Re: 9/6/00 - [BIFS] Biofiltration Systems, Inc. -- Technology or Technique?
BIOFILTRATION SYSTEMS, INC. (Pink Sheets: BIFS). - -TECHNOLOGY OR TECHNIQUE?
September 6, 2000
BioFiltration Systems, Inc. (BIFS) seems to be fond of publicity. After all, the Company has issued twenty-three press releases since early June. Most of those have promoted the Company’s new Internet presence, particularly its plans for a roaming, high-speed, wireless Internet that it calls SWOMI.
BIFS says that SWOMI (that stands for seamless, wireless, omnidirectional, mobile Internet) "surpasses other companies claimed throughput speeds for broadband wireless systems by over one hundred percent." According to the Company, SWOMI "will allow users to have continuous mobile Internet connections at speeds up to 2 Mbps." Sounds like pretty heady stuff. And not just to us. Internet message boards have been swamped with postings about BIFS - since the beginning of June over 130,000 messages have been posted on the BIFS Message Board at Raging Bull alone.
All of this talk has apparently had an effect on the price of BIFS shares as well. On August 16th, share prices reached $2.26 following a series of press releases disclosing plans for the SWOMI rollout. With about 513 million shares outstanding this meant that BIFS had a value of over $1 billion dollars. Not bad for a Company that had just $6 in its bank accounts at the end of 1999.
But not all of the buzz about BIFS has been positive, and not all publicity is to the Company’s liking. In two recent press releases, BIFS expressed its displeasure with some recent criticism. But more about that later.
Stock prices have retreated from those heady numbers of mid-August. By Labor Day, BIFS stock had decreased to around 70 cents a share. Still, that leaves the Company valued at more than $350 million.
Just how did this struggling company transform itself in a matter of months? What do investors really know about SWOMI – other than the smattering of information contained in the Company’s press releases? We decided to take a look.
Wasting Away
The Company is still called BioFiltration Systems, and that name reflects its business – or at least its business plan – during the first seven or so years of its existence. Until BIFS entered the Internet arena on April 1, 2000 the Company had focused on plans to market a patented technology that could be used to treat waste water, such as the by-products left behind by aircraft deicing and anti-icing fluids.
This Sarasota, Florida based Company has been in business since at least late 1992, but, so far at least, it has generated revenues of only $2000 in connection with its waste water treatment technology.
The Company was listed on the OTC Bulletin Board (OTCBB) until September 1999. It lost that listing after failing to comply with new NASD regulations that require all OTC Bulletin Board companies to file regular reports with the SEC on a timely basis. Companies listed on the OTCBB prior to enactment of the new requirements were given a time schedule in which to comply, starting with companies whose names were at the beginning of the alphabet.
In a recent press release, the Company sought to explain the reason for its delisting, stating "[t]he new regulation was phased in from July 1, 1999, through June 22, 2000. Those companies starting at the beginning of the alphabet, including BioFiltration Systems, were delisted first because they did not have time to meet the new requirements."
BIFS may have been caught by surprise, but many other "early alphabet" companies were not, and have maintained their OTCBB listings. After all, the SEC approved the OTCBB eligibility rules on January 4, 1999, six months before the delisting process began. Shouldn’t that have afforded ample time for any OTCBB company to prepare the necessary financial statements – particularly if the company had no operations, negligible revenues and virtually no current assets?
In Search Of Net Profits
BIFS did file a Form 10-SB with the SEC on March 29, 2000, but the information in that filing was soon outdated. As of April 1st, the Company dramatically shifted its focus when it acquired Beach Access.Net, Inc. an Internet service provider located in South Carolina, in exchange for 1.75 million shares of unrestricted stock.
In a Form 10-Q filed for the period ended March 31, 2000, BIFS stated that it also "invested 8.6 million shares of restricted stock in Beach Access.Net, Inc. to acquire other related business assets and operations." The Company issued yet another 8 million shares to Jay Knabb, the former owner of Beach Access and certain unidentified Beach Access employees. Mr. Knabb would continue to run the Company’s Beach Access subsidiary under an employment agreement that included options for him to acquire up to another 15.25 million shares of BIFS at one tenth of a cent per share.
That makes for more than 18 million shares already committed to the Beach Access acquisition – with options for 15.25 million more. It is not clear, however, whether those numbers reflect the Company’s recent 100 for 1 stock split. According to the Form 10-Q, that split was effective as of April 15, 2000 – meaning shareholders would receive 100 shares of BIFS for every share they owned on that date. So did BIFS obligate itself to issue up to 33.25 million shares in connection with the Beach Access acquisition, or over 333 million shares?
