Letter to Shareholders August 5, 2010

Subject: "Sex, Lies and PIPES"

Dear Shareholders of Greenfield Program Companies:

Please forgive the tongue and cheek subject line.  It was intended to capture your attention.  I really want all Greenfield Program company shareholders to read what is written here. In fact, I think the information in this letter is valuable to any investor participating, or even thinking about participating, in the over-the-counter market.  As the subject line implies, I promise to include here in my letter a discussion of sex, lies and private investments in public equity (PIPEs).

I am a big fan of publicly listing start-up and early stage businesses on the over-the-counter market.  I believe the over-the-counter public market offers small investors and small business entrepreneurs an ideal venue for profitable collaboration.  A start-up investment that exceeds an entrepreneur’s credit card limit is hard to find.  A meaningful return opportunity on less than a $10,000 investment, let alone less than a $1,000 investment, is equally hard to find.  Together within the over-the-counter venue, small investors and small business entrepreneurs can be of mutual benefit to each other. 

Something You Haven’t Heard Before and May Not Want to Hear

NewMarket's goal for the Greenfield Program is to foster the best available over-the-counter collaboration for small investors and small business entrepreneurs.  It is my personal goal for the Greenfield Program to stimulate a small investor and small business entrepreneur collaborative movement that reaches far beyond the capacity of any one program.  It is my hope that the Greenfield Program will inspire the initiation of multiple similar programs.  I believe the over-the-counter market can be the world’s best opportunity for consistent small business finance and small investor returns.  However, the full potential of the over-the-counter market to provide the optimal collaborative venue will require a substantial resetting of expectations for both investors and entrepreneurs.

Narrowing Down The OTC And OTCBB Topic

The over-the-counter market is a complicated topic that can include the off-exchange trading of a variety of financial instruments such as stocks, bonds, commodities and derivatives.  This letter intends to address only the trading of stocks quoted on the Over-the-Counter Bulletin Board (OTCBB) and the Over-the-Counter Pink Sheets (OTC). 

Even a discussion of the OTCBB and the OTC can be complicated and confusing.  Both the OTCBB and the OTC have changed dramatically over the last ten years and both continue to evolve rapidly.  The OTCBB was only approved by the Securities and Exchange Commission (SEC) for permanent operation in 1997.  At that time, the OTCBB included approximately 6,412 quoted securities with an average price per share of approximately $2.47.  In 2009, the OTCBB included only an approximate 3,535 quoted securities with an approximate average price per share of $0.04.
 

The OTC is even more complicated than the OTCBB because it includes a greater variety of quoted securities with various quotation standards.  In addition to quoting the stocks of domestic companies, OTC securities include directly quoted foreign companies as well as foreign companies quoted as American Depository Receipts (ADRs).  The quotation standards for OTC quoted securities range from requiring minimum price per share standards and the reporting of audited financials, to maintaining no minimum price per share requirement and no financial reporting requirement.

In my experience working within the OTCBB and the OTC markets since 2002, the various standards and complexities of the two quotation venues are not widely understood by shareholders or the managers of the quoted companies.  It’s a large amount of information not easy to sort through or assimilate. 

To further focus the subject matter of this letter, and in so doing attempt to reduce the amount of relative information necessary to digest, I will concentrate my discussion on OTCBB and OTC companies that would be considered start-ups or early stage operations.  The OTC and  OTCBB include large, multinational corporations today that have substantially different investment considerations than start-ups and early stage operations.  Fannie Mae and Freddie Mac, for instance, are currently listed on the OTCBB and Blockbuster is now listed on the OTC.  The OTC’s new premiere OTCQX tier includes numerous major foreign companies such as Adidas and Air France-KLM.  The circumstances of Fannie Mae and Adidas as quoted on the OTCBB and OTC respectively, are an interesting topic in themselves, but in a substantially different category than the circumstances surrounding a start-up or early stage company.

Why Go Public On The OTC Or OTCBB In The First Place?

