Breakdown of Zack's Small Cap report
Mr. Marckx report begins with an admission of the obvious. It was once again, a very poor year for Zecotek and its shareholders. Many on Seeking Alpha and elsewhere claimed that Zecotek would win a sizeable amount of money in its patent case and pointed towards a Markman win as the obvious tip of the hat and also the legal team was purportedly working for a percentage of the outcome and not charging Zecotek. I am not sure how that statement can be reconciled with the large legal bill Zecotek incurred.
By several measures 2014 was a disappointing year for Zecotek (ZMS.V) (OTCPK:ZMSPF). This was particularly true from an income statement standpoint which suffered from delays in recognizing order revenue, product introductions being pushed back and elevated legal expenses.
The Zack's report goes on to use wishful language in a number of statements it makes about the details of the undisclosed end of the patent suit. Phrases such as:
And while terms were not disclosed
may have been part of the settlement
We think it is a reasonable assumption
Using that logic, it is also not unreasonable to assume that it is possible (probable?)
Importantly the paragraph starts out with this undeniable statement that leaves no room for wishful thinking.
What, if anything, was awarded to Zecotek from settlement of the lawsuit we do not know.
Bob McWhirthers (President of Selective Asset Management Inc) once calculated the value of Zecotek's lawsuit on the back of a napkin to shareholders, while describing ZMS stock as go up or BLOW UP depending on a win or loss, but Zack's insists the lawsuit being closed without a settlement amount of $ for a company hemorrhaging capital is a win. How do you see it? I know its difficult to know when the details remain private except for the legal bills which are public.
Zecotek was the one suing St.Gobain for possible patent infringement and their rights to the product were never being questioned. Somehow, Mr. Marckx postulates that "would be" customers were reluctant to order Zecotek crystals because of the lawsuit. I fail to understand the logic.
We think another issue that may have been created while the lawsuit was ongoing was potential hesitance from other would-be customers to purchase the LFS crystals from Zecotek given the ambiguity over the related patent. So now with lawsuit settled, we think order flow and order fulfillment will increase and improve overall.
Just past its first decade of existence Zecotek sales for 2014 were near $200,000 but this lack of progress is contradicted by the glowing terms of the Zack's report. Dr.Ferrouk's salary alone is more than double total revenue for the fiscal year, subsequently millions of dollars of losses resulted again.
And we continue to view Zecotek's crystals as ultra-competitive in the PET scanner space. The company has indicated that they are seeing demand from both the human PET scanner industry as well as pharmaceutical research.
Fortunately the report does acknowledge that CERN has not placed a significant order. Many bullish investors imply that CERN is certain to choose Zecotek for their supplier and this is simply not true. The past indicator is that CERN has not chosen Zecotek and they are only in the running for possible sales orders.
And while Zecotek has had an ongoing relationship with CERN, which has been validating the crystals for potential use in the rebuild of the Large Hadron Collider, the organization has yet to place a significant order.
An order may come, but past history of Zecotek is concerning and casts doubts on all statements suggesting an order is imminent.
In the past shareholders have contributed towards development of 3D TV without glasses technology development. There were several announced inquiries about the patented technology but none of the announcements resulted in a license agreement or sales. Consequently the company has stated that investment by shareholders is wasted.
While the company had initially focused their 3D technology on the consumer TV space, Zecotek now believes there are greater opportunities elsewhere.
Not to be deterred by a balance sheet hemorrhaging red ink and down to its last few dollars before issuing more shares again last fall, Zecotek continues to spend money on the next big thing. 3D printing. They are partnering up with an Armenian company not known to have been in the additive manufacturing industry previously and are asking shareholders to fund that venture too. Shareholder money is funneled to the Armenian developers and shareholders should ask why Zecotek feels it is justified to spend on this sector when that is not its field of expertise. Any number of other 3D printing investments would likely attract investors over this daliance.
When all is said and done what remains important is the financial viability of any success. The outstanding share, options and warrants increase dramatically over the ten years and any success at this point is becoming extremely diluted with no end in sight to the financial losses numbering in the millions each year. Someone classified Zecotek as a science fair and that is not far from reality at this point.
Even with Zack's rose colored view of the company and (past excessive stock price targets) they are forecasting another losing year financially for the troubled company and could result in yet another PP deal to pay the increase R&D expenses and bloated salaries and perks of the management.
While we think R&D may remain elevated with ongoing development of various products, we look for improvement in operating loss
Finally it is concerning when reading the report and detecting bullish suggestions that are not borne out by factual reasons. In other words conjecture. For example one sentence begins and ends with opposing logic.
And while it's still too early to speculate on specific quantities that CERN may order from Zecotek,
And to finish the sentence, the report goes on to do just that, speculate about large untold riches on the horizon.
we think that it's reasonable that it could eventually be in the several million dollars to potentially tens of millions of dollars worth of product.
A bullish report in every aspect and in my view overly optimistic. These are my views and I would love to hear your considered opinions on this report.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.