That amounts to quite a few shares, but the largest shareholders remain the Company’s Chief Executive Officer Alpha Keyser and his wife Victoria. As of December 1999 the Keysers owned 2,825,000 shares, which became 282,500,000 shares after the split (assuming they continued to hold them all). Since that time, they filed, under Rule 144, to sell 45,000 shares on April 12th (before the stock split) and another 5 million shares on July 25th (after the stock split) for a total of approximately $1.5 million. The most recent filing was made one day after the Company announced the successful testing of its SWOMI system.
The Company has recently issued some other shares as well. In the second quarter of 2000 (BIFS does not say exactly when), the Company sold over 4.9 million shares for a total of $789,000. It is unclear whether those numbers reflect the split or if, in fact, 490 million shares have now been issued to those investors. In either case, the Company offers no details of those stock sales. Were the shares sold within the United States or abroad? Who were the purchasers and how did the Company identify them? Was there a placement agent involved, and if so, was it compensated? What were the terms of the offering? The Company’s public filings do not provide any of these details.
Taking Stock
Nor does BIFS explain how a struggling water treatment company in Florida met up with an Internet service provider in South Carolina. While the Company says it has plans to continue trying to develop a market for its pollution system, virtually all of its public announcements since April have focused on its Internet operations.
The commitment to Beach Access would appear to be based on expectations rather than past performance. The most recent 10 Q indicates that the Beach Access acquisition brought the Company’s revenues from zero for the first six months of 1999 to $166,432 for the first six months of 2000. How was that income generated? The Beach Access web site indicates that subscribers to its Internet provider services pay monthly fees of $19.95 to $34.95. Even at the lowest of those fees, it would take just under 1400 monthly customers to generate $166,000 in fees over a six month period.
Limited revenues have not impeded the Beach Access subsidiary from expanding in recent months. Since April, it has acquired customers from three local competitors, Internet servicing rights to an additional 1,300 resort customers, the assets of a computer wholesaler, a company in the wireless systems industry called Revcon, Inc. and the assets of Alliance Computers, LLC.
The price for those acquisitions – 12.8 million shares of BIFS stock. That exceeded, by about 50%, the 8.6 million shares that the Company said it had allocated for new Beach Access related deals. So where did the additional stock come from? Was it issued by the Company, provided by the former owner of Beach Access, or contributed by other shareholders? The Company does not say.
What did the Company actually receive for those 12.8 million shares? The Company has already discontinued operation of the computer wholesale business - purchased in April for 2.5 million shares. Plans to convert that company’s "pager customers" into ISP users went awry. That, in turn, affected the ability to service the potential customers of one of the other ISP’s purchased by Beach Access – for 1.8 million shares of stock. As a result, the Company is now trying to renegotiate the terms of that transaction.
The Company paid a total of 100 million shares to purchase Revcon Technologies, Inc. and Alliance Computer Systems, LLC. In fact, BIFS did not simply issue 100 million shares for those two companies, it also entered into five year employment agreements with their former owners, and awarded them options to purchase an additional 2 million shares of BIFS stock.
What value do those businesses bring that would justify the issuance of all those shares?
In the Company’s June 11th press release announcing the proposed Alliance acquisition, CEO Alpha Keyser noted that "the acquisition of Alliance not only brings a wide variety of network engineers, but a sound network of business to business customers…" He reiterated those comments in a July 19th press release announcing completion of the Alliance transaction.
In the June 11th release, Jay Knabb, the former Beach Access President who now runs the Company’s Technology Group added "Alliance is designed to give our company an additional avenue of revenue growth and to give our shareholders the opportunity to participate in a rapidly growing industry and share in the potential impressive profits that can be derived from these operations."
Potential would seem to be the key word here. According to BIFS, neither Alliance nor Revcon had any significant operations in the first six months of 2000 – despite that "network of business to business customers" and "pending municipal contracts" that Revcon will apparently be transferring to the Company.
Exactly what is the business of Alliance? Of Revcon? Who are those business-to-business customers? What are the nature, and the financial terms of those municipal contracts? None of those details are offered in the Company’s press releases.
Then again, most of the Company’s recent press releases focus not on these acquisitions, but on the deployment of SWOMI. Once again, however, the devil is in the details.
SWOMI The Money
What is SWOMI? The Company says that the acquisition of Beach Access "brought with it the technology for a wireless Internet access capability." But does Beach Access actually own any proprietary technology? If it does, it’s not saying.
Consider then what the Company does say on its SWOMI web site. "It’s not wireless. It’s not access. It’s not fast. It’s a whole new language." But if it’s not wireless, access or fast, is SWOMI anything more than a catchy slogan and a means to market an existing technology?
