Nexus Group International Inc - Street Wire
Nexus posts $8.3-million loss and trumpets face value
Nexus Group International Inc NXS
Shares issued 237,438,125 Nov 22 close $0.175
Thu 22 Nov 2001 Street Wire
FACE FORWARD
by Lee M. Webb
Nexus Group International Inc., the latest incarnation of Grandma Lee's
Inc., reported a net loss of $8.3-million on meagre revenue of $719,277 for
the year ended June 30, 2001. The company released its audited financial
statements and artfully crafted annual report on Nov. 19, at the 140-day
limit for reporting its year-end results.
While the artistically rendered annual report headed "face value" may be
aesthetically pleasing, the audited financial statements paint a dismal
picture. The $8.3-million loss, including more than $1.1-million in
writedowns of previously much-hyped assets, boosted the company's
accumulated deficit to $23.6-million. Nexus's selling, general and
administrative expenses, which are not broken down, amounted to
$5.3-million; a rather hefty tab to generate only $719,277 in revenue,
almost all of which came from the company's restaurant operations. Perhaps
of even more concern to investors, Nexus had less than $50,000 in cash and
a working capital deficiency of $3.3-million as at June 30.
Nexus's financial statements are presented using accounting principles
applicable to a going concern, which assume that the company will be able
to realize assets and satisfy its liabilities in the normal course of
operations. "The company believes that it will be able to generate
sufficient cash from the sale or realization of the land held for resale
and other assets, the successful commercialization of its new technologies,
and through other sources of financing to enable it to successfully market
its new products and generate sufficient revenues to meet its obligations
as they become due," state the notes to the financial statements. Over the
past fiscal year, most of Nexus's obligations were met by issuing 93
million shares and a further 35.5 million shares were issued between July 1
and Oct. 30, bringing the outstanding shares to more than 324 million. As
indicated in the management discussion and analysis, that number is likely
to increase significantly as more shares are issued to meet the company's
obligations.
As dismal as the meagre $719,277 in revenue may have seemed to many
shareholders, some were even more disappointed in the portion of that
revenue derived from Nexus's touted foray into technology. "Our Nexus team
has had great success over the past year marketing to the U.S. government
and has established a rapport with many U.S. government agencies," Nexus's
president and chief executive officer, David Lobb, wrote in his letter to
shareholders in the annual report. That great marketing success is
difficult to square with the paltry $19,272 in revenue generated by the
company's technology ventures, all of which was derived from Canada,
according to the notes to the financial statements. Inasmuch as the
financial statements do not provide intersegment sales figures, it is not
clear whether any of that paltry technology revenue was generated by the
company's much-hyped biometric venture.
Nexus's dismal year-end results are juxtaposed with a bevy of upbeat
messages in the company's annual report, leading off with the chairman's
message from Jerry Janik. "Since I last wrote to you in our 2000 report,
our company has changed dramatically," Mr. Janik wrote. "Nexus has been
very busy reorganizing, repositioning, and essentially rewriting the book
defining its future." Whatever the dramatic changes, reorganization,
repositioning and rewriting, Mr. Janik's general face-forward optimism
seems to have remained constant ever since he became involved with Nexus's
predecessor in 1997, regardless of the specific circumstances or name of
the company.
Mr. Janik delivered his first message to shareholders as chairman and chief
executive officer on Nov. 10, 1997, shortly after he acquired a 39-per-cent
stake in the company by selling four real estate assets to Grandma Lee's in
a share transaction. Mr. Janik optimistically declared that the real estate
assets would generate more than $7-million in free cash flow over the next
three years. Mr. Janik projected that the company would have "a good strong
asset base, significant cash on hand and no bank debt" within the year. At
the time, Mr. Janik's vision for the company involved "clustering" of the
company's restaurant-related operations. "We, in essence, have two markets:
the end consumer who purchases a loaf of bread or buys something to eat and
the franchisee or partner who invests in a franchise opportunity," Mr.
Janik declared.
