VanityFair was unfair to PInk regarding John Liviakis who's stocks usually go to zero and cost shareholders millions of dollars
Data Race being a prime example
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Data Race Inc.
The Wall Street Journal -- November 11, 1998
TEXAS JOURNAL
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Heard in Texas:
Publicist Seen
Boosting Stock
Of Data Race
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By Jonathan Weil
Staff Reporter of The Wall Street Journal
Has Data Race found its second wind, or does it just have a more effective cheerleader?
That's the question many money managers are asking after a remarkable run-up in the San Antonio company's stock. In July, Data Race traded for 59 cents a share and was just three days away from being de-listed by the Nasdaq Stock Exchange. By last week, its shares had jumped more than sixfold to $4, though they've slipped a little recently. Meanwhile, its market capitalization has surged to $60.1 million from $3.5 million in June; and that's with a large dilution of shares, to 18.5 million outstanding from seven million.
The answer certainly is hard to glean from the company's recent financial performance. Data Race has reported recurring losses and negative cash flows for more than a year while waiting for sales of its one product to take off: a gadget called Be There!, which allows computer users to talk on the phone while using e-mail or other cyberspace features on the same line. In the meantime, its outside auditors have noted in reports to the Securities and Exchange Commission "substantial doubt about the company's ability to
continue as a going concern."
So, what's the reason for the stock's rocket flight? Some money managers point to one thing: the promotional efforts of an investor-relations consultant named John Liviakis.
"The company's stock would be doing nothing without him," says Wilson Jaeggli, who heads up Southwell Partners, a Dallas hedge fund.
Data Race hired Mr. Liviakis and his firm, Liviakis Financial
Communications, based in Sacramento, Calif., on July 13, around the same time its shares were hitting rock bottom. Since then, Mr. Liviakis has used news releases and a whisper campaign with fund managers, brokers and other investors to promote the company's prospects, say persons who have been contacted by him. And the consultant's claims for the company aren't something that can be proved, Mr. Jaeggli says: "It's just all pie in the sky."
Yet despite red flags, the stock remains near its recent highs, closing yesterday at $3.25.
Mr. Liviakis protests Mr. Jaeggli's characterization of his work. "We're doing a good service to the industry," he says. "You should know that things are looking very good for the company. Is that hyping? I don't think so. It's just honesty."
According to institutional investors he has contacted by telephone, Mr. Liviakis has said that the company's prospects are improving and that the company is in talks with potential merger partners or large customers. In a telephone interview with a reporter, Mr. Liviakis says that while he can't divulge any details, "there's clearly an exciting change in the revenue activity of the company starting in October."
However, Data Race's president and chief executive officer, Ben Barker, says that he was unaware Mr. Liviakis had been making such statements and that he is surprised the consultant would do so. For one thing, Mr. Barker says, the company won't comment on its October revenue -- to Mr. Liviakis or anyone else outside the company -- until it releases its fiscal second-quarter results in January.
"He shouldn't be commenting on revenue before we've reported results," says Mr. Barker. "We don't share that information with him. ... He has certainly had some knowledge of where we stand and the progress we're making on a qualitative basis. But to the extent that he's speculating on translating that into future numbers, that's certainly something he's not getting from us." Mr. Barker says he plans to question Mr. Liviakis about his remarks on the company's October revenue.
Mr. Liviakis didn't return phone calls seeking his response to Mr. Barker's comments.
There may be other reasons for concern as well. News releases about Data Race that Mr. Liviakis has mailed to potential new investors list himself as a contact. But they don't mention that his firm has been paid with Data Race stock, despite federal rules requiring such disclosure. His company has received 1.4 million newly issued shares, a stake today worth about $4.6million, making Liviakis Financial the largest shareholder in Data Race. Mr. Liviakis's vice president, Robert P. Prag, has received 468,825 shares.
Mr. Liviakis and Data Race have disclosed these holdings in filings with the SEC. But federal securities laws require investor-relations consultants who are paid with company shares to detail those holdings on all materials they distribute promoting the stock, including company-issued news releases that list such consultants as contacts.
Such laws "allow the investor to make a decision as to whether the information they're receiving is objective or biased," says Hal Degenhardt, district administrator of the SEC's Fort Worth regional office.
A separate publicity sheet in Mr. Liviakis's investor-relations kit says that services provided by Liviakis Financial "are typically paid for with restricted stock and/or options," but it doesn't list the firm's exact holdings, though required by law to do so.
Mr. Degenhardt says such vague statements wouldn't meet statutory requirements, though he declines to comment on Data Race specifically.
