Airtech International Group Corp. (OTCBB: AIRG) seems to be relying upon NewBridge Capital, Inc. (Pink Sheets NBRG) for financial salvation. That could ultimately present a problem. NewBridge financial statements at least those that we could find seem to be more smoke than substance. Can accounting legerdemain relieve Airtechs monetary woes?
Building NewBridgesComplicated transactions do not necessarily translate into success or profitability. If they did, NewBridge and its affiliates would be riding high. As we discovered, the individuals who run NewBridge have extensive experience with small public companies, inter-company transactions, common control and complex accounting practices. Unfortunately, the companies in question, including NewBridge and BioSecure, have one other thing in common they dont seem to make money.
NewBridge and BioSecure have other, significant similarities. Fred G. Luke, the President, Chief Executive Officer, and a director of BioSecure, is also the Chairman and President of NewBridge. Jon L. Lawver is a director and corporate secretary of both companies. An individual named Leonard J. Roman is Chief Financial Officer of NewBridge.
NewBridge became public by virtue of a reverse-merger in June 1999. Thats when NuVen Capital Limited Partnership, a company owned and controlled by Luke and Lawver, acquired control of a public company called NRG Incorporated. NuVen soon merged NRG into a Nevada corporation and changed its name to NewBridge. As a public company, NewBridge said it planned to invest in and acquire businesses.
Investors will have a difficult time finding current information about the financial condition of NewBridge. NewBridge shares trade on the Pink Sheets, at around 2 cents a share when they trade at all. The Company last filed a financial report with the Securities and Exchange Commission on May 22, 2001. That report, for the quarter ended March 31, 2001, hardly suggested that NewBridge was in a position to fund BioSecure or AirSecure certainly not with cash.
At first blush, the NewBridge numbers appear substantial. But what do they really mean? While New Bridge reported current assets of $3.29 million at the end of March 2001, the Company had just $183,565 in cash. The balance consisted of values attributed to various receivables from affiliates ($2.7 million) and marketable securities ($246,227). The Companys assets also included such items as equity-method investments ($829,094) and investments, held for sale ($1.39 million). Revenues consisted of $1,621,530 in fee income from affiliates. Exactly what were all those investments, fees and receivables from affiliates? Were they merely bookkeeping items, or could they be converted into roughly that amount of cash?
Ya Gotta Have HartConsider the case of Hart Industries, Inc. Hart (now H-Entertainment) is a public company whose shares traded on the Nasdaq Small Cap market until they were delisted in 1993. Hart then moved to the Over-the-Counter Bulletin Board (OTCBB: HENI), where it now trades at about 6 cents a share.
Until March 9, 2001, Harts day-to-day business was managed by NewBridge, Luke, and other consultants. In fact, Luke was the Chairman and President of Hart Industries until December 28, 2000 and Lawver served as its Chief Financial Officer.
According to the NewBridge Form 10Q, NewBridge received a fee of $1 million in connection with the acquisition of Hart by Holoworld Café. Who owned Hart prior to the Holoworld transaction? According to Harts Form 10 K for the year ended December 31, 1999, 43.3% of the Hart common shares were owned by NuVen Advisors Limited Partnership, which, in turn, was owned 93% by Luke and 7 % by Lawver. Fred G. Luke and his father, Fred Graves Luke, each owned an additional 9.6% of Hart. At the time of the Holoworld reverse-merger, Luke was listed as the largest shareholder of Hart.
$1 million sounds like a significant fee, but what value did NewBridge actually receive? The largest part of the fee consisted of $730,000 in notes receivable that were assigned by Hart to NewBridge. Hart also agreed to forgive an unspecified sum of money that was owed to it by NewBridge. Finally, NewBridge agreed to assume $31,000 of liabilities payable by Hart.
What was the nature of those notes, and who was obligated to pay them? When were the payments due? How much did NewBridge owe to Hart? The NewBridge Form 10-Q did not address those issues. Investors reading the Form 10-Q might assume that the $730,000 was easily collectible, but was it?
Harts Form 10-K for the year ended December 31, 2000 afforded some valuable insight. Hart originally received notes receivable totaling $1,030,000 in connection with stock options that it granted to a group of consultants in December 2000. The notes, or at least most of them, were then assigned by Hart to NewBridge in payment of the fee.
Who were the option holders who executed those notes? A familiar cast. In October 2000, Hart had issued options to a group of consultants; Luke, Lukes father, and Lawver, received options for 300,000 shares, 300,000 shares and 280,000 shares respectively. In December 2000, the options were exercised, the promissory notes were signed, and Hart filed a Form S-8 registering the option shares. That meant the option holders could sell their shares immediately, without paying any cash to exercise the options.
It seems then that the fee received by NewBridge consisted of promises by Luke, Lawver, and perhaps others, to pay for their Hart options in the future. Hart merely transferred that obligation to NewBridge - which, for a time at least, was under common control. As a result, NewBridge now booked the notes as a fee, while Hart took the position that the notes had been fully collected in March 2001.
In the end, NewBridge booked the value of this accounting maneuver as an $823,000 fee. Should investors expect NewBridge to vigorously pursue collection of these notes? As best we can determine, NewBridge has not indicated whether Luke, Lawver or any of the other consultants have made any payments.
One last word on the Hart-NewBridge connection. On March 7, 2001, Hart entered separate Advisory Agreements with both NewBridge and Luke. Luke and NewBridge each agreed to provide virtually identical services, for which Luke would receive $1500 a month, and NewBridge would be paid $3500 a month, both for two year terms. Luke executed the agreements for both Hart and NewBridge. His signatures were witnessed in both cases by Lawver.
