STOCKPATROL RINGS "Bellwether Report" BELL:
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Galton Biometrics, Inc. - Fickle Fingerprints of Fate
Investigative Reports
July 22 2005
Stock promoters continue to clutter cyberspace with spam e-mails promising the moon. Virtually every day, dozens of stock profilers echo a common theme; buy shares of an obscure company now, before it is too late, and enjoy the riches of Croesus. The names of the companies vary, but the promises are all of a kind. Unfortunately, most of these stories prove to be tall tales riddled with holes. This moon, as investors rudely discover, is truly made of Swiss cheese.
Proper analysis of an investment requires consideration of myriad details, including the industry, the competition, and the company's past history and current financial condition. Thoughtful analysis does not merely heap praise upon potential, it tempers optimism with reality and measures potential by performance. So when a promoter spouts code words like "homeland security" and predicts that a little-known stock will increase by 564% over the next twelve months we take notice, but with one eyebrow firmly raised.
As we did when we saw a recent e-mail campaign boosting Galton Biometrics, Inc. (Pink Sheets: GALB). When we first learned of the promotion, on July 11, 2005, Galton shares were trading at approximately 49 cents, up from 36 cents at the beginning of the month. According to the promoter, however, Galton was poised for a rapid rise, with a "potential 12 month upside" of 564% and a "consensus price target" of $5.62. Was this simply another tout sheet designed to seduce unwitting investors, or was Galton ready to rise? We decided to review available public information on the Company and found, as is the case far too often, that there were few details to be found.
Playing the Biometrics Field
The e-mail extolling the virtues of Galton was strictly a one-sided affair, offering an optimistic view of the Company's prospects, but no material information concerning its current operations, financial condition, or risks of a speculative investment.
Galton apparently has little operating history to recount. The Company became public in October 2004 by acquiring control of a publicly traded shell called Injectomatic Systems, Inc. (which had itself become public through a reverse-merger in June 2003). As best we can determine, Galton, which does not file regular reports with the SEC, has not made public the terms of that transaction or its prior operating history.
Injectomatic, which was headquartered in Barrie, Ontario, Canada, did file required public reports – but only for a brief time. A Form 8-K filed with the SEC on June 17, 2003, disclosed the terms of the reverse-merger by which Injectomatic gained control of the public shell. It did not, however, include any financial statements for the existing Injectomatic business and, as would later be the case with Galton, there was no way for investors to determine from public documents whether the Company was viable.
Injectomatic was only the most recent incarnation of a public entity that had changed names and business plans at least two times before. Initially, as Celebrity Resorts, Inc., the Company owned a destination resort and fishing camp in central Florida as well as an interest in an Arena Football League franchise. (The publisher of this website is familiar with that entity since, for a brief time, he was a director and shareholder of Celebrity Resorts). In the early 1990s, Celebrity Resorts morphed into Celebrity Entertainment, Inc., with new management and ownership and aspirations in the entertainment field. Celebrity Resorts and Celebrity Entertainment had one thing in common – aside from retention of the "Celebrity" name. Both entities filed regular reports with the SEC.
Injectomatic adhered to that practice just long enough to register some of its common shares. On August 5, 2003, two months after filing the Form 8-K that disclosed its reverse-merger with Celebrity Entertainment, Injectomatic filed a Form S-8 Registration Statement, registering 1.5 million shares of common stock for its "Employee Stock Incentive Plan for Employees and Consultants." A Form S-8 Registration Statement becomes effective upon filing, so those shares could be sold immediately, even though the Company had not disclosed whether or not they had been issued and, if so, to whom.
Less than two weeks later, Injectomatic advised the SEC that it would be unable to file its Form 10-Q quarterly financial report for the period ended June 30, 2003 on time because it would require "additional time in order to finalize quarterly financial information, complete consolidation of financial statements and complete managements (sic) discussion and analysis." The Company promised, however, that the report would be filed "on or before the fifth calendar day following the prescribed due date. The Form 10-Q for June 30, 2003 never was filed, and neither was any subsequent financial report. Injectomatic never filed any subsequent public reports – and neither has Galton - although there is nothing that would suggest that the Company has been excused from that obligation.