I believe the first relevant question to ask as an investor or the manager of an early stage company is why an early stage company should go public at all?  There is only one answer -- to gain access to early stage financing.  The second question might be why go public on the OTC or OTCBB market?  That answer lies within the high pre-IPO expenses, price per share requirements and total market cap, among other metrics, associated with alternatively listing on a national exchange, in addition to the requirement to have already established some semblance of an operating history. OTC and OTCBB quoted companies incur minimal expenses associated with going public and, once public, obtain immediate access through the public equity financing market to early stage investment capital. 

Some may argue that better early stage financing is available than the investment that is available to OTC and OTCBB quoted companies.  I in fact, even advise entrepreneurs that if they can find early stage investment outside the OTC and OTCBB market, to take it, and avoid the complexities of the public market altogether. However, I continue to find no shortage of entrepreneurs in the market for $100,000 to $3,000,000 in early stage investment still pursuing quotation on the OTC and OTCBB markets.  My conclusion is that the $100,000 to $3,000,000 investment market outside the OTC and OTCBB public capital market is sparse.

What A PIPE Looks Like in the OTC and OTCBB Market

Regardless of your perspective on the OTC or OTCBB as the best market for early stage financing, OTC and OTCBB-quoted early stage companies are likely somewhere in the process of managing a capital raise.  The primary class of investment capital available to early stage OTC and OTCBB companies comes from the PIPE market.  The PIPE market can be as complicated and convoluted as the OTC and OTCBB market itself.  PIPE investment structures can take many forms.  The best source for basic to advanced information on PIPEs, to include market statistics on the growth of the PIPE market, is an organization called Deal Flow Media (www.dealflowmedia.com).

The basic structure of the PIPE investment market category available to early stage companies quoted on the OTC and OTCBB ordinarily comes in the form of a convertible security.  In general, an OTC or OTCBB company issues to a PIPE investor a debt or preferred stock instrument in exchange for cash.  The OTC or OTCBB quoted company then typically repays the cash investment by issuing stock or ‘converting’ the debt or preferred stock to common stock.  The PIPE investor usually has a protected premium built into the ‘conversion’ terms.  That protected premium takes the form of a floating discount.  In other words, the dollar value of the PIPE investment converts into stock at a fixed discount of a variable share price.  If the share price increases after the investment, then fewer common shares may be required to pay back both the investment and investment premium than would be required if the share price stays the same or decreases.

If you are like I was in 2002 when I first came to the OTC and OTCBB markets, you might need this convertible PIPE security concept explained just one more time.  If not, go ahead and skip to the next paragraph.  If you are still here, let’s follow the example of a $100,000 convertible PIPE investment.  Let’s say a PIPE investor provides $100,000 to an early stage company and requires a 20% protected premium.  The company issues the PIPE investor a $100,000 note convertible into common stock at a 20% discount of the common stock price per share.  In this example, let’s say the share price at the time of conversion is $0.10.  With the 20% discount, the $100,000 note value is converted into stock at a share price of $0.08.  So the total number of shares to be issued is calculated by dividing the $100,000 balance due by the $0.08 conversion price and issuing the PIPE investor 1,250,000 shares of common stock.

Liars and Cheaters to Watch Out For in the PIPE OTC and OTCBB Market

At this point in the discussion of convertible PIPE investments, some of you may be going through all the possible permutations in your head as to how such an investment can be abused.  What if the PIPE investor sells short and then submits the conversion request?  Such a short sale might permit an opportunity for the investor to sell short at a higher price and convert at a lower price.  The conversion price being lower than the short sale price could provide the PIPE investor an extra premium above and beyond the agreed upon protected premium.  However, what if the conversion processing time exceeds the time available to the investor for holding a short position open?  The investor’s broker is likely then to buy the investor in and cover the short position at the then current share price. Maybe you think the broker will look the other way and allow the investor to hold open a short position longer than the time allowed by regulation. But, what about the broker’s Regulation SHO short sale reporting requirements?  Maybe the PIPE investor is a hedge fund and the PIPE investor is loaning (as hedge funds do) its security interest in the company to a third party that is in turn selling short. 

