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  • stockmanphil stockmanphil May 23, 2008 9:18 AM Flag

    Our Top Pair Trade – IVVI and BIEL

    The following is a summary of our top pair trade - Short Ivivi Technologies (IVVI) and Long BioElectronics Corp (BIEL) - They are in the same space and we believe one is going up and the other is going down.


    Product

    The products of the two companies have some similarities, but there are some significant differences. The products of both companies are based on electromagnetic technology, which has been used to treat a variety of conditions relating to post surgical pain and soft tissue injuries. Both companies are attempting to market their various versions of this technology into the market.

    BioElectronics version of this technology is a wafer thin, drug-free patch that is designed to be worn directly against the skin. The patch is typically applied in conjunction with various types of bandages. The patches are very lightweight and are typically applied to the site of injury or surgery in conjunction with bandages. For plastic surgery and general surgery related usage the patch is typically applied on top of sterile dressings with additional bandages placed on top of the patch in order to ensure it remains in place. For general injuries and bruises the patch is typically applied directly over the injury site and secured with elastic bandages. The product is specifically designed to allow the wearer to go about normal daily life while wearing the product. BioElectronics Corp. believes this portable design philosophy is a significant advantage as it believes the product design is much more compatible with a mass-market and retail target markets.

    Ivivi Technology has taken a different approach in its product direction. The company's products are mainly targeted at long-term acute care hospitals and skilled nursing facilities. The main product, which is called SoftPulse, is comprised of coils, which provide the actual therapy to the site of injury, and a generation system, which is a separate unit connected to the coils with wires. The SoftPulse product weighs 7 pounds. Because of the separate coil and generator design this product is not portable and is thus not designed to be used by a patient as he or she goes about normal daily activities. The Roma (3) device utilizes a disk shaped signal generator that is approximately 9 inches in diameter and weighs approximately 2 pounds. The company also produces the Torino product line which is battery-powered and weighs approximately 4 ounces.

    Ivivi, however, has announced several products which will invoke a more portable technology and are specifically designed to be worn during normal daily activities. The company indicates plans to file for over-the-counter certification of this product with the FDA by December 2008.

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    • We believe it is possible for BioElectronics Corporation to be near profitability on approximately $ 4 million to $ 5 million of revenue for 2008 considering its high gross margins, its distribution based marketing model, its very limited operating expenses and its reasonable salaries for its personnel.

      Investing in Ivivi versus BioElectronics Corporation – One is a Short and the Other a Long

      We can certainly understand why Ivivi shares are trading near their 52-week low considering the questionable profitability of the Allergan deal, questionable growth in direct sales, and an expense structure that appears at a minimum to be rich and possibly overly excessive - Not mention a crew of over paid executive who continue to take money out of the company even though they are failing in the mission to deliver for the shareholder.

      We believe significant upside potential exists for BioElectronics Corp. shares as it does appear a revenue ramp is occurring at a time when expenses are relatively stable. When we consider the press release today announcing that BIEL is now at break even, the fact the Allergan deal is at risk of going south in a hurry, in our opinion, the bloated expense structure of IVVI and the probability that IVVI is still more than two years away from profitability - in addition to the fact the stock already trades at an sky high multiple on revs and there are no earnings - we believe an excellent pair trade is short IVVI - which is 50% over valued in our opinion and long BIEL, which seems to be at or near profitability and a potential 4 or 5 bagger over the coming months.

    • Valuation

      With approximately 10.4 million shares outstanding as of the end of the last reporting period and a $2.52 stock price, Ivivi's market capitalization is approximately $26 million. The stock trades near the 52-week low. Shares trade at a very high 16 times trailing 12 month revenues – (this is an approximation as we have used the December quarter revenues as a proxy for the March 2007 quarter revenues which were unavailable). It is clear to us that many investors are counting on a steep revenue ramp for the company over the coming periods in order to justify valuation. Even if one were to assume 100% growth for the company in 2008, which we believe is highly unlikely, shares would still be trading at eight times projected 2008. We would consider such a valuation to be extremely rich considering the state of the small-cap market.

      Considering the shares are trading near the 52-week low, we believe investors are likely disappointed in the results that have been achieved. We believe it is likely that investors are disappointed in year over year direct sales growth. Additionally, year over year nine month period revenues from rentals is falling. We would be very concerned about this if we were shareholders as this business is the company’s cash cow. It is also likely that investors are finding it difficult to understand the near term or long term profitability of the Allergan relationship. If we were to perform a more thorough analysis of the direction of the company going forward basis we would certainly want to interview management to discuss what appears to be excessive operating expenses.

