current ratio is 2
huge long term debt + capital leases which is equivalent to 91% of total assets
shareholder deficit

Income statement
Revenues consist of sales and related service which provide $32 million (37% gross margin)
Rental revenue provides $45 million (23% gross margin)
Both of these declined yoy

No breakdown on the operating expenses which dropped $3.1 million (8%)
Bad debt expense dropped slightly
G&A went up by 11% (about $450K)
Interest expense is down slightly to $4.1 million (this is a big danger area)

In reality, operations are running at a significant loss. An unconsolidated joint venture is pushing them into profitability ($1.5 million in earnings, up from $1.2 million).

Cash flow
Operations provided $6.9 million (vs $1.1 million net income) due to depreciation and bad debt expense and $2.1 million due to unconsolidated joint ventures (net), offset by a huge drop in payables. If the unconsolidated joint venture is the only thing making a profit why do they suck up cash?

Capex is $3.2 million vs $8.2 million depreciation. I won't even guess at free cash flow.

They borrowed a net $1.7 million.

The company went Chapter 11 in 2003 and emerged the same year. The $250 million promissory note is to senior debt lenders from prior to the bankruptcy, secured by all the assets.

Principal amount of promissory note due is based on excess cash flow. ugh! None was due in 2006 or 2007. The note matues Aug 2009.

I don't want to bother looking at the 10-K for this company, but let's take a quick look:
Their offices are in Brentwood, TN. Hmmm, why Brentwood (extremely upscale neighborhood) and not Nashville? Let's quickly check the officers' salaries in the 14A. The CEO had $1.2 million in total compensation. The COO made $647K. CFO made $582K. Not ridiculous.

AHOM provides home services and products: respiratory (75%), infusion (12%), and equipment (shrinking to 13%). Typically Medicare, Medicaid, or other 3rd party payor. 249 centers in 34 states. Started in 1991.

2,454 full-time employees, 82 in Brentwood.

Looking at revenues from 2002 to 2006, they're flat. Why the hell do any top management get a bonus?

Costs in both business segments have increased every single year!
The operating expenses category has been decreasing each year except 2003.

Net income per diluted share:
2002: ($3.29) loss
2003: 74 cents
2004: 78 cents
2005: 43 cents
2006: (15 cents) loss

The stock is currently selling for $2.32, which based on my totally diluted share count of 21 million shares, corresponds to a market cap of around $49 million. Q1 had a $1.1 million profit, but don't forget the $250 million claim on free cash flow.


The $250 million debt is a killer for a business that's not growing and not very profitable. They just hired a sales and marketing guy, but what they really need is a CEO who is focused on cleaning up the business. A gut feel says the stock price is probably about right, but I wouldn't want to own it at any price, really.

Trivia question: What's the difference between sales and marketing?

Trivia answer: Sales is the company's representative to the customer ("Let me show you what our company has for solving your problems"). Marketing is the customer's representative to the company ("Let me show you what our customers' problems are").