VITAL LIVING PRODUCTS, INC. (OTCBB:VLPI) – JUST THE ANTHRAX, MA’AM
October 26, 2001
Remember when Anthrax was just the name of a rock band? Now, you can turn on your television to any station and it seems to be “all anthrax, all the time.” So why should we be surprised to see aggressive companies out there trying to capitalize on the public’s anthrax anxiety? We’re not. As we wrote on September 19th, “n the aftermath of last week’s terrorist attacks, state securities regulators are warning investors to be on the lookout for opportunistic investment scams and scare tactics that could be similar to those associated with last year’s Y-2K fears.” At the time, we weren’t focusing on anthrax. Now, everyone is.
That includes a bunch of little-known companies that have announced anthrax related products in recent days – and have seen their stock prices soar. But do those products work? Does the mere announcement of an “anti-anthrax product” translate into a solid investment? Consider what each company is saying, and the questions that remain unanswered.
Just Testing
Vital Living Products, Inc. makes water testing products. At the end of June the Company’s assets included just $400 in cash and $276,000 in receivables, while its current liabilities totaled $2 million – including $260,000 in bank overdrafts and trade account payables.
On October 1st, Vital Living’s stock was languishing at 9 cents a share. Since then, however, the Company’s shares have moved dramatically higher, hitting $2.03 on October 23rd, before settling back to 65 cents on October 24th (which was still a sevenfold increase over the October 1st price). One day later, on October 25th, share prices moved up to 75 cents. Trading volume has increased even more dramatically – from 1,100 shares on October 5th to 9.7 million shares on October 23rd.
To place this all in perspective, consider the fact that more than 57 million shares of Vital Living stock were traded between October 9th and October 25th. Compare that to the nine month period from January 1st through October 8th of this year, when fewer than 2 million shares of the Company’s stock were traded – in total. In other words, over 96% of this year’s volume came in the last 17 days.
What suddenly attracted investors to this previously unattractive stock? The sudden interest in Vital Living was apparently fueled by an October 15th announcement that the Company had “been working on developing a test for detecting bioterrorism.” That test was to be unveiled on October 23rd at the Friar’s Club in New York. That’s right, the Friar’s Club – better known for hosting celebrity “roasts” and other comedic events. Drum roll please.
That gave investors one week to salivate – and the Company had an additional eight days to promote the upcoming unveiling. On October 16th a press release said that Vital Living would be ready to begin shipping its “PurTest® Anthrax Test” to retailers by Thanksgiving. The Company promised that “[e]ach home or business that has a PurTest® Anthrax Test will be better prepared to deal with bioterrorism.” That’s quite a bold promise. But should the public be expecting a “magic bullet” or just another turkey this Thanksgiving?
Where will the Company be shipping those kits? In that same October 16th press release, the Company’s President and CEO, Donald Podrebarac, proclaimed that “since making the announcement yesterday that we had developed a consumer test for bioterrorism, retailers have been asking how soon we could begin filling orders.”
Who are those “retailers?” Just one seems to have surfaced so far. On October 25th Vital Living disclosed that Meijer, Inc. of Grand Rapids, Michigan plans to sell the PurTest® Anthrax Test in the pharmacies of its 152 stores. On the other hand, at least one major retailer has made it clear that it is not on board. A spokesperson for Lowes, the nation’s second-largest home improvement retailer, says that Lowes has no plans to carry the kit. And while Mr. Podrebarac claims that the Company has a commitment from ACE Hardware Corp to make the product available to its chain of independent stores, ACE reportedly has not placed any orders yet.
Shares A Poppin’
The Company says it plans to sell these kits to the public for $19 to $25. It wants to start out by producing 10,000 units a day, and then increase production to 20,000 or 30,000 units daily. A cynic might conclude that all the hype is just a means to boost those sales. Then again, some investors might think it’s designed to boost stock prices. Indeed, who has benefited from that dramatic rise?
At the end of June, Vital Living reported that it had 3.4 million shares outstanding. Earlier this week, the Company said that more than 7.3 million shares had now been issued. Where did those extra 4 million shares come from? The Company’s press releases didn’t say, but it is likely that at least some of them were issued in exchange for convertible debentures and warrants that were part of a $450,000 financing in February 2001. Vital Living says that just $291,000 remains owed on those convertible debentures, suggesting that the remaining $159,000 has already been converted into stock. Registered stock, in fact, since the Company filed an Amended Registration Statement for almost 4 million shares underlying the debentures in June 2001.
