At least, that’s the way it’s supposed to work.  However, since the onset of the global financial crisis, the micro-cap public market has not been working that way at all.  Since 2008, there has been a waterfall of companies dropping from NASDAQ to the OTCBB and in turn, from the OTCBB to the OTC.  Average share prices have dropped and price per share volatility has increased.  There are dramatically less market makers than three years ago and virtually no clearing firms.  Market confidence is very low and attracting the interest of potential new shareholders is a tall task.

Just prior to the onset of the global financial crisis, NewMarket raised $7 million in 2007 to fund a strategic growth plan.  In 2008, the investor that funded the $7 million went into redemption (See Today’s Lion Hearted Market).  NewMarket spent most of 2008 and 2009 dealing with collateral issues resulting from the demise of the $7 million investor and trying to unwind the investment.  The original $7 million investor was finally retired by the end of 2009 and replaced by two new investors.  The transaction required a reverse split of the Company stock.  Unfortunately, the post-reverse price per share did not stick and a year later the Company was facing a second reverse split.  The second one did not work any better than the first and the Company is not currently of the mind that three times could be a charm.

The symbiotic relationship is broken marketwide with few exceptions.  Access to investment to fund an ongoing growth strategy through the symbiotic shareholder relation of years past is not likely to start working again any time soon.  In order to maintain a high growth objective and fund a high growth strategy, NewMarket is regrouping and reinventing.  The basics of the reinvention have been reviewed in previous blog entries and in an October 26th public disclosure.

The public disclosure discusses a possible change of control event and emphasizes the value of the subsidiary foreign operations.  The possible change of control is anticipated as part of transaction that would bring to NewMarket a game changing operation – a new business direction.  The value of the subsidiaries is emphasized as NewMarket believes a game changing operation could garner strategic growth capital through the sale of one or more of the existing subsidiary operations.

NewMarket has explored a number of transactions that could result in a change of control and a new business direction.  New business directions that could come to be include business intelligence, financial services, and mobile application development.

A number of conversations are also ongoing with various parties in regard to the possible sale of one or more of the subsidiary operations.  NewMarket is working toward timing a near simultaneous subsidiary operation sale with a transaction leading to a new business direction.

Nothing is for sure and no transaction is yet developed far enough to warrant a public announcement or disclosure.

The next blog entries will talk more about the leading new business direction prospects and how each new direction might fit with the existing subsidiary operations.

The blog post previous to this one, Greatness Is A Road Leading Towards The Unknown, is a good refresher on NewMarket’s current status and ongoing efforts.  For anyone new to NewMarket, there are only seventeen blog entries in total so far and all are a worthwhile read. The blog entry on November 16^th, Get To Know The Subs and the following seven entries are dedicated to providing a detailed overview of the Company’s operations.

NewMarket is supposed to be a high growth operation.  Sales have grown from about $1 million in annual sales to more than $100 million over the course of the last ten years. Growth has been achieved through a combination of acquisition and organic expansion.  Both require investment. Even just sustaining operations requires outside financial services to manage the periodic ups and downs of cash flow.  From 2002, when the NewMarket high growth business strategy was implemented through 2007, the Company had reasonable access to investment and commercial banking resources.  During that period of time the company reported award-winning growth being named as one of the fastest growing high-tech companies in North America by Deloitte over five consecutive years.

Then the global financial crisis hit in 2008.  NewMarket’s access to investment and commercial banking financial services has been more challenging than in years prior.  See the November 4^thblog entry, Today’s Lionhearted Market, for a review of the OTC capital markets since the end of 2007.

The current thinking at NewMarket in reaction to a poor capital market, some strong operating subsidiaries and an ongoing high growth objective might be summarized in two bullets:

1. Divide and conquer and,

2. Smaller is better.

As stated in NewMarket’s October 26^th public disclosure, the Company is seeking opportunities to sell its operating subsidiaries.  This disclosure is consistent with the ‘thinking’ summarized above. Smaller investments have less risk as the investor has less to lose.  Multiple smaller investments may be easier to come by in the current financial markets, than one single large investment.  A small investment in each of the subsidiaries could sustain a high growth objective for each subsidiary.  It’s too early to say what independent investments in each of the subsidiaries might look like structure wise.  That will depend on the preferences of the yet unknown new investors.

