EEDGETECH SERVICES, INC. (OTCBB: EDGH) Part I – LOOKING FOR AN EDGE
August 5, 2003
Value, like beauty, may be in the eye of the beholder. Still, one can’t help but think that beyond every valuation is a theory – valid or bogus – and an objective. That’s what makes this one so puzzling. On July 30, 2003 a surprise suitor made an unsolicited offer to purchase 90% of EdgeTech Services, Inc. (OTCBB: EDGH) for $1 a share. Considering EdgeTech’s financial state, the offer seems bizarre.
EdgeTech is an IT consulting firm based in Toronto, Canada that became public in early 2002 (at first calling itself Secure Enterprises Solutions, Inc.) as the result of a reverse merger with a Nevada public corporation called NewsGurus.com, Inc. As part of that transaction the former owners of EdgeTech received 16 million shares of the public company and $66,000. About 12.8 million of those shares went to two brothers, Tae Ho Kim (the Company’s present CEO) and Sang Ho Kim (EdgeTech’s President, CFO and Chairman of the Board). An additional 825,000 shares were issued to an individual named Richard Biscan, who acted as a finder in connection with the transaction.
The Company had less than $18,000 in the bank on April 30, 2003 (the date of its last public report), and although it had revenues of approximately $1.4 million for its most recent fiscal year (which ended April 30, 2003) it lost more than $500,000. After considering recurring losses from the Company’s operations, and an accumulated deficit that exceeds $677,000, EdgeTech’s auditors say there is substantial doubt about its ability to continue as a going concern.
The Company had 31.3 million shares of common stock outstanding as of April 30, 2003, and its common shares were trading at 15 cents on July 29, 2003. So why in the world has someone made an unsolicited offer to buy 90% of EdgeTech at $1.00 a share – or more than $28 million? Even the Company’s insiders might be puzzled by this one. In recent months holders of unregistered EdgeTech shares have announced their intention to sell shares – mostly at prices well below $1 a share. One of those sellers is Richard Biscan, the finder who helped bring about the reverse-merger, who filed Forms 144 to sell 200,000 shares just days before EdgeTech received the tender offer.
What’s going on here?
Tender is the Offer
On July 30, 2003 EdgeTech’s common stock had closed at 16 cents a share, on volume of 234,200 shares. The next morning, EdgeTech issued a press release before the market opened. According to the Company, a Florida firm called Hollingsworth, Rothwell & Roxford (HRR) offered to acquire 90% of EdgeTech’s outstanding shares at almost seven times the current market price.
The letter from HRR, which apparently arrived the previous day (July 30th) by fax and e-mail, dictated several pre-conditions. The first two seemed perfectly reasonable. EdgeTech would have to enter into a confidentiality agreement so that HRR “be able to do all of our due diligence on your fine Company,” and the EdgeTech management team would have to remain in place.
The third condition, however, was somewhat more unusual. HRR insisted that EdgeTech publicly release “this Letter Offer from HRR in its entirety in both Canada and the U.S. on a national scale in both countries.” That, of course, could be expected to have a predictable effect; shares of EdgeTech were likely to soar as investors learned of the $1 tender offer.
EdgeTech said that it planned to respond to the offer within a week. As might be expected, the market reacted immediately. On July 31st EdgeTech stock rose almost 400%, to 75 cents a share, before closing at 50 cents a share. Volume was almost 11 million shares.
Why was HRR insisting that EdgeTech disseminate its offer letter “in its entirety,” rather than simply release news of the unexpected offer?” HRR did not say. The letter attempted to justify the $1 bid, and establish HRR’s credentials.
HRR characterized EdgeTech as “undervalued,” based upon the Company’s public reports, its “well managed” business, and “7 years of continued rising revenues.” It went on to recite EdgeTech’s relationship with “business partners” that include “Microsoft, IBM [and] Symantec,” and its “clients” including “major government and private sector clients in Canada and the U.S., such as IBM, Falconbridge, Bell Nexxia, Rogers Telecom, and the Province of Ontario.”
HRR did not specify the “publicly available reports” that it had “evaluated in depth.” Presumably, they would have included the Company’s recent Form 10 K, which reflected losses of over $500,000 for the fiscal year ended April 30, 2003, and losses of 2 cents per share - double that of the previous year. Upon reviewing that report, HRR also would have seen that the Company concedes that “without additional capital or profitable operations our ability to operate as a going concern is uncertain.”
As for those “7 years of continued rising revenues,” HRH either has access to audited financial information that has not been made public, or is relying on unsubstantiated statements from the Company. The public records do not reflect audited financial information for EdgeTech going back seven years. Here is what we did find.
On May 31, 2002, the Company filed a Form 8-K with the Securities and Exchange Commission concerning its acquisition of EdgeTech which, until that time, had operated as a private company. According to the Form 8-K, EdgeTech, the private entity, had been “growing steadily since 1995 from sales of $365,000 CDN (approximately $261,000 in U.S. dollars) to sales of approximately $1.7 Million CDN (just over $1.2 million U.S.) in the most recent year ending April 30, 2002.” The Company conceded, however, that sales growth had “slowed due to a significant restructuring in 2001, lack of sufficient growth capital and weaker market conditions,” and promised to file financial statements in connection with the acquisition no later than July 31, 2002.
When those financial statements were filed, in an Amended Form 8-K, they reflected revenues of approximately $1.65 million dollars (Canadian) for the year ended April 30, 2001 but offered no revenue figures for earlier years.
The Company has referred to its purported seven years of revenue growth on more than one occasion, most recently in a July 30, 2003 press release – issued the same day as the tender offer arrived – which bore the headline “EdgeTech Announces Seventh Consecutive Year of Record Revenue Growth With 29% Increase.” Surely, no serious tender offer would be predicated on a headline or other anecdotal statements, unsupported by audited financial information.
HRR’s offer letter also makes reference to EdgeTech’s “partners” and “clients” – repeating, virtually verbatim, the description of those “partners” and “clients” that EdgeTech inserts in its press releases. Here again, one would hope that HRR would have – or seek – more detailed information on those relationships before committing to a $28 million acquisition.
EdgeTech’s public filing offer few clues to the nature of those “partnerships.” The most recent Form 10-K states that
During fiscal 2003, we have added over ten additional "corporate partnerships" with the total now exceeding more than thirty, including those with some of the leading security technology companies in the world. These "partnerships" enable us to offer a broader suite of products and services to potential clients and thus enhance our potential for growth. Additional "corporate partnerships" are contemplated and additions or deletion in the list of corporate partners could occur at any time.
Is there any exclusivity to these “partnerships,” or are they the sort of arrangements that dozens – if not hundreds – of other companies enjoy with major firms like INM and Microsoft? EdgeTech offers no details of the relationships.
It all seems like scant information on which to predicate a $28 million offer. Then again, HRR’s offer letter doesn’t say how it plans to finance the purchase of all those shares. What was HRR thinking? As we will see in Part II of this series, this is not the first time HRR has stepped up to the takeover plate.
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