That leave Galton shrouded in mystery, with few clues about the Company's actual operations or viability. We know, for example, that the Company is now headquartered in Geneva, Switzerland and that its President is Bob Hilsinger – at least according to the modest information available on the Pink Sheets. And we know that the Company is, or aspires to be, in the biometrics industry.
Biometrics is a method of identifying a person based on physiological or behavioral characteristics using automated identification tools. Biometrics includes fingerprinting, iris scanning, facial scanning, voice patterns and similar techniques. Such techniques have become critical tools for security in general and homeland defense in particular. But, largely because of those concerns, the biometrics industry is populated by myriad companies, large and small, that are established, well-capitalized and, in some cases, firmly entrenched. Some of these entities already enjoy relationships and contracts with government agencies in the United States and abroad. It would appear to be a difficult market to penetrate, particularly for a company with no discernible track record and questionable capitalization.
Is Galton actively involved in the biometrics field and does it have the ability to become a significant player? Based upon the available information it is difficult to determine whether the Company has any viable products or services– despite the unbridled optimism of its promoters. Indeed, a recent e-mail touting the Company glossed over the Company's activities, stating simply that Galton "owns a portfolio of biometric solutions for any type of customer willing or needing to enhance its security systems" and going on to claim that Galton "has gathered a substantial portfolio of technologies, which it owns or in some cases has a license agreement for in order to service its customers."
The promoter's "profile" of Galton offered no details about those technologies and license agreements. Instead, it focused on the promise of the biometrics industry, claiming that "more than 90% of the companies in the security hardware and software business are profitable." The promoter did not indicate the basis for that calculation, but even assuming that the statistic is accurate, there is no information available that would demonstrate Galton is anything more than a wannabe participant in that sector.
For Whom the Bellwether Tolls
An investment "newsletter" called Bellwether Report was among the first to jump on the Galton bandwagon. On November 17, 2004, Bellwether Report issued a "morning alert" identifying Galton as a company that its "analysts" would be watching. Bellwether described Galton as an "aggressive growth company positioned in the Homeland Security Sector" – although it offered no details that would suggest Galton actually occupied any "position" in homeland security. Bellwether also noted that an individual identified as Arthur Secret, who "has been part of the team that invented the World Wide Web at CERN" had joined Galton as Chief Technology Officer.
The following day, Bellwether again identified Galton as an "aggressive growth opportunity," stating that the Company had been given a "new target price of $8.00 by Stock Targets."
Bellwether's enthusiasm did not wane in the following months. In February 2005, Bellwether sent out a newsletter "re-introducing" Galton, which it described as "one of the most lucrative opportunities our analysts have discovered." Bellwether went on to say that Galton was "a company that has provided several unique developments in the area of biometric fingerprint technology" and a "homeland security gem."
Two months later, Bellwether was still singing a similar tune. In April 2005, Bellwether distributed a newsletter recalling that Galton "flew out of the gates when first introduced, trading up over 500% in a very short period of time." Bellwether conceded, however, that its initial enthusiasm was pre-mature "by about 6 months, as they were never able to lock down contracts or capitalize on a working revenue plan."
Had things changed since the initial Bellwether endorsement? There is no indication that Galton has been able to "lock down" those contracts and the Company has yet to reveal its "working revenue plan." To the contrary, as we will see shortly, the Company apparently no longer has the rights to a critical license. Still, as of April 2005, Bellwether said it was "amazed by how far the company has come" and was "extremely comfortable bringing this company back to our subscribers."
Unfortunately, Bellwether did not say exactly what provided that comfort level and there is little evidence that Galton actually has "come" far at all.
Considering these questions, it is difficult to consider Galton a "homeland defense" business, despite the efforts by promoters to put a positive spin on the Company's prospects. The Company's website (http://www.galtonbiometrics.com/index.htm) is only marginally more informative than the fact-free promotions. The website states that Galton has "licenced a unique biometric technology from the USA" which can be used for fingerprint identification and addresses national security concerns as well as privacy issues. Galton claims that the licensed technology generates a short Biometric Identifier Number (BIN) based upon a person's fingerprint that can be used in connection with personal identification credentials like credit cards and passports.
