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Public nobodies

They are publicly traded but rarely noticed.  Many bay area companies quoted on the  Over-The-Counter Bulletin Board have few employees, lose gobs of money and seem to discard business plans by the month.  And they tend to live forever.

By SCOTT BARANCIK
Published July 30, 2006

It's been a typical month for penny stocks in the Tampa Bay area.

EarthFirst Technologies, a developer of alternative fuels, finalized plans to be acquired by a maker of concrete parking bumpers. Cell phone retailer and former men's apparel designer FTS Group said it would begin selling satellite Internet access in Florida. Internal Hydro International, a three-person company with no revenue last year, said a proposed joint venture would give it access to $40-million in hard assets, including an Italian factory. Homebuilding company Cytation changed its name to Deer Valley.

Tech Data they ain't. Most of the 30-plus local companies quoted on the Over-the-Counter Bulletin Board have a handful of employees, are losing gobs of money and seem to discard failed business plans like week-old pizza. Even your neighborhood investment guru probably hasn't heard of public companies like St. Petersburg's Hydron Technologies, Tampa's Dynamic Leisure or Clearwater's Diagnostic Corp. of America. But for as little as a few cents per share, you can buy stock in local entrepreneurs that just may have a break-out product on their hands.

It's a high-risk gamble. Penny stocks are lightly regulated, highly volatile, tough to unload quickly and a favorite target of scam artists who profit by spreading false rumors via e-mail, fax or cell phone. This year, local over-the-counter stocks have risen as much as 560 percent Shells Seafood Restaurants and declined as much as 97 percent (Medical Media Television).

Fallen angels and empty shells

Who are these companies?

Some of them previously traded on the New York Stock Exchange, Nasdaq Stock Market or American Stock Exchange but were delisted for falling below a minimum price, market capitalization or other eligibility benchmark. Such fallen angels include cryogenics firm Cryo-Cell, manufacturer Reptron Electronics, network security provider NetWolves and phone company Trinsic.

The dropoff can be steep. Digital Lightwave, a Clearwater maker of fiber optic testing equipment that peaked at $150 per share in 2000, was cut loose by Nasdaq last year and briefly saw its stock fall to a single penny in October. It closed Friday at 25 cents per share.

Few companies ever make it to the big leagues. This year, 16 of the 3,300 stocks quoted on the bulletin board have graduated to a major exchange, and all but one of those went to the Amex. But for many small companies, getting quoted on this less prestigious service- owned by the National Association of Securities Dealers but run by Nasdaq - is far better than having no access to public markets.

It's certainly less cumbersome to qualify. Unlike stock exchanges, the bulletin board does not mandate financial hurdles, set corporate governance rules or seek fees from the interested company. Its only requirements are that the company file quarterly and annual reports with the SEC and guarantee at least one market maker will broker share trades, which helps ensure a minimum level of liquidity. (A competitor, the Pink Sheets, requires neither. Local Pink Sheet companies include Dais Analytic, an Odessa maker of nanotechnology polymers, and St. Petersburg-based Hathaway, which acquires and spins off communications software.)

"The paperwork to the SEC can basically say the company has no sales, no revenues and its entire board of directors is currently incarcerated," said James Angel, associate professor of finance at Georgetown University and a former member of the OTCBB's advisory board.

Many private companies that want to have their stock quoted on the bulletin board don't bother applying to the SEC for a new ticker symbol. It's faster and less cumbersome to acquire a shell company that's quoted there, as private Cast-Crete expects to do in its pending reverse merger with EarthFirst Technologies.

What makes the shell-acquirer relationship work is that it's symbiotic. By merging with a promising new line of business, the shell's investors may boost demand for their stock and loosen up other sources of capital.

Despite repeated business failures, some shells are reincarnated repeatedly.

"Their corpses have a value," Angel said.

Surviving failure

How can a business go years with little or no revenue? By living off the publicly-traded community's version of gruel: their stock.

Perennially short of cash, over-the-counter stocks in the bay area and beyond use stock to compensate almost everyone, including contractors, consultants, lawyers, employees and even landlords. Can't pay off a note? Give 'em stock. Need more cash? Issue more stock, warrants or private placements. That's how a company like Veridien, a Pinellas Park antiseptic maker whose stock closed Friday at 3.5 cents per share, finds itself with 229-million shares outstanding.

Premier Development & Investment's bio is typically tortured. Since incorporating in 2001, the Tampa company spent three years developing a restaurant concept that never launched, had to rescind its purchase of a realty company and acquired a second restaurant concept, Players Grille Restaurant and Bar, that has yielded just one location so far. Premier's 2005 revenue totaled less than half that of the average Outback Steakhouse restaurant.

Such struggles have led Premier to alternately shrink and expand its supply of stock. Among its moves: a 50-for-1 stock split in 2003 to "enhance (its) liquidity," and a 1-for-200 reverse split two years later to "increase the price per share." The company's stock closed Friday at 30 cents per share.

To gamble, or not?

If you tend to favor mutual funds over individual stocks, you probably won't have the stomach for penny stocks. Experts say you shouldn't invest any money in them that you can't afford to lose.

But it's hard not to be intrigued by companies like Tampa's U.S. Energy Initiatives, which makes systems to convert gas and diesel engines to nonpetroleum energies. Or BlastGard International, a Clearwater company whose explosion-resistant trash can was recently designated as a "qualified antiterrorism technology" by the U.S. Department of Homeland Security. Or perhaps Diamondhead Casino, a Madeira Beach company that sat on a 404-acre Mississippi tract for 10 years before announcing last month that it would build a casino on it with famed developer Donald Trump.

"We have the land, the location and the desire," CEO Deborah Vitale said in a news release.

Scott Barancik can be reached at barancik@sptimes.com or (727) 893-8751.

[Last modified July 30, 2006, 00:54:13]