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HS3 Technologies, Inc. - Ka-Boom or Ka-Bust
Investigative Reports
March 2 2006
stockpatrol.com
Promoters always find a new way to reach investors – even if it means falling back on an old time-tested technique. As we recently noted, snail mail could be replacing e-mail as the medium of choice for spreading hype about obscure companies. See, Something Old. Something New. Recently, a number of promoters have decided to use the U.S. mail to deliver their “reports” on public companies – sending out slick, costly brochures that tout the prospects of tiny companies. The fancy brochures may appear to be objective reports, but, for the most part, they are paid advertisements. And while they have a far more professional veneer than sloppy emails touting penny stocks, they share a common purpose with their cyber counterparts – to induce investors to buy shares.
Some of the snail mail promotions are on a single page, a postcard teasing prospective investors. Others are far more detailed – like a twelve page “Special Report by Stock Trader News” promoting HS3 Technologies, Inc. (OTCBB: HSTT), a Nevada corporation that plans to deliver high-speed internet connections and surveillance services via satellite. As best we can determine, the brochure first appeared in mid-January 2006 and circulated for several weeks thereafter. The report – featuring color pictures of satellites and soldiers – predicted that HS3 could be “the next homeland security blockbuster,” with a technology that could secure the nation’s oil and gas wells.
The brochure was impressive – but how about the Company? Between October 1, 2005 and December 31, 2005, HS3 earned revenues of $2312, hardly enough to pay for the advertising campaign, much less a sign that the Company has gained traction in the homeland defense sector – or any other area. As we discovered, the contrast between the promotion and performance was striking.
Undervalued or Overstated?
Stock Trader called its fancy brochure “your ultimate guide to UNDERVALUED STOCKS” – and the hyperbole did not stop there. The front page – boasting a picture of a satellite beaming signals down to earth – claimed that HSTT “could be the investment opportunity of your lifetime,” claiming that the Company was “poised to dominate the ENERGY SECURITY market by using new super-fast Satellite Internet systems to monitor America’s 500,000 oil and gas wells.” To drive the point home, Stock Trader predicted that “you could make huge profits investing in this company!” and predicted that HSTT could turn every investment of “$5,000 into $20,000 or more.”
Stock Trader News continued to display its unbridled enthusiasm, and a penchant for using exclamation marks. By page 2 of the brochure, Stock Trader News had grown even more optimistic – perhaps believing some of its own hype – predicting that “a $5,000 investment could turn into more than $25,000!” and that HSTT “could make you financially independent!”
HS3 could prove even more profitable for the individuals behind this promotion. A disclaimer (in tiny type, as compared to the bold-lettered, large print endorsements for HS3 that King George III could have read without his spectacles) toward the end of the brochure conceded that the “undervalued Stock” report was merely a “paid advertisement.” The disclaimer also acknowledged that C. I. Marketing LLC, “which managed the publication and distribution” of the brochure, as well as several affiliated companies and vendors, have received the astronomical sum of $1,075,000 from an entity called Breakaway Consulting Ltd. for this “advertising effort.” What is Breakaway Consulting and why was it funding this campaign? The report did not say and we have not found any details about the promoter’s generous benefactor, but Stock Trader News did indicate that Breakaway Consulting owned an unspecified number of shares of HS3. Not surprisingly, Breakaway reserved the right to sell its shares and break away from HS3 “before the date of a profile, during the date of a profile, or at anytime after the date of a profile.”
Page 2 of the “Undervalued Stocks” advertisement featured a letter from the editor of Stock Trader News, Jack Burney, who continued to beat the drum for HSTT. newsletter. Burney predicted that “energy security may become the biggest stock opportunity of this decade,” noting that North America’s energy supplies, gas and oil wells and pipelines are “unguarded” and “vulnerable to terrorist attacks, natural disasters, equipment breakdowns – you name it.” He explained that “a brand new technology has been licensed” that allows oil companies to finally guard their remote oil & gas assets,” and claimed that “the stock I describe to you in this report is a perfect way to take advantage of this brand-new situation and technology.”