Who owns the technology, what did Galton pay for the license, what royalties are due in the future and where is the technique currently used? The website does not identify the licensor or provide any terms of the license agreement, except to state that it is the distributor for the technology in Europe and holds the intellectual property rights for the United Arab Emirates (UAE). And, as we discuss below, there is every indication that the license was terminated five months ago.
For now, it appears that the United Arab Emirates is the Company's principal target market. Galton says that it has initiated discussions for use of its biometric technology in the UAE, although it does not indicate whether those negotiations are being conducted with companies, individuals or government agencies.
The Company also claims that it intends to introduce an identity card incorporating its BIN technology on its website "for the specific use of non national workers in terrorist targeted areas where world wide disruption could be at its worst." So far, however, there is no sign of that identification card on the Galton website.
Questions, Answers, and More Questions
Nor is there any detailed description of the Company's management team or financial condition. Instead, the Galton website offers a few tidbits in the form of "Questions and Answers" - although it is unclear whether that information is timely or presently accurate. Soon after Galton became public, it announced that "questions and answers" would be posted on the website by late November 2004. There is nothing to indicate whether the "Q and A" presently appearing was posted at that time or has been updated since.
For example, the "Q and A" states that the Galton has 23 million shares of common stock outstanding, of which only 3 million are in the public float and are held by approximately 3,000 shareholders. How were those shares issued and to whom? As of March 31, 2003 (the date of the last Form 10-Q quarterly report filed by Celebrity Entertainment), the Company had 262,690 shares outstanding. An additional 1.5 million shares were registered on a Form S-8 in August 5, 2003. That leaves more than 21 million shares unaccounted for - that appear to have been issued to unidentified parties over the past two years.
The outstanding share count gets even more perplexing. According to information obtained from the Pink Sheets, the Company implemented a 1 for 100 reverse-stock split on November 9, 2004 – soon after Galton took over from Injectomatic -leaving approximately 22.5 million shares outstanding. Does that reflect the number of shares outstanding before or after the reverse-split? Who controls all of those shares, and with them the Company?
The status of the Company's operations remains as murky as its capital structure. A November 15, 2004 press release, which is posted on the Company's website, is headlined "Independent Hitachi Study Confirms Galton Biometrics Technology Is Ready For Commercial Marketplace" – but that bold proclamation takes considerable literary license with the tenor of the Hitachi report. As the body of the press release explains, a survey by Hitachi Data Systems Storage Index indicated that many companies in the UAE were considering biometric solutions to increase workplace security. There was no indication that the Hitachi study revealed any groundswell of interest in either Galton or its licensed technology. And while Galton stated that it would "step up efforts" to find customers in the UAE, there is no indication that those efforts have been successful.
Two other press releases issued in December 2004 provided little further insight into the Company's actual operations. On December 7, 2004, for example, Galton announced that it had hired an investor relations firm called Equitilink to help the Company improve communications with shareholders. As readers of StockPatrol.com have seen in the past, Equitilink has represented a number of similarly obscure penny stock companies. See Diamond Discoveries International, Inc. – A Long Way From Tiffany's and Far East Ventures, Inc. – Black and White and Lots of Gray. But while Equitilink praised the Company's "unique" business strategy, it again offered no evidence that this strategy had generated any material business.
On December 15, 2004, Galton issued another press release, announcing that Maxine Most, founder of a company called Acuity Market Intelligence, had been retained to prepare a market intelligence report on the biometrics industry. That press release also said that Galton had been meeting with "various and multiple technology vendors over the past two weeks with a view to cementing new agreements to add a full range of security related products to its list and roll out the first total solution based offering in the market." Seven months later there is no sign that Galton has entered into any such agreements.
Taking License
In January 2005, the source of Galton's "license" was revealed, albeit in an unexpected context. On January 12, 2005, Galton announced a bid to acquire control of Liska Biometry (OTCBB: LSKA), the entity which purportedly had granted Galton a license to market certain biometric technology in the UAE. Galton said that it had launched the takeover bid because of concerns about Liska's financial stability and to strengthen and stabilize both companies.
