Conversation with Carl Smith III
found on RB
KS
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Long Post Follows:
Per Carl Smith III (spent 1/2 hr on phone just now):
1. I asked if there was any equity in the land deal (650 acres on N.C. that we've already seen).
The equity position came from a PA-based VC firm who holds a 2nd mtg as collateral.
Primary financing from reputable large bank which holds 1st position. The Smith family is
from N.C. and was introduced to the deal by a Mike Matheny, a 19yr developer in N.C. and
long-time friend of the family. He is now on DRGI's board. All lots are to be sold; there will be
no leases (i.e. annuity-like payments for many years out). More major Developers, in addition
to the very reputable WHI, are signing dotted lines. Gross margin of $5MM per year for 5
years, ($2.2MM net), Pro-forma. Real estate is the bricks and mortar of DRGI but is expected
to be third as a percentage in total company revenues. Other real estate deals may happen
but I got the impression that there is not an aggressive pursuit in this direction.
2. Battery Division: The company has exclusive rights for U.S. distribution of 30% of the total
output of the manufacturer. This manufacturer is based in China with 5 plants there. There's
also one plant in Romania and one in Poland. Until this year, the Chinese government has
mandated that all production in China be distributed in China. As of 1999 the manufacturer
has authorization to distribute 30% of its output in the U.S. As stated, DRGI has exclusive
distribution rights. I asked Carl why he thought the U.S. market could absorb this product: the
manufacturer has a patent that basically (I'm no techie) increases the batteries' efficiency,
causing it to last longer. Battery sales are taking place, albeit, from what I gather, on a limited
basis. Carl did say that the company does have revenue for 1999 to date, based on battery
sales.
The deal with Prepaid Cellular Solutions (PPS) is based on DRGI's providing the company
with a set number of analog phone units per month. PPS is approx. 3yrs old (Carl's guess)
and is the 3rd largest and fastest growing company of this sort. I was a little concerned when
Carl could not provide me with estimates to PPS's revenue numbers prior to its newfound
relationship with DRGI. He did recommend that I call that company though. At any rate, the
contract will include PPS taking a number of units with a revenue figure of $1.5MM/mo to
DRGI (approx. $500K gross profit). DRGI will be providing the phones themselves (batteries
included) to PPS. The phone and accessory manufacturing will be subbed out to a Chinese
firm (recommended by the current battery manufacturer there). When asked about the
market's receptivity to analog phones in the wake of the digital revolution, Carl stated that the
phones appeal to the low-end users (hence the connection with a pre-paid cellular services
provider) and that this is a rapidly growing market. Maybe someone can confirm the
prospects for this market...
Talks are under way for battery kiosks in shopping malls. I got the impression that this was in
infancy stage.
The battery division is expected to be 2nd largest revenue generator to the company in the
next year.
3. HIV Saliva-based testing kit: This product is currently going through the rigorous testing that
we might expect any medical appartus to undergo. The company is not seeking FDA
approval due to the fact that HIV in the U.S. is on a decline and pales in comparison to the
company's main target of Africa, Asia, Russia, 3rd world nations. Testing is currently being
conducted by "the world's formost authority and medical testing company today". Carl
projects units to begin being sold by 2nd-3rd qtr of 2000. This division is expected to
contribute the largest portion of DRGI's revenues from the second year and beyond.
4. Reverse Split: I found this to be the most interesting of topics discussed. I asked Carl if he
could give me an example of a company that DRGI may be using as a model to see the
benefits of a R/S, should it become "necessary". He gave me a very good example: DATA
ONE (DRGI's predecessor). When D1 was acquired several years ago, the stock was trading
at around $.10. A r/s was transacted bring the share price up. Since the company was legit
(producer of DRAM chips with DEC being its largest customer), the price left the realm of
sleazy MMs and daytraders and climbed to a high of $5.50. Of course, when the Asians
flooded the DRAM market with cheap chips, D1 and a bunch of others died.
While the company is not committing to a definite R/S, they want to vote on the option in case
the stock languishes at the hands of the MMs and daytraders, despite significant news of
earnings and successes (he indicated several significant news releases over the next 30
days, for what it's worth). Here I was a little leary and asked if he did not believe the market
was efficient (i.e. mkt sees real, sustainable earnings and long-term track record of growth,
but does not increase demand for stock). I also asked if he could give me an example of a
company that was adding significant, sustainable earnings, yet a languishing stock price. He
could not think of any off the top of his head. Maybe you all can...
DRGI's projections, assuming stock split (the fact that these exist leads me to believe that the
company is serious about its desire to remove this company from the pink sheets):
Yr1: $6.40
Yr2: $7.84
Yr3: $8.68
Yr4: $8.76
Yr5: $9.07
These figures assume a 1:10 R/S.
I asked if the company has been selling shares: An emphatic no! I asked if the company
would be buying shares. He said they are talking about the option.
My bottom-line analysis is that the company is hungry to leave the world of penny stocks
because it believes its current and future prospects warrant a far more serious look than can
be found here. The above stock price estimates are surely based on the company's cash flow
and cap rate analysis. I'm more than a little comforted that they're crunching the numbers and
seeing that $.15/sh does not even begin to reflect reality. Keep in mind none of the company's
principals can sell shares before 5/01. |