According to the disclaimer, received only a small portion of the advertising budget, $3,000 in cash, for his efforts – although the promotion afforded him an opportunity to solicit new subscribers for his “Stock Trader News”
Such broad statements were the hallmark of the “report” on HS3. Facts and details – particularly as they relate to the realities of HS3, were strikingly absent. The technology described in the report relies on Ka-band satellite transmissions which, according to Stock Trader News, can provide video transmissions at a dramatically faster rate and lower cost. “Undervalued Stocks” did not explain whether HS3 owned or leased any satellites, had any ownership interest in the new technology, possessed any patents or patent applications, or had the rights to use the technology under any license agreements. That left readers to speculate, and perhaps to assume, that the Company had devised the satellite service or had obtained exclusive rights to its use.
The brochure offered virtually no factual details about HS3’s actual operations, no information on the Company’s fiscal condition and no detailed warnings about the hurdles faced by the Company or the risks facing investors. And while it insisted that “HS3’s proprietary technology is the solution businesses have been searching for!” the “report” did not identify any proprietary products or technology belonging to HS3.
Still, the promoter played the role of an unabashed cheerleader, saying at one point that “I can’t think of any publicly traded company with this kind of upside potential.” Observers can only wonder at the limitations of this promoter’s thought process.
To cap off his letter, Burney reminded readers that “it’s not very often that something truly new appears under the sun. But when it does, people who recognize it early…and TAKE ACTION before anyone else does – can make fortunes very quickly.” Interestingly enough, that statement might well describe the actions of promoters, and the rewards they reap when they fuel speculation about little-known companies with no track record and uncertain prospects.
This message was reiterated throughout the brochure – with statements like these
• “HSTT could make you financially independent!”
• “He who hesitates is lost! I believe the time is right for HS3, its services and its stock. ACT NOW – Don’t delay!”
• “HSTT could be a money-making opportunity of a lifetime!”
• “Claim your share of the HUGE energy security market!” and
• “HSTT could make you EXTREMELY WEALTHY1”
Evidently, a $1 million advertising budget engenders considerable enthusiasm, and a plethora of exclamation points.
Ka-Boom
“Undervalued Stocks” devoted the bulk of its slick brochure to a seemingly endless endorsement of HS3’s prospects – cast against a backdrop of the need to enhance homeland security and the remarkable potential of Ka-band communications. The brochure claimed that that the Ka-band satellite would make it possible to offer high-speed internet services to rural communities and to provide real-time video surveillance to remote posts, including “sensitive border areas” and “oil & gas facilities.” And, it insisted that HS3 has a jump on all of its competitors because it is positioned to be “the first national provider of the Ka-band high-speed Internet system.”
But is this accurate? A company called WildBlue Communications, Inc. has been using Telesat’s Anik F2 satellite to offer Ka-band services to rural communities since at least mid-2005. Unlike HS3, WildBlue certainly is well-financed. On January 10, 2006, WildBlue announced that it had secured a credit facility of over $200 million to fund its efforts to bring high-speed Internet access to remote communities. The financing group included two of WildBlue’s biggest shareholders, Liberty Media Corporation and the National Rural Telecommunications Cooperative (NRTC). Liberty Media, a New York Stock Exchange listed company, owns a broad range of electronic media and communications businesses. NRTC represents over 1,200 member organizations by delivering telecommunications services to rural America.
And what of HS3 – which purportedly has a “jump start” on the competition? On January 18, 2006, HS3 announced that it had signed an agreement to act as a “Value Added Retailer” of WildBlue’s services – in other words, HS3 will become a wholesaler of the WildBlue services – seemingly a far cry from the market niche described by “Stock Trader News.” The Company says that the agreement with WildBlue will provide HS3 with “the cost-effective satellite platform to deploy its proprietary product offering and advanced wireless technologies providing real-time security and monitoring solutions to the Homeland Defense Sector, oil and gas industry, hotels and many other industries.”