Galton said that it had offered to exchange one share of Galton common stock for every three shares held by Liska stockholders. The Company also stated that it was offering funding needed by Liska to develop its BIN Binary technology.
Ironically, Galton indicated that it had become concerned after reviewing Liska's public filings, including its most recent financial reports. Liska, unlike Galton, files regular public reports with the SEC, including financial statements – so that investors have access to such information. In contrast, Galton's financial picture remains a mystery.
As it turned out, however, Liska's public filings do include revelations that should trouble Galton shareholders and potential investors. The description of Liska's biometric fingerprinting process sounds remarkably similar to the language used by Galton when describing its licensed technology. As we discovered, there is good reason for that. In September 2004, Liska announced a "one-year, US$5 Million technology licensing agreement with European Launch Pad SA (ELP) of Geneva, Switzerland," an entity which (according to Liska) was associated with Galton. Under that licensing agreement, Liska agreed to provide ELP "the right to use and market our proprietary fingerprint biometric services within the United Arab Emirates," in exchange for agreed upon payments.
So, it would seem, Liska is the source of the license upon which Galton has based its business and the promoters have premised their recommendations. There is, however, one fundamental problem. Liska terminated the agreement for non-performance on February 14, 2005 after ELP defaulted on the first payment. Liska then advised ELP and Galton to cease using, promoting or marketing Liska's technology.
According to Liska, neither ELP nor Galton have acknowledged the termination.
How do these developments affect Galton? As Liska explained in its Form 10-K for the year ended December 31, 2004, it appeared that Galton "relies heavily on Liska's proprietary technology, operating under a sub-license agreement with ELP. Said sub-license agreement became null and void upon the termination date of the ELP license agreement."
Liska's Form 10-K also discussed Galton's unsolicited takeover bid. Liska stated that it was notified of the bid on January 15, 2005 but was unable to determine whether Galton made necessary filings with the SEC prior to announcing its takeover plans. In any event, Liska's Board of Directors determined that the offer was not in the best interest of Liska's shareholders. There is no indication that Galton attempted to move forward with its plan to capture Liska.
Did Galton have any other products or services to offer, absent the Liska license? On February 2, 2005, the Company claimed that such products were indeed in the pipeline. Liska stated that it was in the process of developing and patenting "some key components to knit together missing elements of its integrated solution for Biometric driven security devices in multiple sectors," including a first (software-based) prototype of a biometrics-based authentication device, that will allow more secure logins for many applications but will be specifically targeted at the banking sector initially in Switzerland." We have found no subsequent disclosure detailing those products or the status of any patent applications.
Although the Liska license had been terminated on February 14, 2005, and the new suite of products had yet to be unveiled, Galton continued to lay claim to a place in the biometrics industry. On February 17, 2005, Galton disseminated a press release stating that "TTS ZURICH ISSUES" had issued a third party recommendation on Galton with "a complete analysis of where we stand today on the development of our business plan. We look forward to updating our shareholders in the very near future."
As best we can determine, shareholders still are awaiting that update.
TTS Zurich, which received $17,500 for generating the report, offered virtually the same pitch as the later spam e-mails promoting the Company – with one notable difference. TTS ZURICH set a twelve month price target for Galton of $5.10 a share, and predicted a "potential 12 month upside of 264%" - 300% less than the recent, even more enthusiastic, e-mail promotion.
Employing an approach that the e-mails would mimic, TTS Zurich devoted scant attention to details of Galton's business and instead focused on the potential of the biometrics industry. It even listed a handful of potential competitors - established companies with substantial existing revenues like RSA Security Inc. and Identix – ignoring the fact that Galton cannot truly compete with these businesses unless it has a well-financed operation and marketable products. And, although the report did not cite a single revenue producing product or service within the Galton portfolio, it projected that the Company would enjoy net profits $5 million on sales of 27 million by 2007.
Is Galton likely to meet those goals? Without public reports and published audited financial statements investors are left dancing in the dark.
Better they should sit this one out.
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