The Company is promoting SWOMI as a "seamless wireless omni-directional mobile internet." In a July 24th press release, the Company stated it had completed "successful testing of its roaming broadband high speed wireless internet with measured speeds of 2 mega bits per second or 256 kbps." Here’s how BIFS described SWOMI:
Preliminary assessments of the SWOMI™ systems performance indicates it surpasses other companies claimed throughput speeds for broadband wireless systems by over one hundred percent and achieves speeds fast enough to facilitate the use of all multimedia features now in use on high end internet web sites.
One of the more advanced capabilities of SWOMI™ is it’s (sic) unique ability to seek and switch from one cell to another using patented firmware thereby allowing users to seamlessly roam beneath the network without having to reconfigure or reset their computers as they move between cells. This provides users with unrestricted movement within the roaming connection.
In that same release, Beach Access spokesman Jay Knabb describes SWOMI as "distinctly unique compared to other such systems."
SWOMI, it seems, is a method by which Internet users can move around and remain online through a "box" connected to their computer. But is the process unique, or is the Company merely configuring another firm’s technology by constructing a network of antennas and cells that will keep customers connected?
The Company’s press releases do not offer those details, but an August 26th article in the Myrtle Beach Sun News may afford some insight. That article suggested that the Company had "developed technology that turns any laptop computer into a high-speed, wireless, mobile unit." Of course, as the article indicated, there are limitations - a continued signal is dependent upon staying within "the coverage area." Antennas, according to the reporter, are installed every few miles.
So is SWOMI a strategically placed series of antennae? While the Myrtle Beach Sun News article indicates the Company had "developed technology," has BIFS, or Beach Access, developed a new technology or adapted another company’s products? The Company refers to "patented firmware," yet there is no indication, either in the Company’s public filings or the records of the United States Patent and Trademark Office that BIFS, Beach Access or Messrs. Keyser and Knabb hold any patents for a wireless technology.
Is SWOMI even patentable? If not, and the Company owns no proprietary technology, what is there to stop larger, more established and better financed companies from replicating the technique?
BIFS has never indicated that it manufactures SWOMI – or anything else for that matter. So it stands to reason that the SWOMI system is based upon hardware that the Company acquires elsewhere. Perhaps one clue can be found in a June 16th press release announcing a "strategic alliance" between the Company’s Beach Access subsidiary and a wireless hardware manufacturer called OTC Telecom. According to the Company, this relationship would allow "both companies to further develop and rollout a ‘Seamless Area Wireless Mobile Internet (SWAMI’).’…This strategic alliance is a great opportunity for both companies, not only do we have direct access to the technology, but OTC Telecom, a privately held company, will have the opportunity to expand their presence in the service providers market."
What was SWAMI then appears to be SWOMI now. Unfortunately, the press release does not specify the roles to be played by each company in this "strategic alliance." However, our visit to the OTC Telecom web site indicates that that company manufactures and sells wireless local area network products under the brand name AirEZY. In fact, on January 28, 1998, OTC Telecom and Harris Semiconductor announced the development of a wireless product that enables communications at a rate of 2 mbps.
It seems then that this OTC Telecom relationship is central to BIFS plans. So what are the terms of the strategic alliance? What will it cost the Company to acquire the hardware to set up its SWOMI systems? Can OTC Telecom terminate the deal if a better prospect comes along? How much of this equipment will be needed for each SWOMI set-up? Can OTC Telecom deliver the product on a timely basis, in the quantities the Company may require, and at a reasonable price?
One more question – perhaps the most important for those intrigued by SWOMI’s future plans. What happens to SWOMI if it can no longer obtain the hardware from OTC Telecom? Are other sources available, and at what cost? None of these questions have been addressed in the Company’s press releases.
And what about the competition? Is there anything unique about the OTC Telecom products? The wireless internet is hardly the province of any one company, let alone a relatively small concern like OTC Telecom and a fledgling operation such as BIFS. Intel has recently announced plans to expand its wireless presence, and companies like Apple and Palm are already firmly entrenched in that arena. Even telecommunications companies, like Nokia, have started to market wireless alternatives to the traditional avenues of Internet access.
Back To The Beach
Over the summer, BIFS sent out a steady stream of press releases announcing agreements to install SWOMI in condominiums, hotels and motels, most of which are located in Myrtle Beach, South Carolina. Yet, while the Company continues to herald its success in placing the SWOMI system, the announcements leave several key questions unaddressed.
How, for example, will the Company generate revenues? BIFS plans to charge $40 per week for the SWOMI service, but has anyone committed to making those payments? The motels and condos mentioned in the press releases may be willing to make SWOMI available to their customers, but have they agreed to start paying BIFS once SWOMI is installed? Or will the Company have to rely upon weekly fees paid by those guests who elect to utilize Swomi while roaming? As a practical matter, how likely is it that those guests will want to spend an extra $40 per week rather than utilize Internet "ports" provided in many hotel and motel rooms? Sure, those guests can take their computers to the beach with SWOMI, but who really wants sand in their high-priced computer?