Perhaps the abuse to be concerned about has nothing to do with the PIPE investor at all.  Maybe it’s the anonymous stock message board poster(s) that has already sold short and is now endeavoring to profit as much as possible by publishing disparaging remarks about the company’s management in order to damage shareholder confidence and drive down the share price.  The reduced share price then forces the issuance of the greatest number of shares possible to service the fully-disclosed convertible preferred stock or debt the anonymous poster learned about in the company’s public filings.  The idea that all the effort and money going into providing improved transparency through public reporting might be getting used against the company and its shareholders almost makes you wish the company might elect a non-reporting status. 

If it’s not the anonymous message board poster, perhaps it’s the foreign broker that has dual listed the company on the Berlin Stock Exchange and is now arbitraging the company’s stock by selling short at a higher price in Berlin and buying lower the next day in the United States to cover the Berlin short sale. 

Perhaps the PIPE investor, the anonymous poster and the Berlin arbitrager are all working together.  As absurd as it sounds, there might possibly be a grand conspiracy involving PIPE investors, market makers, paid message board shills and foreign brokers, or perhaps that’s all conjecture and just the stuff conspiracy theories are made of.  I think the truth is probably somewhere in between.  The important point here is that somewhere between potential abuse and full-on conspiracy theories lies the state of the market today.  All the layman can do is speculate as to who is up to what. 

Early stage companies are going public to get access to PIPE investments.  The funds the companies receive help them achieve business plan milestones that periodically shed optimism on the future prospects of the company as reflected by an increased share price.  OTC and OTCBB share prices can frequently fluctuate dramatically and when that fluctuation is a dramatic share price increase from $0.01 per share to $0.03 per share, small business investors have the opportunity to enjoy a substantial return on investment. 

Occasionally, the market is not so optimistic and the share price goes the other way.  Share price declines in my experience are frequently joined by a corresponding negative shareholder mood swing.  The depressed mood, I believe, can make us all susceptible to grand conspiracy speculation and vulnerable to the various short sale tactics orchestrated to make money on a decreasing share price.  A down share price and shareholder mood swing can perpetuate further share price decline as shareholders abandon hope that the company’s next prospective milestone objective just might trigger a future positive uptick. 

Can Dilution Be Avoided?

“Dilution, Dilution, Dilution!!!!” This is a common battle cry heard round an OTC or OTCBB company with a declining share price.  It rises from the message boards and can rally a virtual angry mob.  It is fueled by the initial shareholder mood swing triggered by the onset of a share price decline and in turn, becomes the fuel for further share price decline.  The dilution rhetoric starts with casting doubt on the capability of management and can cartwheel into hurling inflammatory accusations at management’s integrity.  It might start with comments as to how a better management team would not issue stock to raise money for an early stage business plan.  A better management team would prioritize the return on investment potential for retail investors and otherwise raise money for the business plan via a means that did not require public stock to be issued. The integrity accusations often begin as questions or allegedly rhetorical comments.  An honest management team would not issue stock to raise money.  Are we sure the management team is even raising money with the issue of stock?  Perhaps the management team is just issuing stock to themselves.

Here is the most important paragraph in this letter.  The bottom line; the key concept; the essential truth as it relates to the collaboration between small business investor and early stage OTC and OTCBB companies is that the quoted company is going to issue stock.  A small business investor CAN achieve a return on investment with an OTC and OTCBB company that issues stock.  Some of you may still be reeling from my statement that early stage OTC and OTCBB quoted companies are going to issue stock.  If you are, brace yourself. Here comes number two of the old one-two.  The amount of shares an OTC or OTCBB company issues is immaterial to the return on investment opportunity for the small business investor.

It’s Not Supply Vs. Demand; Its Demand Vs. Demand

I frequently voice my opinion that the fundamental financial performance of an OTC or OTCBB quoted company has little or no correlation with the company’s share price.  Remember, I am concentrating discussion here on start-ups and early stage companies that usually have investment opportunities based on speculation of a company’s future, not a company’s historical performance.  Nevertheless, it is hard to resist extending financial performance and share price correlation argument to include the Fannie Mae and Blockbuster type quotations. It’s also hard to resist pointing out that the foreign companies and ADRs are dual-quoted foreign exchange listings, and as such are substantially different over-the-counter securities all together.  As an aside, look for a separate letter coming in the future dedicated to my argument that the fundamental financial performance of OTC and OTCBB companies does not have share price correlation.  Today, let me otherwise direct attention to the economic principle of supply and demand when it comes to early stage OTC and OTCBB share price performance and let me bring your attention to an OTC and OTCBB stock trading anomaly in regard to the supply and demand principle.