Misplaced emphasis on HS3’s market position is not the only glaring deficiency in the Stock Trader News presentation. The report offered no insight into HS3’s financial condition and operating history, or to the risks and competition that the Company faces. Instead, it sought to leverage concerns about homeland security into potential for HS3, with statements like this:
Make no mistake; threats of terrorism and soaring gas prices are going to force America’s oil companies to pay any price to protect their vulnerable wells and pipelines – which could catapult HS3’s stock into the stratosphere.
Unfortunately, the conclusion does not necessarily follow from the premise; there is no reason to believe that other, better-established, well-funded companies in the defense and communications industry will not capture this market, leaving HS3 in their dust.
Other assumptions adopted by the report seem to be constructed on similarly shaky foundations. Take, for instance, the notion that “HS3 is a “prime take-over candidate” which is “very likely” “to be bought out and [see] its stock…take off like a rocket.” To illustrate this concept the promoter noted that Cisco once purchased the shares of Cerant, a tiny privately-owned telecommunications company, for $7.3 billion in Cisco stock. What is the point of the analogy – particularly since there are no facts that would suggest that HS3 is similarly positioned for success? There is no reason to believe that Cisco, or any other established entity is poised to acquire HS3, yet the promoter offers this teaser which could mislead potential investors.
The balance of the brochure sounded variations on these same themes, claiming that oil companies “are likely to pay any price to implement HS3’s proprietary technology that no other company has.” And, the promoter also was quick to point out, the Company’s technology can be marketed to assist with border patrol, school security and rural Internet users.
The promoter also was prepared to play the numbers game, illustrating how fortunes could be made by riding the HS3 rocket. “Early-bird investors could make enormous potential profits if this stock shoots up from $1 to say: $4,” the promoter noted, stating the obvious. By that same logic, if shares spike to $10 every HS3 investor could become a Wall Street magnate. On the other hand, if shares tank, as is more often the case with highly speculative penny stocks, investors stand to lose their entire investment – a warning that is absent from the glossy brochure. Repeated statements that readers should consult their investment advisor are no substitute for full disclosure of the risks involved with such a speculative investment.
Continuing on that same theme, the report projected that HS3 would merely have to match the performance of its competitors – whoever they might be – and maintain a Price/Sales ratio of $28.7 million, to justify a $44 per share stock price. How will the Company achieve that performance? The promoter conjectured that HS3 would need only to capture 1% of the market for oil and gas wells and cattle ranches to generate $25 million in gross revenues – although no basis for those calculations was provided.
The “ultimate guide to Undervalued Stocks” offered one final argument for its enthusiastic endorsement of HS 3 – the “proven track record” of the Company’s “world-class management team” and its “direct knowledge of the industry, extensive management experience, and unique administration skills.” What is that track record, and what does it prove? The brochure contained brief biographies of the Company’s executives, which mirrored, for the most part, information included in the Company’s public filings.
What expertise and experience is possessed by members of HS3’s executive team? The Company’s President and CEO, Mark Lana holds a marketing degree, has thirty years of experience in the real estate industry, and owned a medical transcription business. Treasurer and COO, Lougene Baird, has a background in project management, founded, managed and ran “a number of her own businesses” and served as Treasurer of a non-profit organization. According to the Company’s public disclosures, Ms. Baird also is a licensed real estate broker in Colorado and an “international certified livestock judge.” Brian Gansmann, HS3’s Marketing Director, spent most of his professional career in the advertising, marketing and public relations fields. Only Dennis Baird, the Company’s Director of Construction and Installation, appears to have extensive experience in a significant aspect of the Company’s planned business. Mr. Baird, according to the report, “has twenty-two years experience in building and maintaining various forms of communications systems throughout the Western United States.”
The Company’s executives may have extensive professional resumes, but the brief biographies in the report do not indicate any technological expertise or significant experience in the security and homeland defense industries which are two of the Company’s principal targets.