Finding new investors in an adverse market is a tall task, let alone negotiating a structure to attract new investment while allowing ongoing future benefit potential for existing investors and shareholders.  The next few blogs will discuss the strategies being explored to divide and conquer in order to win multiple new growth investments and maintain future benefit potential for existing investors and shareholders.

The beginning of the otherwise ending OTC era is marked by The Penny Stock Reform Act of 1990 at which time the OTCBB was launched as a pilot to improve issuer transparency and, in turn, the integrity of the OTC market.   The history of the era is captured in the chart of OTCBB historical performance.  Market liquidity peaked in 2000 and was strong from 2003 through 2007.  However, the increasing daily share volume as a percentage of dollar volume since 2000 is an indication of declining average share prices and signs of trouble.  The dramatic loss of market makers and the reduced number of daily positions since 2007 is the final chapter for the OTC era started in 1990.

Companies such as NewMarket that have previously entered into financing arrangements based on OTC market performance of yesteryear, not only don’t have reliable access to capital in the current market, but additionally face performance issues with those financing arrangements entered into before the OTC market went dramatically south (See ‘Outdated Investments – Hope on the Horizon’).

The current road toward capital formation for early stage, small and medium, high growth enterprises is unknown and wrought with legacy issues.  The fourth NewBlog post was titled Lion Hearted Market and it began –

“Engaging a growth strategy into today’s market requires a lionhearted spirit, if not complete disregard for daunting odds.   NewMarket’s reinvention may seem to some an impossible feat.  The Company sallies forth in sober recognition of the severe grade of the uphill battle ahead.” 

Today’s post serves as a progress update on the Company’s endeavor to reinvent itself – which was officially and publicly disclosed on October 26^th this year.  In that disclosure NewMarket CEO Bruce Noller stated,

“I believe that the strongest ingredient within the foundation of NewMarket is its foreign subsidiaries. Whether as a whole or in separate parts, the potential value of the subsidiaries has yet to be fully realized.”

The last seven NewBlog posts have been dedicated to providing detail on all the operating subsidiaries.

The October 26^th disclosure went on to state –

“The Company is currently in discussions with several potential strategic investors. The possible investment transactions under consideration include supporting a continuation and expansion of the Company’s current business model focused on systems integration services in foreign emerging markets, and alternatively, seeking the sale of the Company’s subsidiaries operating in these foreign markets.”

A final data point important to today’s update comes from the just previous NewBlog entry, 7 of 7 – North American Ops and Motivation For Reinvention:

“The North American operations suffered an unexpected, sudden and dramatic drop in sales this year reported in the Company’s second quarter financial statement for 2011.  The impact to the overall Company resulting from the drop in North American sales was recorded in a ‘Going Concern’ statement included in the second quarter report.  The cash flow generated by North America operations has historically funded corporate management expenses and costs related to being a public company. “

A ‘going concern’ statement is generally an indication that a company needs to raise capital to sustain operations.  However, in NewMarket’s case, even though the practice has been for North American operations to fund corporate management and the expenses of being public, NewMarket still has other solid performing operations outside the United States and the option of using funds from its foreign operations to fund corporate management and the expenses of being public instead of raising capital.  On the other hand, taking funds from the foreign subsidiaries is not simple due to foreign laws, among other complications.  Of even more concern, it detracts from the value and the growth potential of the foreign subsidiaries.

NewMarket clearly has some hard choices.  The public capital formation markets don’t make it easy for NewMarket to access new investment and taking funds from the subsidiaries detracts from “the potential value of the subsidiaries … yet to be fully realized.”

Today is the 22^nd of December and NewMarket has not announced either a strategic investment or a letter of intent to sell any of the subsidiary operations.  The Company has also not announced any change in its plans to continue discussions regarding a strategic investment or the sale of subsidiary operations.  If you speak with management, they will tell you both efforts are continuing.  The October 26^th disclosure indicated a target date of year-end to take first steps in a new direction, but of course mentioned that no guarantees could be issued.  Clearly, the market challenges are requiring more time for first steps than management and shareholders alike would prefer.

In summary, the OTC market whereNewMarketis listed, in its current condition, is not helpingNewMarket’s strategic fundraising efforts.  It arguably might even be considered a liability.  Without fundraising, the North American operation issues and corresponding corporate management and public expense shortfall is potentially detracting from the value of the subsidiary operations.   So what now?

