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TMFBent (99.84)

When CEOs Cry

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December 08, 2006 – Comments (2)

One of my investing theorems is that CEOs who have time to complain when I write about their overpriced stock are probably worried about their overpriced stock, and not running the business. After all, if their business is great, what does it matter what I think? And if I'm really as big a ninny as they claim in their PR campaigns, why bother trying to refute me?

That's what we might be asking about our friends at Earth Biofuels, whom I wrote about here:

(http://www.f...06111023.htm)

CEO Dennis McLaughlin, the guy who was involved with penny-stock disasters like Blue Wireless and Ocean Resources, put up a long-winded rebuttal on the Earth site.

(http://www.earthbiofuels.com/communication.pdf)

Note that shortly after the original article, their IR guy contacted us and said there were all sorts of false and misleading statements in the original writeup, but when asked what those might be, he stopped responding. I'm guessing that's because they figured out that my opinion of their business (summar: lousy and overpriced) doesn't qualify as a "false" statement, thanks to a little thing we've got in the U.S. called the first ammendment. (Of course, if there is any mistake in fact in there, I'll make an immediate correction upon seeing the contradictory evidence...)

Back to Earth's self-contradictory screed, which is pretty much like an extra-long version of the rebuttals I've seen from companies like GlobeTel, and other penny-stocks extraordinnaire. I find it pretty amusing, and it looks to me like a pretty good indication of desperation. My favorite part is where they tell you that earnings don't matter, cash flow does, and then have to fess up that their cash flow has been bad, and then change direction and say that there's more to a valuation than cash flow. (Tell it to the financiers out there, Mr. M.)

I'm sorry to see that Mr. McLaughlin didn't take the time to tell us more about his roles at Blue Wireless, Ocean resources, and the bankruptcy at Aurora Natural Gas, or Aurion Technologies (http://www.b.../story8.html)

I'm also sorry to see that he didn't talk more about Earth's great plans for profits. For example, did you know that Earth's Durant, OK plant is designed NOT to be automated? Why try and get more efficiency when you can collect tax credits! Collecting tax credits? Is THAT the business plan at Earth? According to what Earth's IR guy told the Durant Democrat, it is, at least in part

(http://www.d...ws/news8.txt)

Are tax incentives a growth industry? I doubt it, even with a Democratic congress. But, as I've pointed out here (http://www.fool.com/news/mft/2006/mft06112227.htm) Earth can't even break even on its product at the gross margin level without those incentives. What will it do when its margins are crushed by big players like ADM? Plead for more public money? This is exactly why I predict that 90% of the "alternative fuel" plays out there will burn investors big time.

Just remember -- there's billions of bucks worth of cheap financing available these days to people with ideas for businesses that can create cash flow. That's what all those private equity deals are about. Given that reality, why do you suppose these biofuel companies are all springing their shares onto the market these days? Could it be the smart money won't hand them wads of cash, but gullible equity investors will? And, of course, the supply of gullible equity investors can dry up pretty quickly when a stock tanks, which is why we see so much happy news from the entire alt-energy space...

But back to Earth: Things just keep on getting better! Remember the fuzzy market math on Earth and its parent holder, Apollo Resources? (http://finance.yahoo.com/q?s=AOOR.OB) Here's another brain tickler for you mathies out there. Apollo is currently valued by the market at a market cap of $37 million. Yet Apollo sold Earth (its subsidiary) a LNG business for $36 million worth of Earth Stock.

(http://biz.y...48.html?.v=1)

So, lemme get this straight. Apollo's a major holder of Earth, and it's got a biz worth $36 million, but the market thinks ALL of Apollo is only worth $37 million? And someone please explain to me why Apollo -- if it already owns this great LNG biz, feels the need to offload it onto one of its subsidiaries for a stock swap? Could it be because they think they're getting the better end of the trade?

Keep watching this story, folks. If we don't see Earth crash and burn, I'll take a bath in biowillie...

2 Comments – Post Your Own

#1) On December 11, 2006 at 10:57 PM, downwithpumpers (99.29) wrote:

Dennis may not have wanted to talk to you but he's been making some serious open market purchases.

http://finance.yahoo.com/q/it?s=EBOF.OB

I would not be at all surprised to see this one make a run to two bucks, or even higher.

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#2) On December 12, 2006 at 9:22 AM, TMFBent (99.84) wrote:

Me neither... But I don't think it means much. In fact, I'm pretty sure the primary reason the LNG outfit was shifted from Apollo to Earth was to be able to show a boost in revenues... Similar reasoning to having all these 51% stakes in bio-fuel joint ventures. Looks great when you report consolidated revenue for the whole shebang, even though you're only getting halvsies on the bottom line (if any).

I just checked what that LNG outfit is worth... A measly 2.3 million in revs last reported annual, with an operating loss of 1.1 million. And somehow that biz is worth $35 million in Earth stock? Deals like that could only come via a cozy, related-party transaction. As of the last 10Q for Apollo, it recorded about 2/3 of that value for the LNG biz as goodwill.

In the end, I suspect Dennis will put this one to sleep, as he did Aurora, the salvage outfit, etc.

I close with a love letter from Dennis's most recent 10QSB for Apollo...

"Recent operating results give rise to concerns about the Company’s ability to generate cash flow from operations sufficient to make scheduled debt payments as they become due. The Company has completed recent financings, described above, to help fund its working capital needs. As of September 30, 2006, the Company continued to seek other financing from private placements, convertible debt instruments and other acquisitions to expand its opportunities in the areas of oil and gas production, oil and gas transmission and biodiesel and LNG production and sales. The Company has implemented cost saving measures, primarily in its oil and gas operations, by implementing cost controls designed to reduce unnecessary expenditures and operate production activities within the current economic constraints with which the Company currently operates. The Company will take additional cost savings measures, if necessary, to enhance its liquidity position.

The Company’s need to raise additional equity or debt financing and the Company’s ability to generate cash flow from operations sufficient to make scheduled payments on its debts as they become due will depend on its future performance and the Company’s ability to successfully raise capital and implement business and growth strategies. The Company’s performance will also be affected by prevailing economic conditions. Many of these factors are beyond the Company’s control. If future cash flows and capital resources are insufficient to meet the Company’s debt obligations and commitments, the Company may be forced to reduce or delay activities and capital expenditures, obtain additional equity capital or restructure or refinance its debt. In the event that the Company is unable to do so, the Company may be left without sufficient liquidity and it may not be able to meet its debt service requirements. In such a case, this could result in a substantial portion of the Company’s indebtedness becoming immediately due and payable. As a result, the Company may not be able to continue operations due to liens, collateralized notes or other secured positions placed on the Company’s assets."

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