Jun

16

Penny stocks can add up

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Entrepreneur leverages small investments into big business.

You don’t need to invent an Internet widget or own an over-hyped biotech firm to sell stock in your company.

Even small businesses can cash in on the appetite for initial public offerings. Newark-based TheaterXtreme, an old-fashioned, bricks-and-mortar retailer, is expecting to raise millions of dollars once it gets permission from regulators to start publicly trading its stock.

The deal is tiny by Wall Street standards, but it could double or triple the investment of about 200 early backers of the company while making TheaterXtreme’s founder, Scott Oglum, an instant millionaire after years as a struggling entrepreneur.

TheaterXtreme is among a handful of small Delaware companies hoping to use the bottom rung of the stock market — known as the microcap, or “penny stock” market — to jump from mom-and-pop status into the bigger leagues. The state does not track how many Delaware-grown companies go public every year.

Universal Capital Management, a business development company in Milltown, is one of the few firms in the state catering to companies like TheaterXtreme that want to use the penny stock market to raise money. Universal Capital is advising Oglum and the owners of seven other companies who are in various stages of taking their companies public.

The market for penny stocks is limited, mainly because there is so much risk involved in buying shares of small, unproven companies, said James Angel, a professor of finance at Georgetown University who specializes in microcap stocks.

But the rewards can be great if the company succeeds, said Angel, who has helped the Nasdaq Stock Market and securities regulators write policies governing penny stocks. That’s because such companies often start out worth less than $1 a share — which is why they are called penny stocks. If the company turns a steady profit, those shares can climb quickly, Angel said. Even if a stock never cracks $5 a share, early investors can make 10 times their investment, if they can find a buyer.

“You can make money, but the question is, is that the best way to make money,” Angel said. “Don’t put all of your rent money into one of these companies.”

Of the 14,000 public companies in the U.S., about 3,300 are considered penny stocks that trade on the OTC Bulletin Board operated by the Nasdaq, Angel said.

TheaterXtreme, which sells and installs home theater systems, does not yet have regulatory approval to sell its stock in the public markets, but it has issued more than 18 million shares to private investors, including employees, friends and family members of the founder, Oglum. Those initial investors paid either 35 cents a share or $1 a share, Oglum said. When the National Association of Securities Dealers grants the company permission to trade publicly sometime later this year, those shares could fetch several times that amount, Oglum said.

The company has been filing annual and quarterly financial reports with the U.S. Securities and Exchange Commission for more than a year, and has a ticker symbol, TXEG, that will become active once it is approved by the dealers’ association.

Oglum, the company’s chairman and chief executive, said he has always dreamed of running his own company.

After working as a store manager in the 1980s for Entre Computer Center, one of the first computer retailers in the country, Oglum and a partner founded Second Source Computer Center in Newark. The company, which specialized in used computers, had a fatal flaw that didn’t come up until after Oglum and his partner had expanded, opening several stores. Second Source was a secondhand name owned by somebody else.

After a legal battle over the name, Oglum sold his share of the business and used the money to found TheaterXtreme Entertainment Group Inc. Six months before he opened the first store, he made sure to tie up all the rights to the name.

From the beginning Oglum said his goal was to build a national chain with hundreds of franchises and corporate-owned stores across the country. So far he has nine stores open in six states, with his headquarters in Glasgow. Another 12 stores are in various stages of construction and should be open by the end of the year, he said.

Bob Werwinski is the company’s biggest individual investor, after Oglum. The retired UPS executive and his wife own more than 2 million shares, which Werwinski said he bought because he believed in Oglum as much as he believed in the company.

That is typical for penny stock companies, said Joseph Blair, an executive vice president with Wilmington-based WSFS Bank. The first investors in small companies typically put their faith in the founder because there isn’t a financial track record, said Blair, head of wealth management for the bank.

Although some individual stores are turning a profit, TheaterXtreme has not turned a profit since its founding in 2003. The company has sold about 1,000 of its theater systems, which typically cost between $6,000 and $10,000.

Oglum predicts that the company will make a profit within a year, as more stores open.

The next phase of growth for the company will begin when its stock can be sold publicly through traditional brokers. The company won’t be listed on a major exchange when it gets permission to begin trading, but as a public company, basic information about its stock will be available through Web sites like Nasdaq’s OTC Bulletin Board, or from financial services companies like Bloomberg.

Once it begins trading publically, the marketplace will set the share price. The higher that price rises, the more money the company can collect by issuing new stock. That cash will then be plowed back into opening new stores, Oglum said.

“You don’t go public to stay small,” Oglum said.

Source: Delaware Online

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We often pay our debts not because it is only fair that we should, but to make future loans easier. - François de La Rochefoucauld

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