The next few blog entries will be dedicated to exploring fundraising strategy alternatives to the Company’s past OTC public stock leveraged financing transactions and alternative business strategies that might circumvent the current North American operations issue and possibly even find new opportunities from the resolution of issues.

NewMarket continues forward into the unknown and optimistic that Charles de Gaulle is right.

Today is the 7^th blog entry since the ‘Get To Know The Subs’ series and it is about the 7^th NewMarket operation headquartered in Dallas, Texas.  The North American operation headquartered in Dallas is technically not a subsidiary.  The operation is not contained within a separate corporate structure, as are the other six operations.  The North American operation initiated in 2002 with an asset purchase from a private technology services company.   The management of the private company came with the asset purchase and became the senior management team atNewMarket.  That management team has been augmented since 2002 through further acquisitions and hiring and remains today in various key roles.

Since 2002, the North American operation has been a value added reseller of brand name technologies to include Microsoft, Cisco and Sun.  The ‘value add’ includes installation, custom programming and maintenance services.  The range of large and small corporate clients crosses a number of industries and has included Fortune 500 companies such as AMR , Maersk and CSX.   Expertise from the North American operations has from time to time been deployed to augment services provided throughNewMarket’s foreign operating subsidiaries.

Counter to the general economic conditions in North America since the onset of global financial crisis, NewMarket’s North American operations have otherwise been strong compared to previous years – until recently.  The North American operations suffered an unexpected, sudden and dramatic drop in sales this year reported in the Company’s second quarter financial statement for 2011.  The impact to the overall Company resulting from the drop in North American sales was recorded in a ‘Going Concern’ statement included in the second quarter report.  The cash flow generated byNorth America operations has historically funded corporate management expenses and costs related to being a public company.   The global financial crisis appears to have caught up toNewMarket with the recent drop in North American sales playing a central role in the Company’s drive to reinvent itself.

This blog entry concludes the series started with ‘Get To Know The Subs.’  If you have not already, review the eight, in total, entries chronicling the subsidiary operations to include the North American operation highlighted in today’s entry. NewMarkethas six solid operating subsidiaries outside of North American and one ailing operation inNorth America.  The one troubled operation is a key one since it is supposed to carry the overhead burden for the overall Company.  Stay tuned to the ongoing NewBlog entries to see howNewMarketpursues its reinvention to leverage the value of the solid operations in an effort to overcome the set back inNorth America.

As one of the top 20 importers and exporters in the world, Singapore is a highly competitive, ‘developed’ economy.   Singapore has a AAA credit rating from all three major credit rating agencies.

Singapore became an independent nation in 1965 after a long history as a British trading post and naval base.  English remains the official language in Singapore.   Singapore has long practiced ‘free-trade’ and the economy has enjoyed decades of growth.  The business environment has evolved over the course of Infotel’s nearly 30 years and Infotel has evolved along with the local business environment changes.

Infotel has historically grown by excelling as a local sales and support organization for major brand name telecommunication companies from all over the world.  Over the years, Infotel has continually expanded and refined the telecommunication product lines its represents and supports.  In more recent years, after a long period of regional economic growth, the major brand name companies have increased their local presence and reduced Infotel’s margins.   Infotel is accordingly beginning its next era of growth by expanding its reach into less economically developed regions in Southeast Asia where the major brand names are less represented and margin opportunities are better.  Infotel is also bringing focus to its relatively unique aviation industry expertise acquired through operational experience and exporting that expertise globally.

Infotel is another NewMarket example of the “yet unrealized value of the Company’s operating subsidiaries,” and impetus driving NewMarket’s reinvention.

Dalian, the geographic location, is a major city and seaport on the Yellow Sea.  Dalian is the southernmost city of Northeast China and China’s northernmost warm water port. Dalian has a rich history and diverse culture having been occupied over the past two centuries by Britain, Japan and Russia.

Before proceeding too much further, if you haven’t already, you should read the WALL-E entry to understand where and how each of the three Chinese operating subsidiaries fits in the NewMarket organization.  This entry today will just be about the Nubao operation itself.

Nubao was acquired in December of 2009 from China Radio Technology Co., Ltd (CRT). Nubao was a start-up subsidiary with little operating activity or history prior to the acquisition.  The value of the acquisition was the experience inherent in the operation coming from CRT.  CRT was attracted to the opportunity to work with NewMarket to develop a more global opportunity for CRT by providing services to Nubao.