The Company’s plans for SWOMI are not limited to resorts in Myrtle Beach. In August, BIFS announced plans to market SWOMI to hotels and convention centers across the nation through a strategic alliance with a telecommunications consulting firm called HospitalityLinx. What are the terms of that arrangement? The Company’s press release did not provide those details.
These press releases provide few details of the financial aspects of the Company’s rollout efforts. Investors are left to wonder how much it will cost to set up each SWOMI system. For that matter, what is a SWOMI system? At last report, the Company had about $860,000 in the bank, and had committed at least $150,000 to development of a prototype system covering six miles in Myrtle Beach. Six miles is a start, but if coverage of that area could cost over $140,000, how much can it possibly cost to build a truly seamless internet? Remember, BIFS still needs cash to pay the salaries those new executives it recently acquired.
It Isn’t Easy Being "B"
If BIFS has welcomed positive publicity, it has expressed a far different view of recent criticisms.
An August 23rd article on Bloomberg news service focused on the checkered past and questionable activities of a stock promoter named Orville Baldridge. According to that story, Balbridge had been involved with BIFS, as well as other Pink Sheet companies, and recently owned as much as 6% of BIFS through something called the Balbridge Group.
According to the Bloomberg article, the Company’s CEO Alpha Keyser confirmed a relationship between BIFS and Baldridge, indicating that the Company sold shares to the promoter at 25 cents a share so he could sell them at a markup and "get the stock going." But, according to Keyser, Baldridge did nothing and the Company bought the stock back. The article also noted that Keyser and his wife had recently "dumped" 6.6 million shares of BIFS stock for $1.2 million.
The Company apparently was not pleased with the Bloomberg article, or the impact it might have on investors. So, in response, the Company issued a press release. BIFS insisted that the Company has had "absolutely no involvement" with Balbridge since early 1999. Mr. Keyser also took the opportunity to remind investors that the Company had been delisted from the OTCBB only because "they did not have sufficient time to meet the new requirements." BioFiltration Systems had the misfortune of starting with the letter "B." Keyser also pointed out that he and his wife had sold only the number of shares permitted by law, and had filed all appropriate documents.
The Company’s press release left a few questions unanswered. Mr. Keyser did not deny that Balbridge had been sold shares at a discount so he could mark the shares up "and get the stock going." What exactly did the Company expect Mr. Balbridge to do in order to get those shares moving? Was there a plan for him to promote the Company? Since BIFS had virtually no revenues at the time, and no operations, exactly what facts would Balbridge use to kindle interest in the shares?
If, as the press release states, the Company bought shares back from Balbridge, when did it do so and what did it pay? Even though Mr. Keyser says that BIFS ended its relationship with Mr. Balbridge in early 1999, his Balbridge Group still owned 250,000 shares (and had the right to acquire 250,000 more) at the end of December 1999 according to the Company’s Form 10-SB.
The Company was not finished addressing recent criticism. Two days later, on August 25th, BIFS sent out a press release responding to negative comments that had appeared on the Internet and elsewhere. This time, the Company said it was asking federal law enforcement authorities and the SEC to intercede. It wanted them "to investigate recent attempts by several persons to wrongfully discredit the company and its stock by ‘bashers’ and others who have made false and harmful claims and is also soliciting the investigation of those persons who published articles on the Internet claiming to have knowledge of the company’s products and who attempted to discredit their reliability without seeing them demonstrated."
Why did the Company feel compelled to strike back at its critics? According to the August 25th press release, BIFS believes that investor interest, which had been kindled by the promise of the Company’s new technology, had been doused by "bashers" who questioned the potential of SWOMI. Those attacks, the Company asserted, had come "on the heels of a dramatic number of contract signings for the product by both private and government entities" and a "corresponding boost to the stock price…from twenty five cents to over two dollars a share in a two week period." Then along came the nay sayers and stock prices retreated.
In other words, the Company appears to believe it had been fairly valued at that $1 billion level.
Just one more thing. Which government entities have signed up for SWOMI? We have been unable to locate any press release providing that information.
Swoosh!
Despite this assault by the "bashers", BIFS remains undaunted in its promotion of SWOMI. Late last month the Company unveiled a "corporate identity for its SWOMI™ technology" by issuing – what else - a press release. As BIFS explained, the new SWOMI logo is "strategically designed" to communicate SWOMI’s "innovative capabilities."
Not only that. Jay Knabb, CEO of the Beach Access subsidiary (and identified in the press release as the "developer" of SWOMI) believes that "the logo’s balance of simplicity and nuances will foster both quick comprehension and provocative discussions."
We are confident investors will welcome the "quick comprehension" part. But, in light of some of its other recent press releases, how will the Company feel about those "provocative discussions?"
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