“Everybody is selling!!!”  This is yet another common battle cry heard round OTC and OTCBB companies with a declining share price. A question I often ask shareholders that comment on such large volumes of selling is, “who is buying?”  There can be no sale without a corresponding purchase. 

Most investors that have been around the OTC and OTCBB for even just a few months have witnessed increased trading volume with a declining share price.  If we consider the economic law of supply and demand for a moment, and we assume that an increased supply of stock up for sale (what one might refer to as dilution) would lower a share price, then how do we explain the simultaneous increased sales (buying) volume?  If demand goes down or even stays the same, shouldn’t we expect the volume of stock sales to remain the same or even slow down? 

I suggest that something else is going on here.  The increased sales volume does not support the notion that increased volume of stock is causing the reduced share price.  Alternatively, consider for a moment that demand has changed, not increased or decreased, but just plain changed.  What might have been a demand for the stock to trade at a higher price has now been replaced with a demand for the stock to trade lower.  The change in the type of demand maintains a consistent or even increasing sales volume.  Such an increasing demand for lower price stock might be driven by a requirement to fill open short positions.  The OTC and OTCBB supply and demand anomaly is manifested by sales volumes that remain unchanged or even increase when share prices decline. 

We certainly are not witnessing a screaming sales volume of residential homes at depressed prices.  We are otherwise watching homeowners incrementally reducing sales prices over long periods of time as they do their best to sell, but not give away their home.
I submit the large trading volume and the decline in OTC and OTCBB share prices is more a function of demand vs. demand than supply vs. demand.  The demand for stock at a decreasing price overcomes the demand for stock at an increasing price.  The increased supply of stock may attract the demand for low price stock, but the increase in supply itself does not cause the price decrease.

Here is the second most important paragraph of this letter.  The primary objective of this letter is found here.  The key concept paragraph was the most important paragraph.  If you cannot accept that early stage OTC and OTCBB companies are going to issue stock, then nothing else in this letter matters.  If you are ready to accept that early stage OTC and OTCBB are going to issue stock, then you are ready for the second most important paragraph and the primary objective of this letter.  Small business, retail OTC and OTCBB investor return on investment opportunity requires a collaborative relationship between the company and the investor based on a mutual confidence and trust.  I know I essentially pointed out the collaborative relationship topic early on, but I imagine only now after the last several pages of discussion can you begin to fully understand the gravity of that relationship. 

Shareholders have to have confidence in management’s genuine intentions to build toward stated business plan objectives with skill, integrity and the kind of hard work that gets dirt under your fingernails.  Management has to have confidence in small business investors to understand the share price volatility that will result from the demand vs. demand over-the-counter environment and take responsibility for managing their own return on investment as milestone business plan objectives periodically trigger share price increases.

Letting Go of the Long-Term Return-On-Investment Strategy

If small business investors can get comfortable with the idea that OTC and OTCBB quoted companies are going to issue stock and then find management teams they trust and are willing to collaborate with in building a mutually beneficial relationship, then the remaining challenge is to know what to reasonably expect out of that relationship.  Understanding the demand vs. demand nature of the share price volatility is a step in the right direction.  Letting go of the long-term return on investment strategy is the next big step.

Publicly listed or not, statistically seventy percent of start-ups do not reach sustainability within the first three years.  Another interesting statistic I have come across indicates that most entrepreneurs do not achieve personal financial success until they work on their fifth start-up.  Start-up and early stage statistics vary from source to source, but all of them are relatively bleak in regard to the likelihood of long-term success.  Regardless of these bleak statistics, I still contend that start-up and early stage OTC and OTCBB companies can be a source of consistent and promising returns for small business investors.  Even though many of the early stage OTC and OTCBB operations may not sustain beyond three years, most of them will achieve multiple milestone successes along the way that can trigger multiple dramatic share price increases and corresponding return opportunities.