As it turned out, clustering did not result in any significant revenue
growth and the real estate assets did not generate $7-million in free cash
flow, but they did generate some interesting transactions. A 4.2-acre
parcel of land in Oakville, Ont., was acquired at its appraised value of
$4.1-million and subsequently sold for gross proceeds of $4,125,000. A
9.6-acre parcel, also in Oakville, was acquired at its appraised value of
$3-million and subsequently written down to $2.6-million. Perhaps the most
intriguing transaction involved a $1.1-million mortgage receivable
representing a 54-per-cent interest in a promissory note secured by a first
mortgage on the Carter Bay property, consisting of a number of lots on
Manitoulin Island. During 1999, this asset was written down to an estimated
realizable value of $360,000 and sold to TFAC Inc. in return for satisfying
$360,000 worth of the company's obligations. TFAC subsequently sold the
mortgage back to Mr. Janik or a company he controlled for shares of Nexus.
On June 30, 1999, Mr. Janik sold 7.72 million shares at five cents per
share in a private transaction, his last reported sale of any of his Nexus
holdings.
Mr. Janik's 1998 message to shareholders was even more upbeat. "Fiscal 1998
has been an incredible time," Mr. Janik declared before going on to state
his clear vision for the company, then called Heritage Concepts
International Inc. "Everybody needs to understand who we are and where we
are going," he wrote. "So let's be clear. Heritage Concepts is a franchise
business, currently engaged in bringing new restaurant ideas to the
marketplace." Among those new restaurant ideas were the Great Canadian Soup
Company and Viva-An International Sandwich Bar. "Right now, Heritage
Concepts International Inc. is exactly where it's supposed to be," Mr.
Janik claimed. "But more important, it is continuing to move ahead in a
direction that will undoubtedly please consumers and investors, alike."
Whatever the pleasure derived by consumers, investors had little tangible
evidence of it, if the stock price was any indication.
The 1999 message from the chief executive officer opened much less
cheerily. "The Annual Report, at first blush, evidences less than
encouraging results for the year," Mr. Janik began. He then went on to put
a more positive spin on the dismal results, which included a loss of
$5.3-million. According to Mr. Janik, the disappointing results reflected a
cleansing of the balance sheet in readiness for future growth. The Great
Canadian Soup Company was evidently going to be a key component of that
growth. "We are very excited about this concept and look forward to a
strong year 2000," Mr. Janik wrote. He also indicated that the company was
in the process of purchasing a small Internet entity. "Through great
difficulty we are attaining a clearer vision by concentrating our focus,"
Mr. Janik said. "We look forward to saying goodbye to this century and to
enthusiastically embracing the coming of the next."
By the following year, that concentrated focus had turned Heritage Concepts
into "a unique and highly diversified company," according to Mr. Janik.
Moreover, the notion of purchasing a small Internet entity, mentioned
almost in passing in Mr. Janik's 1999 message, had turned into "a bold
strategy to transform HCI into a technology-focused holding and marketing
company," thanks largely to his vision and anticipation. Mr. Janik's 2000
message noted the appointments of David Lobb as chief financial officer and
Ashley Kelly in the role of vice-president. "They have already positively
impacted the profits of The Great Canadian Soup Company and our newly
launched pub franchise concept, The Whistling Walrus," Mr. Janik wrote. Mr.
Janik also noted that the company had entered into "a strategic alliance
with FoodVision.com to offer unique customer experiences, from online
ordering to event catering."
FoodVision.com turned out to be just another vacuous dot-com bust; it
trades on the pink sheets in the U.S. where its shares are currently
changing hands at one-tenth of a U.S. cent. While the FoodVision.com
alliance had little, if any, direct influence on the company, a more
lasting relationship developed with Raj Kalra, FoodVision.com's president.