The use of wireless intelligent devices is growing by leaps and bounds.  While NewMarket does not expect to compete in the iPad, iPod or iPhone market, let alone the Kindle and Nook market, NewMarket does believe a compelling opportunity exists within the ‘custom’ handheld wireless intelligent device market.   Frito-Lay truck drivers carry custom tablets to manage delivery inventories and schedules.  Flight attendants process credit cards on custom point of sale devices for drink and food orders.  Anywhere you look today you are likely to see the use of a wireless intelligent device: rental car agencies; restaurants; ski resort lift lines; express delivery drivers and classrooms – to name but a very few.  The custom handheld wireless intelligent device market is a global growth opportunity and Nubao provides a cost competitive and capable foothold into the market.

Specifically, Nubao designs and manufactures a wide range of custom wireless products specified by customers, with the company’s primary product focus on wireless communication terminals (GSM, GSM/GPRS modules, GPS modules, GPS trackers, and personal navigation devices).  Nubao provides its customers with industrial design (ID), mechanical design (MD), hardware design (HW), software design (SW), manufacturing, test and evaluation (T&E) and quality assurance (QA) services covering the full range of wireless communication solutions for intelligent terminals.

While the customer wireless intelligent device market is a growing one, it is not always well known.  Mass consumer devices like the ones coming from Apple shout their latest innovations from the mountaintops in hopes that the echoes will send consumers racing to the Apple store.  Custom innovations are intended to provide a competitive edge and are not as likely to be shouted from mountaintops so as to keep the innovation as proprietary as possible.

NewMarket’s Chinese operations produced about $45 million in consolidated revenue in 2009.  As mentioned above the consolidated revenue in 2010 was approximately $78 million.  In the annual report for the Chinese subsidiary, the growth in revenue is attributed to Nubao and the third Chinese operating subsidiary (featured in the next NewBlog entry).  While the specific nature of the custom wireless intelligent device solutions is not publicized, primarily at the request of the customers, the 2010 revenue growth in China would indicate Nubao is enjoying some sales traction.

Copyright Disney-Pixar

Sounds Like WALL-E, the adorable animated robot that saves humanity, but its spelled Huali when it refers to the first of three NewMarket operating subsidiaries in China  (WALL-E was probably made in China).  Huali is NewMarket’s first venture in China.  It started initially as a collaborative business venture with a local Chinese company called Huali Group, LTD. and in 2006 the collaboration was formalized into a subsidiary operation of NewMarket.  The organization of the operating subsidiary is complicated.  The ‘picutre-is-worth-1000-words’ approach is likely the best way to explain the ultimate organizational location of the Huali operating subsidiary, but first let’s talk about what Hauli does to earn money.

Huali is headquartered in the City of Ningbo, China, located just south of Shanghai on the opposite side of the Hangzhou Bay.  Huali fits into the NewMarket family of systems integration subsidiaries with the majority of its sales generated from the resale of major brand name information technology products. This is not to say that Huali lacks services capability.  In fact, NewMarket considers Huali’s technical service capacity to be excellent.  Huali’s sales today are predominantly generated domestically within China.  While services and products are frequently sold separately in U.S. systems integration contracts, the custom in China is for services to be packaged within the product sale.  Systems integrators generally enjoy higher margins on services than  with the resale of information technology products.  Accordingly, while Huali is one of NewMarket’s largest sales generating subsidiaries, it is consequently one of NewMarket’s lower margin generating subsidiaries.  The NewMarket plan for Huali is to expand Huali sales outside of China so that Hauli’s service capacity can be engaged in higher margin service opportunities.  NewMarket has experimented with a few marketing campaigns to expand Huali sales outside of China, but has not yet found the right approach to establish sustainable traction.  The company is currently exploring opportunities to sell services internationally through an established Indian-based technology outsourcing firm.

While Huali’s sales today are primarily generated through the resale of information technology products, the established brand name reseller relationships within China are relatively impressive.  Huali is a value-added reseller of IT products including notebook and desktop computers, printers, servers and networking equipment from a number of global brand partners including Dell, HP, IBM, Cisco, Sony, Epson, Canon and Sanyo.  The company is also an authorized reseller of operating systems, databases, middleware and application software from Microsoft, Red Hat, Oracle, Sybase, IBM, BEA, and Veritas.