Reality Checks
HS3’s public disclosures offer a more sobering view of the Company’s history and prospects. Like many penny stock operations, the entity now known as HS3 became public through a reverse-merger. On November 9, 2005, the Company – then called Zeno, Inc. – entered into a reverse-merger with IP-Colo, Inc., a private Texas corporation that purportedly provided “carrier co-location, Internet protocol/virtual private network/wide area network services, voice over IP, managed hosting services, network services and Internet connectivity.” Pursuant to the agreement, the former owners of IP-Colo (including Mark Lana and Lougene Baird and an individual identified as Robert A. Morrison) gained control of the Company, which changed its name to HP3. The Company also agreed to authorize the issuance of 10 million shares of preferred stock, for “flexibility in future financings.”
What was the status of IP-Colo’s operations at the time of the transaction? The Company did not say. Even modest operations would have been an improvement for the Company. At the time of the reverse-merger, Zeno was in dismal financial condition, having failed in its effort to establish a mineral exploration business in Ontario, Canada. As of September 30, 2005, Zeno had no cash and no revenues.
IP-Colo’s financial condition was only marginally better. As of June 30, 2005, IP-Colo has assets totaling $3,969, including $3,041 in cash. From the date of its inception, December 24, 2004 (sic?), through June 30, 2005, IP-Colo had revenues of $4,723 and expenses of $9,860.
Although the reverse-merger agreement identified IP-Colo as a Texas corporation, a Form 8-K filed by the Company on November 14, 2005 said that IP-Colo was formed in Colorado on December 24, 2005. According to records of the Colorado Secretary of State, a corporation called IPColo, Inc. was formed on December 24, 2004 by Robert Nelson Baird and Robert A. Morrison.
The November 14, 2005 Form 8-K provided a glimpse of the Company’s plans. HS3 said that it intended to provide high-speed internet and surveillance products throughout the U.S., utilizing a satellite network to deliver security information to authorized persons over the Internet. The Company’s proposed new services also included satellite-based high-speed Internet access and web hosting service, as well as “advanced biometrics for time and attendance and access control.” HS3 had a number of targets for these services, including the oil and gas industry, rural America, homeland security businesses, the food industry, and multi-unit housing and business complexes.
But plans are one thing; implementation is quite another. Unlike the dewy-eyed optimists who prepared the unbalanced “Undervalued Stocks” ad, the Company acknowledged that it faced stiff competition from well-established Internet service providers that enjoy substantially greater financing, marketing and technology resources than HS3. Specifically, the Company noted that it would be competing with Ka-band satellite broadband providers, Ku-band satellite broadband providers, and terrestrial Internet service providers – quite a departure from the picture painted by the promoters who crafted the “Undervalued Stocks” report.
The Company also said that it would need “significant additional financing” to implement its business plan. The Company began to address that concern sometime around October 30, 2005, when it sold a convertible debenture to an unnamed institutional investor for $500,000. Details of that agreement, including the identity of the investor and the exact date of the deal, are sparse. The Company’s Form 10-Q report for the quarter ended September 30, 2005, stated that the debenture (and 5% accrued interest) was to be paid, in full, within one year. Alternatively, the debenture was convertible into 500,000 shares of common stock in the event the closing price for the Company’s common shares exceeded $1 per share. According to the Company, the note will be converted because HS3 shares closed at more than $1 on November 29, 2005. As of December 31, 2005, those shares had not been issued.
Had HS3 shares surged suddenly to reach the magic $1 threshold? HS3 common stock, which moved from around 3 cents a share to approximately 83 cents a share in the days after the reverse-merger was announced, generally traded within a range of 83 cents to 88 cents between October 12, 2005 and November 22, 2005. Then, over the next few days, the price crept upwards, closing at 90 cents on November 25th and $1.070 on November 29th. Trading volume also increased measurably – from 11,400 shares on November 22nd to 1,625,500 on November 29th. HS3 stock remained above $1 a share for just one more day – closing at $1.010 (on volume of 1,171,100) on November 30th before beginning a steady decline. On March 2, 2006, HS3 shares closed at 27 cents.