The Great Canadian Soup Company is a money-losing operation that continues
to be funded by Nexus; the asset was written down by $419,000 in fiscal
2001. Little more has been heard of The Whistling Walrus.
In his last message as president and chief executive officer of Nexus
before taking on the role of the company's high-priced chairman, Mr. Janik
gushed over the company's foray into technology, touting the 50-per-cent
stake in AcSys Biometrics Corp., the purchase of Platinum Intermedia Inc.
and a stake in 123hits.com. Mr. Kalra of fleeting FoodVision.com fame is
tagged with the dubious distinction of being one of the founders of
Platinum Intermedia. Mr. Kalra would also serve a stint as president of
AcSys and join Mr. Janik as an officer of Aztek Technologies Inc., a
Canadian Venture Exchange company that had a much-hyped relationship with
Nexus. Meanwhile Platinum Intermedia, which was purchased for 8 million
shares at a deemed value of 7.5 cents per share, was touted to generate
$8-million in revenue in its first year of operation; it never contributed
any revenue to Nexus and was written down by $600,000 in fiscal 2001.
Similarly, 123hits.com was a bust and was written down by $29,458. AcSys
has contributed little, if any, revenue to Nexus, but it continues to be a
prominent and valuable promotional tool.
"With solid fundamentals in place we're moving forward at the speed of
imagination," Mr. Janik declared in the 2000 message to shareholders.
Evidently Mr. Janik was endowed with a very speedy imagination. In a Sept.
4, 2000, Canadian Business article the imaginative Mr. Janik suggested that
AcSys's sales could hit $500-million (U.S.) or more within nine months. He
also had plans to hire 50 or 60 employees and take AcSys to an initial
public offering within 18 months, according to the Canadian Business
article. While AcSys's current employee count is not known, the company has
not yet generated any revenue and the dream of taking the company public
is, at the very least, on hold.
"Nexus's potential is without a doubt centred on its commitment to create a
growth path for our company," Mr. Janik claims in his latest message to
shareholders, this time in the role of chairman. "That path has clearly led
to our investment in AcSys Biometrics Corp." That investment is rather
pricey, particularly for a company generating less than $720,000 in annual
revenue. As disclosed in the notes to the audited financial statements, the
June 30, 2000, agreement to acquire a 50-per-cent stake in AcSys was
rescinded and replaced with a new agreement on June 22, 2001. Under the
terms of the new agreement, Nexus issued 25 million shares with an ascribed
value of 18 cents per share to the control of John Sutherland, inventor of
the vaunted Holographic/Quantum Neural Technology (HNeT) and president and
chief executive officer of AND Corp., and released $372,000 held in escrow.
Nexus also agreed to advance $7.5-million to AcSys and to lend
$1.13-million (U.S.) to an unidentified affiliate of Mr. Sutherland's AND
Corp., which holds the other 50-per-cent stake in AcSys.
AcSys's sole asset at the date of acquisition was the HNeT licence and
related intellectual property. According to the management discussion
accompanying Nexus's audited financial statements, more shares will have to
be issued to meet AcSys's funding requirements. Nonetheless, Mr. Janik is
very enthusiastic about the biometric venture. "Biometrics is the key," he
claims in closing his 2001 message to shareholders.
The management discussion and analysis of Nexus's fiscal 2001 offers a
vague assessment of the previous year's upbeat forecast and closes with yet
another forecast. "Although the company was extremely optimistic in its
forecast for last year, this year should be the beginning of constant and
an increasing flow of revenue," Nexus's management claims. Mr. Lobb picks
up the optimistic narrative in his letter to shareholders.
Mr. Lobb leads off with some remarks about Nexus's share price. "As a Nexus
shareholder I, like you, look over this past year with mixed emotion," the
company's president and chief executive officer writes. "We have
successfully accomplished a significant amount of change during the year
and have taken great efforts to define our organization more clearly.
However, this year Nexus stock traded down to prices that provide for
little market recognition of the substantial underlying value its assets
hold. This is due primarily to the onslaught of downbeat tech news early in
the year and the tech sector generally falling out of favour. The overall
economic downturn has also played a significant role in the decline of the
markets."
While very few investors might take issue with Mr. Lobb's general claims
regarding the economic downturn and the faltering technology markets, some
might question the specific claims involving Nexus and its stock price.
Even at recent trading prices, Nexus's market capitalization hovers around
the $60-million level. Insofar as Nexus only generated $719,000 in revenue,
of which only $19,000 is attributable to its technology ventures, some
might suggest that the company has enjoyed a rather generous valuation.
