Category — Whole Hog

Tell me where it hurts……..

On2 Technologies, Inc. Announces Restatement of Financial Statements

There’s no way to dress up this pig today. Nothing but depressing news for a Whole Hog investor.

• Fraud revealed via Audit “two sales accounts for which revenue had been recognized in the third quarter of 2007, had been falsified”, most of the revenue concerns being flushed rather than moved to a different quarter.
• An embarrassing slap across the face of the CEO “In addition, management has identified a material weakness in the Company’s control environment, specifically relating to Company’s tone at the top, as evidenced by the control tone and control consciousness of the Company’s chief executive officer”
• Revenues were down significantly from last quarter, from over 6 mil last quarter to just 4.5 in Q1.
• The most painful line item for me was the heavy loss for Q1.

The loss for all of 2007 was only $6,837,000. Ouch. Really want more details on that one.

Quite a feast eh!

Bottom line: Am I squealing now? Ready to push that sell button?

Nope. The Whole Hog call was made based on future revenue potential. I still see royalties from embedded chip applications as the real fuel for stock price appreciation. Its clear that we should not expect to see the real impact of those until later this year at the very earliest. The recent JAVA news was huge. That combined with the Silverlight/Move partnership means that ON2 truly has the potential to be Every Video, Everywhere.

Could things be very wrong at ON2? Yes. The accounting snafus really don’t reflect well on leadership.

Is Whole Hog investing a very stupid thing to do? Yes.

Did today’s ugliness materially change the reason for being so stupid? No.

It’s very easy to become deluded when you are in a Whole Hog position, however –

I will remain in the pigsty. Some times there are risks you just have to take.

Whole Hog Investing: Recklessly and foolishly placing all (or almost all) of your investment account in a single equity position.

Very interesting to see the 11% increase in short interest on my Whole Hog play (ON2 Technologies) this last reporting period.

This lends credence to a hopelessly outside the loop Whole Hog investor’s conjecture that the main reason we did not get the reverse split by the deadline was because of the short interest pile on.

What are the shorts to do now? How do they plan to cover that heavy load without causing a squeeze? While I’m sure they thought that the ON2 share price rose far too fast when matched up against current revenues, I do think that they were also attracted by the chance to capitalize on the reverse split. Here’s how ONT shareholders have faired since the Hedge Hogs went Hog Heavy on the short end:

Mighty successful Hedge Hogs. They sure were successful at driving down the price. But volume has dried up significantly and I wonder what negative catalyst they see that will enable them to get the high volume days that they will need to cover. This is the boom time of the year traditionally for ON2, and this year is shaping up as no exception to that rule with the CES show just around the corner. There’s imminent China Mobile news hanging in the air, as well as a possible VP8 deployment. I just don’t see a big chance for any real negatives to hit the stock in the coming weeks. (Of course, I’m just a no nothing Hog outsider). What would happen when some real positive news hits with all these short shares left to cover? Are the shorts just going to sit on this one for months? If revenues increase again this quarter, the current valuation is really not that extravagant.

All of this is pure conjecture however. Dealing with conjecture/speculation, and reigning in flights of fancy is a key factor to successful Whole Hog investing. Its a fine line you walk between solid analysis of the evidence at hand, and fantasy speculation that ignores negatives and overemphasizes any positive. When you go Whole Hog its very easy to fall into that Pollyanna trap.

So let’s add another well worn premise: Regarding the decision not to reverse split, the other conjecture that could lull a foolish Whole Hogger into fantasy land is the possibility of a buyout. (A key element to most Whole Hog plays has to be that its priced at a tempting big boy buyout price) Who are possible bargain shoppers? Adobe of course, plus Cisco because of their recent video emphasis. Nokia, naaa. I’ve always wondered why Microsoft never seemed to show an interest in ON2’s proprietary technology. Once the news came out that their VC-1 codec was only 2% Microsoft proprietary technology, it became even more puzzling. What would have fit their proprietary plans better than the VP codecs? I think the age of Microsoft has really ebbed now. The intensity to dominate that Bill Gates displayed over the years really seems to have dimmed significantly. I’m just not sensing buyout right now however. I think it was the Hedge Hog short threat that stopped the Board from triggering the R/S.

I’ve got my borrowed funds at the ready. I may sit out this week. I think there could be another effort to drive down the price before the CES show. We really seem to have run out of sellers at this price however. This stock took a severe pounding in the second half of the year and it really did not phase the institutional investors at all. Institutional share ownership really hasn’t dimmed.

Looking forward to an even higher percentage of my wealth to be wrapped up in a single company - boom or bust.

Monday looks like the deadline day for the ON2 board to opt for a reverse split. It sure looks like they are not going to pull the trigger. No RS to me is a possible short term negative, but it really doesn’t matter that much in respect to why I’m a Whole Hog here. Significant revenues will drive the stock price either way.