Resetting Return-On-Investment Expectations

Small business investors looking for those milestone return-on-investment opportunities need to have an idea of what to look for.  In my experience, shareholders often have too lofty an idea of the gains a share price might achieve.  I think you need look no further than the market statistics for the OTC and OTCBB.  Statistics for both are available from their respective websites.  The 14 year history chart provided at the onset of this letter is information I downloaded from the OTCBB website.  The average OTCBB security price per share of $0.04 is an important benchmark to remain aware of when anticipating the potential range an OTCBB security share price might trade within.  Below is additional information available from the OTCBB website that I believe a small investor should be familiar with when anticipating the price per share range of a particular security.

I make a practice of monitoring the trading activity of the top 100 most actively traded stocks by share volume on the OTC and OTCBB.  The information on the top 100 most actively traded stocks by share volume is readily available on the respective websites.  The most recent day I reviewed was Friday, July 31, 2010.  Interestingly, the cumulative dollar volume of the top 100 most actively traded stocks by share volume on both the OTC and the OTCBB was approximately $13.5 million each.  Annualized, that is roughly a $7 billion combined market for the 100 most actively traded OTC and OTCBB securities. The weighted average share price of the top 100 most actively traded OTCBB securities is just less than $0.01.  The weighted average share price of the top 100 most actively traded OTC securities is approximately $0.0026.

The reason I monitor the top 100 is because I find a high coincidence of aggressive, high growth oriented early stage business initiatives within the top 100.  These companies are frequently raising money and regularly communicating planed milestone objectives with periodic updates on the realization of planned milestones.  Many of you reading this email may likely find companies where you have made an investment to be quoted on the top 100.  Companies participating in the NewMarket Greenfield Partnership Program are frequently quoted in the top 100.  If a small investor is considering an investment in a top 100 security, then the top 100 price per share performance statistics are relevant in the consideration of anticipated price per share performance and return on investment potential.

Now it’s Time for Sex

If a tree falls in the woods, and no one is there to hear it, it may or may not make a noise.  Early stage companies raising PIPE investments inherently must build an audience for the PIPE investment structure to work.  A PIPE investor, as I explained earlier, ordinarily has a fixed premium built into their convertible investment.  The primary risk a PIPE investor faces is liquidity.  If the stock of the Company in which they invested is not trading adequately, then the PIPE investor will not be able to sell the common stock converted from preferred stock or debt.  Companies without a healthy trading volume may have difficulty attracting PIPE investment.  Without investment, an early stage company may not be able to execute on its business plan and in turn may not be very attractive to a small business investor.  OTC and OTCBB companies have to communicate their plans and milestone successes to the OTC and OTCBB stock buying market.  

Today, communications from the company frequently take the form of press releases.  When considering the press release process, small business investors should refresh their thinking on the current press release process and once again recheck their confidence in management. 

The press release process is different today than what it was ten years ago.  Press releases used to be a mechanism by which individuals and organizations  attempted to get “newsworthy” information into the media.  Frequently, the press release process was managed by a public relations firm that would draft the subject information in a manner designed to catch the attention of a reporter that might follow up and publish an article based on the press release.  Many press releases, however, never made it off the fax machine. 

With the worldwide expanse of the Internet and the pervasiveness of online media services today, virtually every press release gets at least some media distribution.  Public relations firms are not as prevalent anymore as multiple direct-use, affordable services exist for the publication of a press release on the Internet.  For minimal cost, just about anyone reading this letter could publish a press release tomorrow that would be available on the Internet. Obviously, some press services are more comprehensive than others and cost varies, however even those on very limited budgets can get a press release out.

Press releases are an affordable means for OTC and OTCBB companies to get updates out and build an audience of prospective small investors.  Today, every investor that researches a stock online searches on its ticker.  The majority of online financial sites have a news section, indexed by company ticker.  Press is distributed across all the financial research sites by a ticker.  While corporate websites, stock analysis sites, blogs, other online and social media sites may discuss a stock, today the only way to make sure your updates and news are seen is through the press release/financial site system.  It's the most affordable and effective way to get information out on your company.  Since there are about 10,000 OTC or OTCBB listed companies, each OTC and OTCBB company is competing for your attention and is accordingly behooved to create headlines with as much sex-appeal as possible to get you to pay attention to their company and what they are working on (I promised you I would fit ‘sex’ into this letter).  Notably, I have done my best  to capture your attention with my headline.  Press releases are meant to be used as a catalyst to drive you towards company filings, website(s), fact sheets, etc. to learn more about the company.