Buying Buddies
What triggered the fortuitous spike in HS3’s stock price? The reverse-merger apparently caused the initial spurt – from 3 cents to 83 cents – but what pushed share prices over that $1 hump? Interest in HS3 stock peaked from November 28th to December 1st – just as a group of “analysts” were beginning to tout the Company’s prospects. A series of November 28, 2005 press releases announced that a trio of online stock pickers – Shazamstocks.com, StockGuru.com, and AllPennyStocks.com – had issued profiles on the Company.
Even before the press releases were issued, the public began to receive e-mails from “analysts” promoting the prospects for HS3. On November 27, 2005, for example, Shazamstocks.com disseminated an e-mail touching on many of the same themes that later would surface in the slick Stock Trader News promotion. After noting the vulnerability of oil and gas pipelines, Shazamstocks advised readers that “HS3 has the expertise, capacity, staff and ability to host sites located anywhere in the United States [and] a sustainable competitive advantage in its ability to merge existing technology with the latest innovations in satellite broadband service, IP hardware, software, and seamless security.” In addition, according to Shazamstocks, “HS3 technologies, has developed and currently hosts over 600 business websites.”
Parenthetically, the Company’s recent public disclosures contain no details of these 600 websites or any ongoing development and hosting relationships. The Company’s modest revenues - $2,323 between October 1, 2005 and December 31, 2005 – indicate that, to the extent such arrangements do exist, they generate insignificant cash.
According to Shazam, HS3 was positioned to be “the first national provider of a state-of-the-art Ka-band high-speed satellite Internet security system” – by virtue of Telesat’s Anik F2 satellite. Shazamstocks did not describe the nature of the relationship between HS3 and Telesat – or whether, in fact, one did exist.
Shazamstocks reiterated its endorsement of HS3 several times between November 27th and December 1st, distributing a series of e-mails with the same positive message. Since then, Shazamstocks has distributed emails periodically calling attention to various press releases issued by HS3. Shazamstocks’ enthusiasm is understandable; it received $70,000 from an entity identified only as “Wellington Capital” for a “consulting agreement.”
StockGuru was less well-compensated, but no less enthusiastic. PENTONY ENTERPRISES LLC, which owns and operates StockGuru, was paid $15,000 for its coverage of HS3. A November 28, 2005 email from StockGuru contained a recital of HS3’s prospects which, in many instances, tracked the Shazamstocks profile verbatim. And like Shazamstocks, StockGuru reiterated its enthusiasm and cited Company press releases in subsequent e-mails.
The third HS3 booster, AllPennyStocks, operates websites in the United States and Canada offering information on penny stocks. The ubiquitous, Wellington Capital paid AllPennyStocks $20,000 to post and distribute a virtually identical profile, touting HS3’s “expertise, capacity, staff, and ability to host sites located anywhere in the United States” and its “'best of breed' proprietary homeland security surveillance products that broadcast real-time video and data on the new cost-effective, higher-speed satellite Ka-band.”
Neither Shazamstocks nor AllPennyStocks indicate the nature of the relationship between HS3 and Wellington Capital or why a “third-party” was willing to pay such generous sums to promote the Company.
Shazamstocks, StockGuru and AllPennyStocks were not the only online services being paid to spread the good word about HS3. On December 1, 2005, a site called HomelandDefenseStocks.com “featured” HS3, characterizing the Company as a “provider of biometric security and real-time proprietary surveillance systems to meet the growing needs for securing and monitoring transit systems, border and ports as well as vital infrastructure such as waterworks, chemical plants, atomic energy facilities, oil and gas pipelines, refineries and more.”
HomelandDefenseStocks acknowledged that its parent, InvestorIdeas.com was receiving $5,000 a month, plus $5,000 worth of HS3 common shares, to “feature” HSTT. The press release did not indicate who was paying that fee.