Mr. Liviakis says he relied on advice from his company's attorney in determining proper disclosures. "I'm happy to put it in there," he says. "It's not that I'm hiding anything. I'll address it immediately."
Data Race's Mr. Barker says he wasn't familiar with Mr. Liviakis's disclosure practices. "I will certainly chase him on that," he says, adding that he will raise the matter with Data Race's lawyers.
Meanwhile, Mr. Barker has plenty of headaches of his own. There's no question that the company's recent performance has been disappointing. Revenue for the 1998 fiscal year ended June 30 was only $4.5 million, down 77% from $19.8 million last year. Losses widened to $9 million, 43% worse than the year-earlier loss. Cash flow was a dismal negative $1.51 a share.
Data Race temporarily abandoned the highly competitive modem business last year to concentrate on Be There! But like a lot of other neat inventions that never caught fire, Be There! didn't sell. One reason could be the increasing adoption of second phone lines and cellular phones by consumers around the country. But whatever the reason, the result has put a gaping hole in the company's bottom line.
"They had hinged the company on one product," says Jim McIlree, an analyst at Austin-based Loewenbaum & Co., who dropped coverage of the stock earlier this year. "The product was not selling, and as far as I can tell it still isn't."
Indeed, while investors who bought Data Race stock in July may be eyeing some heavenly returns, Mr. Jaeggli warns would-be speculators to stay away from the shares, which he says could fall just as quickly as they ascended.
"You don't want to be the last guy at the door trying to get out," says Mr. Jaeggli, whose fund at various times has held both long and short positions in the stock but currently has no stake.
Over the years, Mr. Liviakis has gained a reputation for producing quick spikes in struggling micro-cap company stock prices, promoting his clients' products and prospects through rapid-fire news releases and cold calls to a wide network of brokers and money managers.
Data Race's Mr. Barker says he is familiar with the fact that Mr. Liviakis's promotional techniques aren't viewed favorably by some investors. In the end though, Mr. Barker says he believes Data Race will live up to the expectations Mr. Liviakis is fostering among investors.
Within two weeks of his hiring, shares of the company's stock surged to $2.281 from 63 cents, largely because his reputation inspired a surge of speculators and prompted many short sellers to buy stock to cover their borrowed positions, says Mr. Jaeggli.
As the market for small-cap stocks weakened in late summer, the stock drifted to $1.625 a share. In the ensuing weeks, the company issued a series of news releases.
On Sept. 30, it announced it had added three new regional resellers to its Be There! distribution network, an expansion of about 25%.
Two weeks later, declaring a "technological breakthrough," the company said it would soon begin offering a second product: a modem for palm-top computers that runs on power from a phone line rather than the computer's batteries.
Then on Oct. 20, Data Race announced a "breakthrough application" for Be There!, saying it had just filled an initial $200,000 order by Sabratek, a Skokie, Ill., health-care provider. Data Race projected that the deal eventually could boost sales by as much as $3 million.
Mr. Jaeggli dismisses the news releases, which didn't move the stock on the days they were issued, as hype. New distributors won't help if Be There! continues to get little response from consumers, he says. And while Data Race's modem may have potential, he adds, it remains unproven since the company hasn't reported any orders.
While Mr. Liviakis agrees with Mr. Jaeggli that the $200,000 Sabratek order is fairly small, he expects the $3 million in orders to come over the next 14 months, even though a Sabratek spokesman says the company hasn't obligated itself to any further orders. "It's a reasonable expectation of a flow of business," Mr. Liviakis says. "For people to be skeptical and say that's worthless information until I see a contract, I don't think that's a fair way to look at it."
Meanwhile, the real surge in the company's stock came two weeks ago on Oct. 27, when shares jumped to $3 from $2.188. Both Mr. Jaeggli and Mr. Liviakis concur that what's boosting the stock are the consultant's continuing efforts to promote the company in phone calls and investor-relations packages to money managers and other investors.
Mr. Barker, for his part, concedes that revenue from Be There! hasn't lived up to expectations, but says, "It's not unusual to have that kind of initial delay in market acceptance." Also, while modems powered by phone lines have been developed before, he says prospects for Data Race's new product are bright, explaining that it's the smallest high-speed modem for palm-top computers developed so far.
Data Race "struggled a great deal" before hiring Mr. Liviakis, Mr. Barker says. "All that he can do is expose the story to a broader potential set of buyers. And the company obviously has to deliver the goods in an anticipated time frame, or else it's hype." |