How much did the debenture holders pay for their shares? The debentures provided for shares to be issued at the lower of (a) .278 cents or (b) 50% of the average of the lowest three inter-day trading prices for Vital Living common stock during the twenty trading day period preceding the conversion. For the sake of argument, let’s say some of those debentures had been converted between August 29th and October 8th. The lowest three inter-day trading prices during that period were 5 cents, 5 cents and 6 cents, respectively. In that case, the debenture holders would have been issued Vital Living stock at about 2.5 cents a share.
That would seem like a tidy profit for those denture holders – but there’s more. On October 25th, the Company announced that it expects to sell another 10 million shares of common stock for $750,000 by the end of the week – that means they’re getting stock at 7.5 cents per share. Vital Living didn’t say whether it planned to register that stock anytime soon. We’ll have to wait and see.
What does that have to do with those debenture holders? Once this private placement closes, the balance due on the debentures will be converted into somewhere between 6 million and 13 million more shares of Vital Living common stock.
Who are those fortunate debenture holders who could wind up with another 13 million shares (worth $9.9 million based on the October 26th closing price of 76 cents per share)? The Company’s public filings identify them only as AJW Partners, LLC, New Millennium Capital Partners II, LLC, and Equilibrium Equity, LLC. Those public filings offer no further details about those investors – except for their addresses. All three are located at 155 First Street, Mineola, New York, Suite B.
And Now, Heeere’s Donald!
On October 23rd, Vital Living’s President, Donald R. Podrebarac, took the stage at the Friars Club to introduce the “PurTest® Anthrax Kit.” Since it was, after all, a place where show biz thrives, Mr. Podrebarac displayed a vial of liquid (which he assured his audience did not contain anthrax) as he introduced the product. As he later explained in an interview with Bloomberg news, consumers can test for anthrax in the air, in water or on surfaces, by using swabs that come with the kit. The samples are then mixed in a red solution with water and left to stand for 24 to 48 hours, depending on the room temperature.
That sounds simple enough, but does the test work? And, as the saying goes, is it safe to try at home? As best we can determine, the kits have yet to be tested by the Centers for Disease Control, or any governmental agency, and Podrebarac admits that the results have not been independently verified. Consequently, there is no objective verification that the kit is effective.
How does the process work? What’s the methodology? Vital Living hasn’t provided that information. The Company does concede that the test results return false positive results about 5% of the time, but what about false negatives? How often does the kit miss a finding of anthrax? Vital Living hasn’t provided those statistics.
In fact, Vital Living has not provided much information about the nature of the tests performed on its “PurTest® Anthrax Kit.” Where was the testing done, and by whom? What was the nature of the control group, how widespread was the testing? Did the Company actually have any anthrax to test, and, if so, where did it get it? In his interview with Bloomberg, Mr. Podrebarac declined to identify the microbiologist who developed the test, citing “threatening phone calls” received by the Company in recent weeks.
Science Makes Sense
The Company’s enthusiasm has been greeted with some skepticism. In an interview with Stock Patrol, Dr. Lawrence Kobilinsky a forensic scientist at New York’s John Jay College of Criminal Justice expressed concerns about open issues of quality control, quality assurance and validation studies. So far, the Company hasn’t addressed those questions, or provided details of the scientific basis for its claims.
Dr. Kobilinsky also wondered whether the kit was based upon specific anthrax antibodies, or might be likely to pick up other bacteria. He was skeptical of the suggestion that the kit might test for both germs and spores, organisms whose surface proteins are markedly different. And he pointed out that it could be dangerous to leave the kit in your living room for up to 48 hours, since “if there are spores they will open and germinate and will grow very fast.” And these questions don’t even begin to address the potential dangers of the inhalation form of anthrax that a consumer could be exposed to while conducting tests.
Perhaps most important, Dr. Kobilinsky points out, “the last thing you want during a public health concern is for people to do self-diagnosis at home.” That would seem to be sound advice. Turn on the television and you will see health workers, covered from head to toe in protective clothing and wearing breathing apparatus as they test for anthrax. Should private citizens be running around their homes in their shirtsleeves with cotton swabs? Or should we be guided instead by this advice from New York’s Mayor Rudy Giuliani: if you think you have received an envelope containing anthrax, leave it where it is, go into another room, wash your hands, and call the local police or FBI.
This make sense since, in the unlikely event there is anthrax in your home, the last thing you want to do is play around with it by dipping spores in vials, spreading it from room to room, or helping spores to germinate. After all, this isn’t a home pregnancy test we’re talking about.
©2001 Stock Patrol.com. All rights reserved.
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