More recently, on January 19, 2005, Beacon Equity Research issued a report rating HS3 as a “speculative buy” with a price target of $1.97 a share. Beacon’s analyst, Shailesh Dhuri, claimed that the “partnership” with WildBlue, left the Company “well positioned to offer Ka-band high speed internet service across the US for educational, energy and hospitality.” Although Dhuri recognized the central critical role played by WildBlue, was it accurate to characterize the WildBlue/HS3 relationship as a partnership? As noted above, on January 18, 2006, HS3 announced that it had entered into an 18 month agreement to act as a value added reseller of WildBlue’s services and products. Beacon Equity, which issues research reports for a fee, disclosed that it had been paid $19,500 by HS3 for “twelve months enrollment in its research program.”
And let us not forget the Stock Trader News brochure, which surfaced at around the same time as the Beacon Equity report.
Two Big Mac’s. Hold the Oil
What was the Company doing to justify the enthusiasm of its well-compensated fans? On December 1, 2005, the Company announced that it had signed a Letter of Intent with CelCCTV S.A. de CV of Mexico to become a “Master Distributor” of CelCCTV’s proprietary hardware and software solutions in the United States. The Company, which said that it expected to enter into a definitive agreement with CelCCTV by mid-January 2006, hoped to market the products “in the Homeland Defense Sector, Oil and Gas industry, Hospitality, Schools” and other businesses.
Was this the proprietary technology lauded by Stock Trader News?
HS3’s next press releases reflected a modest development. In December, 2005, the Company announced that it had agreed to install video surveillance systems in a Sheraton Hotel in Springfield, Missouri and a Holiday Inn in Dubois, Pennsylvania. The system would allow senior management in Cedar Rapids, Iowa to monitor the hotels.
HS3 did not indicate the financial details of the agreements or the level of revenues that were likely to be generated from the two hotel systems.
On January 11, 2006, the Company issued a press release announcing another deal. This time, HS3 said that it had entered into a Letter of Intent to install video surveillance systems in two McDonald’s restaurants located in Cleveland, Ohio. Again, the Company did not reveal financial terms of the agreement.
Two hotels and a pair of McDonalds may have marked a healthy first step for a tiny company, but do these developments justify the unbridled enthusiasm of paid shills who have been touting HS3 as a solution to the nation’s oil and gas security woes?
Two additional press releases were issued by the Company in late January. The first, on January 23rd, served to “introduce” the Company’s “proprietary, cost-effective satellite-based CCTV security surveillance and monitoring system for remote rural Oil & Gas installations.” HS3 noted that “real-time, high-resolution images and data are beamed via WildBlue Communications…cost-effective Ka-band to any designated remote control station” but offered no detailed description of the Company’s contribution to the technology being marketed or the basis for claiming a “proprietary” product.
The second press release, issued on January 16, 2006, urged the United States to increase its surveillance of oil and gas pipelines, citing a report that jihadists were likely to target oil pipelines and refineries. The Company noted that its technology was specifically geared to address such concerns.
HS3 may well have envisioned a market niche that needs to be filled – but is the Company positioned to do the filling? Has the Company established a substantial market for its services in addition to the two hotels and McDonalds that are scheduled to come on line? Have any oil or gas companies signed up for HS3’s services?
Paid promoters like those who authored Stock Trader News’s fancy “ultimate guide to Undervalued Stocks” have offered their unqualified endorsement. Those opinions, however, hardly seem to be worth the expensive paper they are printed on when viewed against the stark reality of the Company’s limited activities and sparse revenues. The Company’s own statements reflect far more modest developments and considerable obstacles including the lack of operating history, an absence of revenues, intense potential competition from well-heeled entrenched entities, and dependence on products and technologies that are owned and developed by others.
HS3 may indeed have the potential to make someone “EXTREMELY WEALTHY!” as Stock Trader News so aptly observes. But whom? Wellington Capital, Breakaway Consulting and other unnamed third-parties may be poised to profit, but where does that leave the ordinary investor.
Did someone say Ka-boom?
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