Not all of the top 100 most actively traded stocks are associated with genuine intentions to build an early stage company into one of the few that might grow beyond three years into a viable and sustainable business.  Again, regardless of good intentions, most of these early stage companies are not going to make it in the long-run.  However, if the management team is not at least aiming for long-term success, then the milestone return-on-investment opportunities may not be there for the small business investors either. 

Unfortunately, some of the OTC and OTCBB companies with sexy headlines need to be scrutinized for good intent.  Small investors have to recheck their confidence in the management team’s intentions and review all company information as I stated before.  This management team confidence check is perhaps an arbitrary judgment call, but in my opinion the most important consideration when deciding on an investment in an OTC or OTCBB quoted company.  Most early stage companies are not likely to have much in the way of assets or historical financial performance that an investor can soundly found an investment decision upon.  The investment decision will rely on the credibility of a business plan and the credibility and integrity of the management team.  Even a good business plan and an honest, credible management team cannot  guarantee a return on investment, but it is a good starting place.

A small investor and small business entrepreneur relationship founded on confidence and trust can foster a mutually beneficial collaborative opportunity.  As the business issues more stock, and it will, trust and confidence between the shareholders and management can improve the potential for the increasing share price demand to better compete with the decreasing share price demand.  OTC and OTCBB quoted companies are bound to have volatile share prices.  The companies we are discussing here are early on in their development and will experience periodic successes as well as setbacks.  With trust and confidence, the successes can stimulate periodic share price increases and the setback-triggered decreases can be mitigated.

The Greenfield Program Takes a Stand

Throughout the history of mankind we have relied on freedom fighters to rise from our ranks from time to time and fight political and military tyranny.  We have not yet defeated political and military tyranny worldwide, but the fight is well in hand.  To finish the fight once and for all, it is now time to bring forces up the economic flank to hold and advance the fight for liberty for all.  Until global poverty is in full retreat, life, liberty and the pursuit of happiness cannot be perpetually guaranteed for those that enjoy it today, nor sustained as a hope for those that only wish it for their children.

The small business economy is the largest segment of the overall global economy.  Small businesses produce most of the world’s gross domestic product (GDP) and provide most of the world’s employment.  The freedom fighters of today are the small business entrepreneurs ready to give blood, sweat and tears to expand the small business sector contributions to the global GDP and employment.  Those entrepreneurs only lack reliable access to early stage investment.  It’s hard to find in the United States, and it’s near impossible in the world’s developing economies.  The over-the-counter markets are a good place for us to start improving entrepreneurial access to early stage financing.

I will finish by reiterating the NewMarket goal for the Greenfield Program; to foster the best available over-the-counter collaboration for small investors and small business entrepreneurs.  A collaboration founded on trust and genuine intent.  The primary thrust of the Greenfield Program is to provide entrepreneurial access to early stage financing mainly within the world’s emerging markets.  It is my personal goal for the Greenfield Program to stimulate a small investor and small business entrepreneur collaborative movement that reaches far beyond the capacity of any one program.  It is my hope that the Greenfield Program will inspire the initiation of multiple similar programs. 

Yes, I am serious.

Philip Verges
Founder and Chairman
NewMarket Technology, Inc.

"SAFE HARBOR STATEMENT" UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This letter to shareholders contains forward-looking statements that involve risks and uncertainties. The statements in this release are forward-looking statements that are made pursuant to safe harbor provision of the Private Securities Litigation Reform Act of 1995. Actual results, events and performance could vary materially from those contemplated by these forward-looking statements. These statements involve known and unknown risks and uncertainties, which may cause NewMarket's actual results in future periods to differ materially from results expressed or implied by forward-looking statements. These risks and uncertainties include, among other things, product demand and market competition. You should independently investigate and fully understand all risks before making investment decisions.