Now for the organizational complexity – It might help to first review an early NewBlog entry titled CCTR – A Gone Awry Reminder Close To Finding Its Way.  NewMarket’s operating subsidiaries in China are organized under an independently listed public holding company called China Crescent Enterprises, Inc.  The NewBlog entry above will provide the background on how this organization complexity came to be.  The China Crescent annual report is also worth reviewing for even more detailed information on the organizational complexity and the nature of Huali’s operations.    Within the annual report you will find the picture below.

CLICK ON IMAGE TO ENLARGE

NewMarket is the majority shareholder of China Crescent.  China Crescent formed CLPTEC (Pronounced ‘Clip-Tech’, named in reference to the China Clipper Flying Boat) to serve as its Chinese registered company.  CLPTEC in turn is the holding company for three Chinese operating subsidiaries.  The official name of what has been referred to here as ‘Huali’ is actually Clipper-Hauli, Ltd.  NewMarket’s original collaboration partner, The Huali Group, Ltd. remains today as a 24% partner of Clipper-Hauli.

In the picture above you see two additional operating subsidiaries.  The next two blog entries will provide insight into each of the two additional operating subs.

In NewMarket’s Annual Report, you can learn that RKM accounted for approximately 5% of NewMarket’s overall $118 million in 2010 sales.  That means, RKM sales in 2010 were close to $6 million.

In the NewMarket Annual Report you can also learn RKM was originally acquired in 2004.  RKM was one of NewMarket’s earliest acquisitions following NewMarket’s move toward systems integration services in 2002.

While RKM’s location in Venezuela might be considered by some as a liability, keep in mind they are a reseller and integrator for Microsoft in Venezuela, which means Microsoft is investing in developing the Venezuelan market.  Microsoft investment is not a bad leading indicator of opportunity to follow.  RKM’s award winning relationship with Microsoft is not only a valuable branding asset in Venezuela, but throughout all Latin America.

RKM is another example of what NewMarket considers the “yet unrealized value of the Company’s operating subsidiaries.”  RKM, like UniOne, demonstrates how NewMarket has acquired a systems integration operation and enhanced the value of that subsidiary post acquisition.  And again, while the acquisition and subsequent enhancement might be expected to have an accretive impact to the value of NewMarket’s common stock, the price per share performance has demonstrated the opposite.  RKM further demonstrates why NewMarket has set out in an effort to see the value of the subsidiaries recognized in a different manner.

The next entry will turn to NewMarket’s operations in Asia.

This blog entry about NewMarket’s operations in Brazil is the first “Get to Know the Subs” follow-up.  As NewMarket continues to develop a reinvention plan based on the “yet unrealized value of the Company’s operating subsidiaries,” the current NewBlog entries are dedicated to providing more insight into each of the operating subsidiaries.

NewMarket’s wholly owned subsidiary operation in Brazil is called UniOne.  A website is available in English for UniOne.  The website includes information on UniOne services and customers.

UniOne is a leading certified reseller and integrator in Brazil for Oracle.  UniOne has been regularly recognized by Oracle for its exceptional project performance.  One such project includes an Oracle project integrated by UniOne for a Brazilian airline.   UniOne has over 450 clients that include: DHL, Embraer, Wal-Mart, L’Oreal and Melitta.

NewMarket’s Annual Report on Form 10-K, indicates UniOne accounted for approximately 15% of the Company’s overall $118 million in 2010 sales.  In other words, UniOne itself did over $17 million in sales.  The NewMarket Annual Report also indicates UniOne enjoyed approximately 7% sales growth in 2010 compared to 2009.  In the Annual Report, you can also learn that NewMarket acquired UniOne in 2006 for a total purchase price of $6.5 million.  At the time of the original purchase agreement in 2006, UniOne had annual revenue of about $10 million.  By the end of 2010, sales from UniOne have grown by about 70%.

UniOne is a prime example of what NewMarket considers the “yet unrealized value of the Company’s operating subsidiaries.”  UniOne is just one example of where a systems integration operation has been acquired and the value of that subsidiary has been enhanced.  While the acquisition and subsequent enhancement might be expected to have an accretive impact to the value of NewMarket’s common stock, the price per share performance has demonstrated the opposite.  Accordingly, the Company has set out in an effort to see the value of the subsidiaries recognized in a different manner – but first, let’s get to know the subs.

The next entry will share more information on NewMarket’s operation in Venezuela – RKM.