there she blows/ ann out, page-3

re: take profits while you can Every time Russeth releases a new 'fluff' announcement to the market a whole new generation of naive traders/small investors get sucked into this stock. Yesterday's announcement was designed to imply that QRS has a "close relationship" with the Aust federal govt, and that the Australian govt, following the recommendations of the Wheeler report, will be falling over itself to bulk order Rapiscan's QXR1000, and that QRS will generate $$$$$!!!!.

Here's the truth:
This is the second time, Russeth has made QXR1000 product launch announcement to the market. The first time was in the context of the full year results, but that didn't move the market (i.e., suck in gullible investors), so Russeth released the news again as an excuse to give the market the impression that 'something was happening' because of the Wheeler report.

The Wheeler report does highlight the need for better screening technology for checked baggage/air cargo, but the QXR1000 is designed to screen carry-on baggage. So there is nothing in the Wheeler report that gaurantees that Rapiscan is about to sell QXR1000 units to Australian airports.

But even if Rapiscan does sell a large order of QXR1000 scanners to Australian airports as a result of the Wheeler report, QRS is not in line to receive any substantial revenue. New shareholders need to understand that QRS receives only around $10k on each Rapsican machine sold. So if the Australian govt purchased 30 QXR1000 machines -- an absolutely huge order by Australian standards -- QRS would receive licencing revenue of only $300k.

QRS's cost base is now about $8-9mill per annum, so in order for QRS just to break even, Rapiscan would need to sell some thing like 9000 QXR machines every year. If we assume there are around 5000 carry-on checkpoints in the world, for Rapiscan to shift 9000 units per year, Rapiscan would need every airport in the world to ignore all the other EDS manufacturers, and buy roughly 1.8 Rapiscan units per checkpoint (!), every year!

In fact Rapiscan will consider sales to be going extremely well if it sells 50 QXR1000 units per year world wide. In 2004 Rapiscan sold only 4 units of the QXR1000 predecessor. My guess is that the new product may lift sales to around 20 units per year (=200k for QRS). QRS is never going to generate more than a few hundred k per year from its deal with Rapiscan.

After yesterday's buying QRS has a market cap of around $40mill (including preference shares). In FY05, QRS generated sales revenue of only 600k. This FY the company looks set to generate a similar figure (the 2.8mill Aus Industry grant, obviously, is not sales revenue). And there is no information at present to suggest that FY07 will be any better. So punters buying at current prices are buying into a $40mill company with a cost base of around $8-9mill, but with long term revenue generating capacity of less than $1mill per year (excluding grant income).

QRS's IP, which the company currently values at cost ($32mill), will likely be reduced to zero following the implimentation of international accounting standards. So the asset base of this company is set to shrink by around $30mill this FY.