pierpont

5/12/05

Stamp of approval for some high tech

To an octogenarian such as Pierpont, it is deeply reassuring each December to see the traditional natural phenomena of early summer repeating themselves.

The weather is getting warmer, the days are getting longer, the jacaranda are shedding their purple blooms, Dasher and Prancer are reappearing in the Myer store windows and IC2 Global Ltd is making a share issue.

IC2 share issues have become an even more regular seasonal event than the migration of the Southern Ocean whales. In December of 2003, IC2 issued 126 million shares at 1.2 ¢. In December 2004, it issued 162.5 million at 0.8 ¢. This year, it's issuing 550 million at 0.225 ¢.

Alert readers will immediately recognise two trends here. The number of shares issued by IC2 gets larger every year and the price gets lower.

There are a couple of other trends, too. Every time IC2 makes an issue, its business is about to improve, but somehow it doesn't quite.

At present, IC2 has three main businesses. The first is Ngage Pty Ltd, which is going to install a digital-screen network in Westfield shopping malls in Australia and New Zealand.

IC2 has lent $900,000 to Ngage, but Ngage is taking some time to engage. The only mall where the advertising screens have been installed is Chatswood.

The prospectus for the latest share issue notes: "Ngage has not to date generated significant revenues from this business. Ngage Pty Ltd is currently cash-flow negative and is incurring losses. There can beno assurance that revenue growth will be established or sustainable, or that the company will operate profitably in the future."

IC2's directors are trying to negotiate repayment of the loan, but given their description of Ngage's financial situation, that could take a while.

The second business used to be called Project 25 but is now designated APCO25.

Project 25 is a mobile-phone service that is supposed to work in the outback even when the networks were down, making it ideal for the military, ambulance and security services.

IC2's annual report says the company is pursuing several material opportunities with US federal agencies for the sale of Project 25 products and is confident of increasing sales in 2005-06.

All jolly hopeful. The only trouble is that IC2 (in its previous incarnation as Westel) has been confident about flogging Project 25 to the Yanks since 2002 and nothing much has happened yet.

It's true that sales are increasing, but they're increasing from a very low base. Sales of actual goods by IC2 last year rose from $280,000 to $460,000, which is the right trend but still exceedingly small numbers.

The third business is IC2's 19.5 per cent holding in Astrovision Australia, which is licensed to launch a satellite into geostationary orbit. The proposed satellite will (hopefully) be able to transmit live images from space.

IC2's chairman, Rodger Johnston, is hoping to have it up and beaming in time for the Beijing Olympics. He also reckons that if he can place it so that the footprint reaches Hawaii, he could sell the satellite's services to the US military. In between watching the pole vault at the Olympics, the troops could see whether Kim Il Jong was launching a nuclear strike today.

The small problem here is that Astrovision can't afford a rocket, so the high-tech satellite is still earthbound.

IC2's finances are pretty earthbound, too. Operating cash flow was negative by $1.7 million last year and the accounting loss was $3.1 million. In fact, IC2/Westel has never made a profit and its losses since 2000 total an impressive $58 million. By June 30, cash was down to $85,000.

The auditors, Grant Thornton, have been wondering out loud whether IC2 is a going concern. They say the company's ability to continue as a going concern depends upon the successful increase in the sales of Project 25, the successful completion of the current equity raising and the conversion of $200,000 outstanding in a convertible note.

The good news for Grant Thornton is that IC2 looks certain to complete the capital raising because it has been underwritten by RM Capital. The bad news for shareholders is that it will be massively diluted.

IC2 has three technologies, but not enough cash to develop any of them. The only way it can raise cash is by issuing more and more shares at lower and lower prices.

The latest issue is for 550 million shares at 0.225 ¢ plus 550 million options at 0.01 ¢ which will raise, net of costs, just under $1.2 million. Subscribers to each share will also get a free attaching option.

The chances of these options being converted is remote because the exercise price is 2 ¢. That's a truly astronomical price in the case of IC2. The shares last traded at the giddy height of 2 ¢ in June of 2001. Given the dilution that will now occur in the stock, the chances of their ever trading at 2 ¢ before the expiry date of 2009 are equally astronomical.

IC2 already has 913 million bits of paper on issue. The 550 million shares will boot the total to nearly 1.5 billion. In other words, a brave punter could buy one-third of this company for a million dollars.

Pierpont's not that brave - or not about IC2, anyway. Anyhow, if the historical trend continues, next December Pierpont expects IC2 to issue a billion shares at 0.1 ¢.

And if Pierpont extrapolates even further, one of these days the share price will descend even further. Pierpont has long toyed with the fantasy of buying a million shares with a postage stamp, and IC2 looks his best chance.

Readers of last week's column may remember that Pierpont was wondering how phone bills are collected in lawless Somalia. The answer is that everyone uses prepaid phone cards, which are sold every 20 or 30 metres along the streets by children and other peddlers. Pierpont's thanks to Chris Davis of Matrix Metals for this vital piece of data.