      There are approximately 117 million shares outstanding when all options and warrants are factored in for BioElectronics representing a market capitalization of approximately $4.1 million. If BioElectronics Corporation is able to meet its revenue plan of approximately $ 4.3 million to $ 5.4 million for 2008 with a resulting near breakeven on an earnings per share basis, shares with likely to appreciate significantly. We believe a company in the medical device base that is experiencing rapid growth and is operating at or above break even should trade for at least four to six times revenues, which would represent a market capitalization of between $ 12 million and $ 16 million, representing an approximate share price for BIEL of approximately $0.20.

    • Balance Sheets

      There is a significant contrast in the balance sheets between the two companies. As of the end of the most recently reported quarter, Ivivi had $8.3 million in cash, $9.3 million in current assets, $10.5 million in total assets, current liabilities of $1.1 million and total liabilities of $1.5 million

      BioElectronics Corp. as of the end of the most recently reported quarter had very limited cash, total current assets of approximately $400,000, total assets of $429,000, current liabilities of $1.8 million, which includes a note payable of approximately $459,000.

      Both companies have significant accumulated deficits with Ivivi at approximately $29 million and BioElectronics at approximately $8.4 million.

      Growth and Breakeven Points

      Ivivi is growing its revenues, but much of the revenue growth is due to its licensing agreement with Allergan. Considering the pricing of the product being marketed by Allergan’s sales force under this agreement, we would certainly question the potential for success of this relationship. Excluding this one customer, growth in revenue was 21% for the nine month period ending December 31, 2007. Direct sales at Ivivi during the December quarter were actually down year-over-year, but were up on a nine-month period to nine-month period basis as were rentals. We believe the revenue growth dynamic at Ivivi warrants some additional analysis in order to draw adequate conclusions.

      The sales to Allergan are highly unprofitable and result in a negative gross margin for the company. This will likely make it difficult for Ivivi to turn a profit over the near term, especially considering its high cost structure. For example, sales and marketing expenses appear to be out of control with $433,000 spent during the most recently reported quarter to generate only $302,000 in sales, exclusive of the Allergan relationship. Additionally, general administrative expenses at $1.4 million for the three-month period and $3.4 million for the nine-month period seem excessively high. We believe the combination of factors - direct sales, which seemed to have some issue or problem, a licensing agreement that seems to be highly unprofitable over at least the short run, significantly high R&D, sales and marketing, G&A expenses all seem to be issues that are likely to delay profitability. Relative to this issue we would want to discuss the actual working dynamics of the Allergan agreement in order to come to rational conclusions as to the overall profitability of this agreement.

      We believe careful analysis of the financials supports an argument that BioElectronics is likely to become profitable before Ivivi. BioElectronics Corp. produced approximately $600,000 of revenue for full-year 2007 and approximately $120,000 of revenue for the first quarter of 2008. Growth at BioElectronics seems to be accelerating significantly due to European and Korean distributor efforts, as witnessed by the substantial sales in April. Additionally, it appears that a Canadian rollout is imminent, for which the company has already received orders. We are estimating the company is likely to produce close to $400,000 during the months of May and June. Management’s revenue plan is to produce in excess of $3 million, which considering the annualized Q1 operating expenses of approximately $2 million, likely places BioElectronics at or near breakeven on a full year 2008 basis.

    • Financials

      The financials between the two companies are vastly different. Ivivi produces more revenues, but has a high cost structure and thus also produces substantial losses. BioElectronics has a lower revenue base, a significantly lower cost structure and therefore while it also produces losses, the losses are substantially lower than those produced by Ivivi.

      For the nine months ending December 31, 2007 and Ivivi produced approximately $1.1 million of revenue up from $813,000 for the same period during the prior year. Of the $1.1 million produced in the nine months ending December 31, 2007 a significant portion was generated from licensing sales and fees, most of which is the result of an agreement with Allergan. Noteworthy are the company's high research and development costs which were $510,000 in the quarter ending December 31, with more than $1.5 million spent on R&D during the last nine months of 2007. General and administrative costs are also significant with $1.4 million being spent for the December quarter and more than $3.4 million spent in the last nine months of 2007.

      Ivivi has a rather significant rental income stream which generates significant gross margins and separate revenue streams from licensing and direct sales. We believe most investor would view this revenue stream from rentals very positively due to the high gross margins and the recurring nature. These same investors are likely to be concerned, however, that the revenues were down meaningfully on a nine month basis.

      For the quarter ending December 31, 2007, Ivivi generated losses of approximately $2.1 million. The loss for the nine month period ending December 31 was $5.3 million.

      BioElectronics Corp. has a smaller revenue stream, but a lower cost structure. During 2007 company generated $603,000 with a 75% gross margin. General and administrative expenses were $342,000, research and development $46,000, and sales and marketing expenses $101,000. The loss for full year 2007 was $1.9 million. During the first quarter of 2008 BioElectronics Corp. generated $120,000 in revenues with an approximate 61% gross margin. The loss for the first quarter of 2008 was $418,000. Sales in April were $181,000 and the forecast for May is xxx.

 
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