I am still hoping for the reverse split however, as it has played out extremely well for 2 of my Whole Hog plays. Both companies saw significant revenue increases post split. I think the split enhanced their ability to attract long term holders. Here’s one example:

Here’s a nice interview with Bill Joll, where he describes the low bit rate edge that VP6-S has over H.264, and the fact that ON2 has the chipset solution, no matter which HD codec is used.

 All of terrestrial television has to go to digital by 2009

I think Bill Joll lays that out pretty well in the interview below. This was a risky move, so I am tipping my hat to Joll.

Since I’ve got most of my net worth locked up in a video codec company, seems appropriate that I attempt to post an internet video.

Here’s a good interview with Bill Joll wherein he outlines the key addition to ON2 that is the final piece of their Any Video, Anywhere plan.

…but the Razr, which sells by far the largest volume for them is a single chip phone and that requires an embedded offering and that’s where the technologies and the capabilites that Hantro brings to the table helps us….

So you say you have a Whole Hog position in ON2 Technologies? Brilliant! I say.

So what exactly would make you change your mind on that? What would make you turn tail and run with what’s left of your hard earned cash?

Yeah, what exactly would make you squeal?

How about if your Whole Hog genius position had a chart that looks like this?

Holy Hot links! Talk about a free fall. Was that a squeal of surrender I heard? No???

You don’t give up yet?

How about some fundamental analysis from the renowned MSN Money Computer Swami:

Damn, ON2 rates a whole 1 (and they don’t use zero). The worst of Hollywood’s movie crap never rates that low.

But you know better, right Einstien? And you’re still still holding onto this pig in desperation?

OK, so let’s throw some scholastics from the Computer Swami at you. How about this?

ON2 is the High School Drop Out of the Amex based on those scores.

High Risk + Low Return = Say what? ONT is a Fundamental Flunky here so far.

You’re ready to click the SELL AT MARKET button now right? No??

OK so what about the short interest? Surely you’ll take the advice of those HedgeHog pros.

Everyone knows that they are the real professionals right?

• ONT short interest in January 1,694,107
• ONT short interest in November 16,192,091

It’s now TEN TIMES HIGHER!!

You have to sell now, the entire universe is telling you that you’re wrong!

Give it up already subliminal sissy, not only am I not selling - I’m smashing my piggy bank for pennies to buy more.

A few issues that would concern me are:

Capitalization - I made a mistake on an undercapitalized Hog that was bought out way too cheap because they were backed into a corner. ON2 is well covered on this issue. They are running cash flow positive already and have quite the piggy bank to tide them through till device royalties kick in.

Debt - A company with a lot of debt is a serious concern for me. ON2 has none.

Competition - This is always a huge concern with a technology company, and this is the issue I spent the most time reading up on. I still believe that ON2 provides the best all around product on the market, and it has several huge advantages over the main competitors, which are standards based. This is a risk, but so far I have only seen ON2’s competitive advantage increase on this issue.

So what would make me squeal?

If my sole reason for buying ONT changed. As long as I see a very high probability of increased revenues for ON2 Technologies, I will stay in the pig pen.

The price drop doesn’t worry me at all, it just gives me an odd craving for bacon.

Outstanding news for the Whole Hog position today.

CEO Bill Joll says:

“What this means for On2 and the market in general is that VP6 and VP7 based cross platform high-quality video will be available for a wide range of mobile, IPTV, and web video devices.”

A wide range of mobile devices means a wide range of device royalties. I’m gonna borrow and buy some more if we see sub $1 prices this week.

Yes I said borrow. Is that a smart thing to do? Of course not, it’s complete insanity.

RELATED STORIES:

ARM Gives Thumbs Up to ON2

Whole Hog Investing: Recklessly and foolishly placing all (or almost all) of your investment account in a single equity position.

Confession - I am currently in a Whole Hog position in ON2 Technologies (ONT).

Commencing finger wagging and mocking now. Go ahead and roll your eyes too if you wish.

Yes, it is very risky. Yes, it is very foolish. Yes, I will likely end up broke.

But - my research on this one, and my instinct, compels me to dive head first into the pig pen.

Let’s look at the chart.

Why the hell did I bring up that hideous chart?????????

Oh yeah, because the point is that the chart is irrelevant for most Whole Hog positions.

In this case, the decision to place my entire destiny in the hands of corporate types in New York that I know next to nothing about, and have never met, is due to the fact that I believe Whole Hoggedly that On2 will achieve substantial increases in revenue in the near term future.

I have Whole Hogged before, 3 times to be precise. 2 big winners - 1 excruciating loser.

I do not advise anyone to Whole Hog this (or any) stock, especially this stock. If the video technology involved evolves away from the On2 solution, or if the politics of the game does not play out right, I will be hit very hard.

But here’s to taking that shot when your gut tells you there’s no other choice. I’m in heavy around 80 cents (held that position for a year and a half or so) and in hog heavy some more where we sit now (near a buck). (The wise among you will notice my piggish folly in taking no profits when it bumped against 4 bucks) Where’s my stop? Did you say stop? as in Money Management?

I’m stopped out when I no longer feel that On2 will be a huge winner in the video codec space.