Moreover, given that many biometric companies experienced remarkable gains
following the Sept. 11 terrorist attacks in the U.S., some investors might
find generalizations about the tech sector falling out of favour to be a
weak explanation for Nexus's lagging share price.
"Last year was focused on building relationships; this year our number one
priority has been to build our business," Mr. Lobb writes. "As the success
of AcSys Biometrics is our primary objective, we have taken substantial
measures over the year to fund its growth. In so doing, we have invested in
CompuBlox Inc. for its programming efforts and in AND Corporation for
further technological developments. As you know, Nexus owns a 50.1-per-cent
interest in CompuBlox - the programming arm of the organization. It is
CompuBlox that ensures the AcSys Facial Recognition System (FRS) delivers
what the market demands." While investors may have some difficulty in
gauging CompuBlox's success in delivering what the market demands in the
absence of any significant revenue, the details of Nexus's creative and
intriguing acquisition of a 50.1-per-cent stake in the company are
disclosed in the notes to the financial statements.
On Dec. 18, 2000, Nexus acquired a 50.1-per-cent interest in CompuBlox by
issuing one million shares with an assigned value of $165,000. At the same
time, Nexus acquired all of the preference shares of CompuBlox in exchange
for 12.7 million shares and 12.7 million share purchase warrants with a
total assigned value of approximately $2.1-million. After the acquisition,
Nexus redeemed the preference shares of CompuBlox for $2.1-million in cash.
While the precise origin of the $2.1-million is not clear, its disposal is
clearly disclosed in the management discussion. "This cash resource was
used to continue to fund the operations of AcSys," that discussion notes.
The management discussion and analysis also notes that Nexus will have to
issue more shares to meet CompuBlox's future funding requirements "until
such time as revenues from biometrics commence."
Mr. Lobb's message to shareholders is followed by a four-page report on
operations that, among other things, attempts to establish the relationship
between Nexus, AcSys, AND, and CompuBlox. According to that report, AcSys
handles marketing while AND and CompuBlox act as AcSys's research and
development department, with AND handling the research and CompuBlox
providing the development. The relationships between the various entities
are more complex than it might seem at first glance, casting further doubt
on a recent Rights and Democracy report that characterized Nexus as an
"Ontario-based company operating through a highly diversified web of
autonomous subsidiaries and partnerships." In addition to the rather tight
financial relationships, there is a significant crossover of officers and
directors among the companies. Mr. Janik, Nexus's chairman, is also the
president and chief executive officer of AcSys. Mr. Sutherland, AcSys's
chief technology officer, is a director of Nexus and the president and
chief executive officer of AND. Mr. Lobb serves as both AcSys's chief
financial officer and Nexus's president and chief executive officer. Ashley
Kelly serves as vice president of both AcSys and Nexus. Little is known
about the officers and directors of CompuBlox, with only the company's
president, Soren Frederiksen, receiving any mention in Nexus's annual
report.
The odd man out in these corporate interrelationships, at least as far as
the account of AcSys's management team is concerned, seems to be David
Delaney, the company's chief development officer. Mr. Delaney may be better
known to many of Nexus's shareholders, particularly the company's cultish
band of Internet supporters, as "Negot8r," a notorious tout who frequented
an Internet chat site operated by StockHouse Media Corp. before being
officially recruited by AcSys. Mr. Delaney, who did not limit his touting
activities to one alias or one stock, apparently abandoned his StockHouse
posting career shortly after acknowledging his association with AcSys.
"Well, I do know he used to post, absolutely, but we have a very strict
policy that no one here posts," Nexus's spokesperson Darlene Marks told
Stockwatch in a recent interview.
The report on operations also touches briefly on the performance of AcSys's
facial recognition system in the third round of biometric comparative
testing conducted by International Biometric Group, a biometric consulting
firm based in New York. Nexus has disclosed very little about the specifics
of the comparative testing and the report on operations does not throw any
light on that matter; however, International Biometric Group's Web site
briefly describes the test methodology. "The test's first visit involves
extensive testing of approximately 240 subjects of various demographic,
age, ethnic, and employment backgrounds," the Web site explains. "Over the
course of one hour, subjects attempt to enroll in each biometric system.