Was Luke planning to perform any advisory services on his own that he could not render through NewBridge? If not, should the entire fee have gone directly to NewBridge, where it might benefit that Company and its shareholders? It is unclear whether any of these fees have been paid by Hart, or its successor, H-Entertainment, Inc.
In any event, Luke and Lawver submitted their resignations from Hart on March 7, 2001 the same day they executed the Advisory Agreements.
Something Borrowed, Something Nu, Lots of Creative Accounting TooIt is common to think of an asset as something having tangible, positive value. Consequently, the mere fact that NewBridge was reporting almost $6 million in assets might suggest that the Company owned valuable property or had cash or valuable securities in hand. But some assets, even if they appear on balance sheets, cannot substitute for cash when it comes time to pay bills, or fund a new business like AirSecure.
How did New Bridge generate the other assets and revenues recognized in its March 2001 Form 10-Q? Consider these few examples:
1. Net, netNewBridge recognized a $560,000 referral fee that it received in consideration for introducing a potential merger partner to NetHoldings.com (now called Global Axcess Corp.). That fee didnt involve cash either it was paid in 438,000 shares of NetHoldings stock that was not due to be delivered to NewBridge until the fourth quarter of 2001. By that time, however, the value of that stock was considerably less. Between October 1, 2001 and March 2002, shares of Global Axcess have traded at prices ranging from 4 cents to 23 cents. That would make those shares worth somewhere between $17,520 and $100,740 far less than the $560,000 fee booked by NewBridge.
What was the relationship between NetHoldings and NewBridge? Jon Lawver was NetHoldings secretary and Leonard Roman was its Chief Financial Officer. Both men were also directors of NetHoldings. The Chairman and President of NetHoldings was an individual named Steve Mortensen. Mortensens name popped up again recently, when he signed a September 30, 2001 Form 10-Q as President of Yes Clothing (now BioSecure). By December 2001, Mortensens signature had disappeared and Luke was back signing public filings for BioSecure. Talk about tangled webs.
The NewBridge 10-Q for the March 2001 quarter did not list each of the receivables from affiliates that comprised a purported $2.7 million in assets. If the Hart numbers are instructive, however, NewBridge seems unlikely to collect anything approximating that sum.
2. Doing EquityAssets reported by NewBridge included equity method investments of $829,094. What did that really mean? Was this a value that, if necessary, could be converted to cash?
An example: New Bridge owned about 50% of BioSecure (then called Yes). During the year 2000, Yes purportedly realized a $971,000 gain by settling outstanding IRS claims. NewBridge claimed its share of that gain recognizing equity income from Yes of $438,000. In reality, however, while Yes may have been saved from making a tax payment, the IRS settlement did nothing to actually swell the NewBridge coffers.
3. Going to MarketNewBridge owned 39,600 share of Hart stock some of which had been given to the Company by an unidentified officer in partial repayment of a loan. Who was the officer, and why did NewBridge decline to identify him? The Company characterized these shares as a marketable security worth $200,000. Were the shares marketable at the time? Had they been registered or were they eligible for sale as Rule 144 stock? Did NewBridge ever sell the stock? The Company did not say, but it could make a significant difference. Shares of Hart (which changed its name to H-Entertainment) were selling for $5 in March 2001. Now they trade at just a few pennies.
4. Nu HorizonsAnother $1.39 million worth of assets consisted of investments held for sale. This included 19.2 million preferred shares of NuOasis Entertainment, Inc. (Pink Sheets: NUOA), another microcap company owned and controlled by Luke and Lawver. NewBridge originally valued the NuOasis stock at $8 million, apparently based upon the original purchase price for those shares. But the NuOasis stock had not been purchased for cash. Instead, they had been acquired in 1993 by NuVen Advisors, yet another Luke-Lawver controlled entity, in exchange for other securities.
NewBridge did not say what those other securities consisted of, but it claimed that their value had been established by independent legal and valuation opinions. NewBridge does not say who provided that appraisal. Despite those independent legal and valuation opinions, NuOasis, in its own earlier public filings, acknowledged the incomplete trading history of the securities that had been exchanged.
NuVen Advisors subsequently transferred the NuOasis stock to NewBridge, which clung to those earlier valuations.
Although NewBridge had the right to convert the preferred shares into NuOasis common stock, it is unclear whether conversion ever would have been practical considering the depressed market price of NuOasis shares in March 2001. On March 31, 2001, NuOasis was priced at approximately 1 cent per share, and there was little indication of a market for the millions of shares that NewBridge would have received upon conversion. That conversion right was set to expire on December 31, 2001, suggesting that the value of this asset was indeed diminishing.
Nevertheless, the New Bridge March 31, 2001 Form 10-Q, recorded investments, held for sale worth $1.39 million presumably consisting principally of the NuOasis investment. Did that valuation reflect the realistic worth of those securities? In order to realize that sum, NewBridge would likely have had to convert the preferred stock into more than 100 million common shares. Then the Company would have to have found a market for that huge block of shares a daunting task considering the relatively low volume for NuOasis shares.
These stock swaps and debt transfers make for complicated financial reports but do they actually enhance a companys value to shareholders? Through bookkeeping entries, one companys obligation becomes anothers asset. At the end of the day, however, what substance is there for public shareholders?
Such inter-company transactions, involving affiliated persons and entities, appear to be standard operating procedure for New Bridge. With that in mind, we will take a brief look at NuOasis, and its affiliate Oasis Resorts International, Inc., in our next installment of this series.
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