NXT Nutritionals (NXTH.OB) shareholders who trust the company’s sweet outlook for 2010 could wind up with a bitter taste in their mouths.
The company’s rosy forecast included plenty of hype about its SUSTA-brand sweetener but none of the actual financial projections that normally dominate official guidance. It also failed to mention a looming threat – massive dilution – that could soon hammer its generous share price.
Instead, NXTH predicted a banner year for the company.
“Over the last several years, we were in the development stage, planning and preparing to launch our products,” CEO Michael McCarthy stated in his recent update to company shareholders. “Today, we have built the infrastructure and positioned a great team of experts to take us to the next level.
“I believe this year is ‘our year,’” he concluded, “and that we will become a recognized force in the industry.”
NXTH’s latest financial statements paint a much bleaker picture, however. During the first nine months of 2009, NXTH’s sales actually plummeted by almost 60% — and its gross profits fell substantially – as the company fielded smaller orders from two of its major distributors, while offering generous discounts and higher “slotting fees” to those who continued to stock its products. The company wound up recording a $16.1 million loss for the third quarter alone, partly due to its weak operational performance but primarily caused by a massive charge for extinguishing old debt instruments and replacing them with new ones worth far more to its noteholders.
Even so, NXTH warned that it will likely need to raise additional capital – listing that goal as a top priority – in order to fund its operations going forward. Meanwhile, NXTH shareholders already face the prospect of enormous dilution whether the company follows through on its fundraising plans or not.
Notably, back in February of 2009, NXTH raised money from private investors who now hold warrants for huge blocks of company stock that can be purchased at an average price of just 50 cents a share. Based on the terms of that deal, experts say, those investors are free to sell their low-priced shares following a one-year wait – beginning next month – if they choose to do so.
The potential dilution would not necessarily end there, either. Following additional fundraising activities in late August, NXTH now has warrants for almost 22 million shares of stock outstanding and available for exercise by private investors at an average price of 50 cents a share. If exercised, those warrants would increase NXTH’s share count by a whopping 60% and dilute current shareholders accordingly.
So far, regulatory filings indicate, NXTH has yet to file the registration statements linked to the private placements carried out last summer. NXTH was supposed to finalize that paperwork by Oct. 26 – clearing the way for additional stock sales by the end of this month – but the filings have never appeared.
Instead, the day after that missed deadline, NXTH sent out a cheerful letter to its shareholders (very similar to this week’s corporate update) that carried no mention of the private placements at all. The stock responded with its most volatile action ever, peaking near $3.50 a share before going on to lose more than half of that value by the end of the day.
Despite bullish touts from penny stock promoters, NXTH has never fully recovered from that hit. The stock currently trades at $1.75 a share, following a 3.3% drop on Thursday.
NXTH staged its biggest comeback in early December, briefly jumping above $2.50 a share, after the company hired legendary basketball star Shaquille O’Neal to become an official spokesman. But that deal came at a high price – representing the prospect of yet additional dilution – for ordinary shareholders.
By the end of 2012, regulatory filings show, NXTH must give O’Neal 3 million shares of company stock in exchange for his publicity services. He was scheduled to receive the first 1 million shares back in November, filings show, and can start selling them at the beginning of February. At that point, he will be free to sell up to 20,000 NXTH shares a day (but no more than 100,000 shares a month) if he chooses to do so.
Clearly, NXTH could face some intense selling pressure – potentially crushing ordinary shareholders – if private investors like O’Neal start dumping their stock next month.
Nevertheless, stock promoters keep urging investors to snap up NXTH shares.
Charles Payne, a big-name commentator on Fox Business Network, has by now issued at least two bullish recommendations on NXTH with predictions that the stock could rocket to $5 a share. More recently, Jarret Wollstein – a newsletter writer who portrays himself as one of the best stock-pickers in the industry – has topped that call with forecasts that NXTH could soar toward $10 a share by the end of the year.
Interestingly, both Payne and Wollstein received payments for their stock coverage from the same obscure “media” firm. In Wollstein’s case, a buried disclaimer shows, that media firm paid for the coverage with money received from an NXTH shareholder “who may or will sell shares of the feature company at or about the time of this report.”
Meanwhile, Wollstein listed several reasons why ordinary investors should be snatching up NXTH shares instead. He claimed that NXTH employs a topnotch management team led by Pepsi alum Michael McCarthy, for example, even though Pepsi itself could find no record of McCarthy’s past appointment there. He also stated that NXTH boasts “fast-growing sales” that are “increasing on a daily basis,” although the company’s own financial reports have since shown otherwise.
In the end, Wollstein blamed any weakness in NXTH’s share price on short sellers – rather than poor fundamentals or looming dilution – and portrayed the stock as a real bargain that’s poised to become one of the biggest small-cap winners of the year.
“This profit-taking has created a spectacular opportunity – and probably the last one – to get in at today’s bargain-basement price,” Wollstein wrote on Nov. 11, even as the stock began another rapid slide. “That’s why I’m strongly urging investors to get into NXT Nutritionals now, while the price is still dirt cheap.”