Those who are able to enroll are then verified against their enrollment;
for systems with security thresholds, this verification begins at high
security. If unable to verify, attempts are made to verify the subject at
medium then low security settings." Nexus has never drawn any attention to
the matter of the various security thresholds, leaving some of its
enthusiastic and gullible supporters with the mistaken belief that its
vaunted facial recognition system would undoubtedly perform even better at
a higher security threshold.
As previously reported by Nexus, AcSys scored a 0-per-cent false acceptance
rate (FAR) and a 3.1-per-cent false rejection rate (FRR) at the medium
security threshold in its primary visit. "This means that within these
parameters 100-per-cent of the time AcSys FRS did not allow an impostor to
incorrectly verify as someone else," the report on operations notes. "We
believe, however, the FRR measurement, or the percentage of times the
system incorrectly rejected a valid user, although quite an impressive
number in its own right, to be far less important a result than the False
Acceptance Rate."
While Nexus downplays the false rejection rate, International Biometric
Group considers it to be a critical metric. "If legitimate users are
rejected in an IT security environment, either backup verification is
necessary, which may reduce the overall integrity of the authentication
process, or help desk intervention is necessary, which adds to the
administrative overhead necessary to operate a biometric system," the
consulting firm notes on its Web site. "Either way, a legitimate user has
been inconvenienced and time has been lost. In an E-commerce environment,
false rejections may be even more problematic: they can lead to a customer
being unable to execute a transaction or access an account. This
often-often overlooked metric is critical to success in IT security and
e-commerce."
Canada Stockwatch will take a closer look at facial recognition technology
and some of the puzzling information and conflicting claims about
biometrics in a future article. Meanwhile, Nexus shareholders perusing the
company's annual report and most recent information circular may encounter
a few specific puzzles of their own. Among those puzzles, may be some
questions regarding insider holdings. For example, Mr. Sutherland, is
disclosed as the beneficial owner of 25 million shares in Nexus's
information circular. According to information distributed by Micromedia
Ltd., however, he has not yet filed an initial insider trading report.
Mr. Janik, who holds even more shares, has filed insider trading reports,
but those reports are far from being a paragon of clarity and the company's
latest information circular does little, if anything, to clear up the
muddle. An information circular dated July 13, 2001, disclosed that Mr.
Janik was the beneficial owner of 58.9 million shares; the most recent
circular, dated Nov. 12, 2001, reports Mr. Janik's holdings at 49.1 million
shares. Oddly, a review of Mr. Janik's insider trading reports does not
show any transactions that would account for the decline in his holdings.
Indeed, according to those reports, Mr. Janik has not disposed of any
shares since June 30, 1999. Those reports do not show the more than seven
million shares acquired on the conversion of a $1-million convertible
debenture, either. Mr. Janik subsequently pledged those shares to the
company in connection with a right of offset against certain real estate
assets and amounts owing from a limited partnership. Securities commissions
are quick to claim that the filing of accurate and timely insider trading
reports is a cornerstone of maintaining public confidence in the markets,
but monitoring those filings, let alone ensuring that they are
understandable, often seems to be another matter entirely.
Investors will not have much time to puzzle through these and other matters
before Nexus releases its first-quarter results, which are due by Nov. 29.
By that time they may be more interested in finding out whether the
forecasted "constant and an increasing flow of revenue" has yet commenced.
In the meantime, perhaps buoyed by the Nov. 20 announcement of a letter of
intent between AcSys and netRequisite Inc. "to co-develop and implement
software for face recognition, Internet-enabled transactions primarily for
the financial market," Nexus's share price has remained relatively stable
in the wake of the dismal year-end financial results. Whether investors
will continue to assign something more than face value to Nexus's fluffy
news releases if the company does not start to generate some revenue from
its much-hyped technology ventures remains to be seen. Nexus closed at 17.5
cents on Nov. 22.
Comments regarding this article may be sent to lwebb@stockwatch.com.
(More information regarding Nexus is available in Canada Stockwatch
articles published on Oct. 16, 19 and 24; and Nov. 16, 2001.)
(c) Copyright 2001 Canjex Publishing Ltd. stockwatch.com |
