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Microcap & Penny Stocks : Tech Squared (TSQD)- Internet Commerce -- Ignore unavailable to you. Want to Upgrade?

To: M. Frank Greiffenstein who wrote (785)	7/21/1998 2:48:00 PM
From: David Browning	Read Replies (6) \| Respond to of 2752

Dear Doc Stone, As a caution, and as a small thank-you, I am addressing this to you in appreciation for your reasoned commentary on TSQD since I first became aware of this thread as part of making an investment in the company earlier this year. Here is a bit of history and a slightly contrary current view from a fellow investor. In early March, a long time friend and investment partner of mine showed me a private placement memorandum from Digital River. He was already substantially invested, and thought I might wish to have a look. The price for this tranche was $2 per share. I read the memo twice overnight and called him back immediately next morning to indicate interest. He invited me to dinner with Joel Ronning whom I found to be extremely bright, though straight-forward and unassuming. I will not quote him here in deference to the privacy of our conversation; suffice it to say that afterward I was ready to invest. Unfortunately, he was awash in subscribers for the placement: I was too late to the party. I understood the TSQD connection and did some analysis on this indirect investment approach pending the public offering for DRIV. I decided to give it a try and bought shares, small pieces, over two weeks. In the interim, I have kept in touch with my associate. He informs me that the institutional visits with the underwriters are beginning this week (the "dog and pony shows"); with the Aug 10 week the target for the IPO. I am now considering at least a partial sell. The impetus was the June 30 quarter P/L in the amended registration statement, and the reverse split which was surely occasioned by these disappointing results. When TSQD had an option on 4.8 million DRIV shares, I had concluded that it took approximately 3 to 3.5 shares of TSQD to "control" one share of DRIV, based on fully diluting the presently outstanding 11.0 million TSQD shares with some 4.5 million in outstanding, low-cost options/warrants, etc. in favor of Ronning and his officers/advisers. (This latter number keeps moving around in the tables in their filings, but I felt it was at least this high.) I used this approach because, if Ronning was ever going to dividend the DRIV shares to the TSQD holders, he would make sure he and all of this associates had fully exercised their TSQD options before any such distribution. (Frankly, I doubt that he will do this as long as the TSQD shares maintain what he considers a proper relationship to DRIV through time.) Following this conservative discipline, then, with the reverse split, my "control" ratio increases to 4.5 to 5.25. More importantly, what is the reason for the reverse split? If they are now targeting a price of $12 for the IPO, before the split they only saw it bringing $8 per share. I expect the underwriters did not want a single digit offering, hence the reverse split decision. Why the low implicit valuation? Look at the June 30 quarter. Revenues were up 53%, a good clip, but significantly less than the 20% per month growth they had been enjoying. Gross profit, the amount left after giving the software clients their agreed share, remained below 17% in the June quarter, continuing well under the 20% target holdback, with no relief in sight. Finally, operating expenses were up 236%, well beyond this investor's subtantial expectations for increase, and no end is forecast to this trend. Pre-tax losses actually exceeded revenues once again, even as sales increased. The bottom line is that break-even is much further down the road than I had estimated using the more favorable rates of sales growth, marginal return, and expense creation that had been suggested by prior published results. DRIV will probably be a spectacularly successful company over time, but anyone who does the math based on the June numbers will see a longer road ahead than previously projected. This caused the haircut in the form of the reverse split which dilutes further the indirect investment of those presently resorting to TSQD to participate in this opportunity. This, in turn, suggests that prices of $5 and upward for TSQD are generous, implying valuations, at least in my model, in the low to mid 20's for DRIV. This may prove unsustainable given the company's current operating trends. On the other hand, in this market. . . . .?? Thanks again for your meaningful comments on this thread. David Browning