Monday, 10 September 2007

Hydralogic Systems to Remain On Howard Group Watch List

While we will not be providing ongoing commentary on Hydralogic (HLS – TSX V) Systems for the foreseeable future, we will keep the Company on our radar screen as we continue to feel that it has considerable long-term growth potential.

The Howard Group worked with HLS over the past year but growth has not been at the pace that was anticipated. In large part, capital constraints were at the root of the issue. The Company grew and expanded its reach in the U.S. market for its mosquito/insect repellant and protection systems and in Canada for its odour management technologies.

What we’ve always liked about the business model is the recurring aspect in that once HLS has its dispersal systems in place, high margin ongoing revenue is derived from the sale of its proprietary environmentally friendly chemicals.

In relation to its need for money, HLS very recently took a large step forward with the completion of a $1.6 million private placement with CCM Master Qualified Fund Ltd. (“CCM”), an investment fund managed by Coghill Capital Management, LLC of Chicago, Illinois. CCM has agreed to subscribe for another $2.5 million private placement pending shareholder approval. This approval is required as CCM already owns 19% (fully diluted) of HLS. The second tranche could take its ownership position to just over 40%.

In regards to growth rates, HLS reported revenues of just over $3.5 million for the first six months of this year compared to $2.6 million for the first half of 2006. Losses for the first six months were approximately $1.3 million.

When we first met with management in late Spring of last year, its expectation was that it could hit $14 million in sales in 2007, providing it had sufficient working capital. As the saying goes, “there’s the rub”.

Interestingly, U.S. based Cohen Independent Research has just released a report on HLS with the comment, “we recommend the purchase of HLS common stock at C$0.30 per share with a valuation target of C$4.44 for long-term, risk-averse investors”.

You can access the report from Cohen’s home page by clicking on the graphic, which is extremely detailed at 108 pages in length.

HLS’ experience with trying to drive its business while watching pennies is not a new situation to us and like most companies we take an active interest in, it always takes longer than expected to get the RPM’s up on the engine.

We are shareholders and will watch with interest over the next two to three quarters before deciding what to do with our position.