GSI TECHNOLOGY, INC. & NEUROGEN CORPORATION

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Hello Readers,

We have good news and bad news. The good news is that our Current Portfolio is pretty the same as it was a few weeks ago, although there have been some improvements. That’s also the bad news. Many of our picks have had upbeat news announcements only to see their stock prices mark time or even drop a little; of course, this has been the norm for the last several months (please see our Newsletters during that time). But this isn’t how it should be happening. Didn’t the Fed ride to the rescue? Isn’t Congress going to turn on the money spigot even more? Shouldn’t the markets be soaring, especially small stocks? Well, the markets did respond to the rate cuts, albeit tepidly, and before small stocks can refuel, their bigger brothers and sisters, namely the big caps and mid caps will need to get much healthier.

During the last part of January, the market showed it still had a pulse. However, there is a sense that we still have not seen the bottom of this, just yet. We now feel it will come sooner rather than later. Yes, it may be a good time to bottom fish, but long-term thinking may be in order.

Here are the headlines since the last Newsletter about companies in the Current Portfolio. Dates in parentheses are when we first recommended them.

Amicas (AMCS) (1/20/08). To present at UBS Global Healthcare Services Conference on February 12. Increases market penetration with more than 60 contracts in 2007.

Nanophase (NANX) (1/20/08). To announce 2007 earnings on February 7.

Move (MOVE) (1/5/08). Earnings call slated for February 28.

Catalyst Pharma (CPRX) (12/20/07). Company and partners begin enrollment for its U.S. Phase II clinical trial of CPP-109 in patients with cocaine addiction. This was a rare instant when the stock did move on good news.

Linktone (LTON) (11/5/07). Shareholders okay acquisition deal with Indonesia media company.

XATA (XATA) (9/20/07). SYSCO, North America’s largest food service distributor, selects XATA as preferred provider of onboard computer technology. And, yes, the stock barely moves.

Wave Systems (WAVX) (9/5/07). Unveils EMBASSY remote administration server version 1.5.

Kodiak Oil & Gas (KOG) (9/5/07). Signs definitive Vermillion Basin exploration agreement with Devon Energy.

SIGA Technologies (SIGA) (8/20/07). Comments on Delaware court ruling.

Radcom (RDCM) (7/20/07). Completes $2.5 million PIPE transaction. Sets earnings call for February 4.

Alliance Fiber Optic Products (AFOP) (7/20/07). Reports improved 4thQT and record 2007 results; balance sheet still looks pretty good. And, the stock marks time.

Pharmacyclics (PCYC) (6/20/07). Balance sheet still looks half-decent.

Alphatec Holdings (ATEC) (6/20/07). Announces commercial introduction of its DYNAMO semi-rigid spinal system.

Oncolytics (ONCY) (6/5/07). Proceeds to full enrolment in U.S. Phase II sarcoma clinical trial. Issued its 7th and 8th Canadian patents.

Encorium Group (ENCO) (5/20/07). Gets $3.4 million of awarded new business contracts.

ECtel (ECTX) (5/5/07). Digicel selects ECtel’s Revenue Assurance Solution across all its different operations in the Caribbean and Central America. To announce earnings news on February 21.

VocalTec (VOCL) (4/20/07). Powers VoIP for WIMAX network in Latin America. VOCL and RedLinX selected by several USAL operators in South Africa.

Immunicon (IMMC) (3/20/07). Receives delisting threat from NASDAQ. Has until July 21 to meet minimum bid requirements, basically. This is what happens to a lot of small stocks in bad markets. The stock falls under a $1 and NASDAQ sends out notices. The worry is that the company panics and does a reverse split, which seldom helps current shareholders. This one’s making us nervous; it’s wait and see.

TTI Telecom (TTIL) (3/5/07). Company and Russian company TechnoServ A/S win contract.

Urologix (ULGX) (2/20/07). Recent quarterly numbers not too good; balance sheet still looks fairly decent.

UQM Technologies (UQM) (2/5/07). Recent quarterly revenues were flat, but company is optimistic about future; balance sheet still looks good.

Endologix (ELGX) (1/20/07). Schedules earnings call for February 21.

Neose Technologies (NTEC) (12/20/06). Discontinues NE-180. Will focus on GlycoPEG-GCSF and Hemostasis programs.

Lantronix (LTRX) (12/5/06). SecureLinx Spider named finalist in 2008 Network Computing awards. Earnings news slated for February 7. Expands wireless portfolio with MatchPort b/g Pro, proclaiming it to be the most secure embedded 802.11 b/g networking module available.

WJ Communications (WJCI) (12/5/06). Reports improved preliminary results for the 4thQT of FY2007. Announces re-engaging with a key customer. Stock is really in the can; wait and see.

YM Biosciences (YMI) (11/5/06). Provides update on AeroLEF clinical development program. Announces that Accipiter Life Sciences Fund now holds 6.3% of the common stock – could be a good thing.

Advanced Life Sciences (ADLS) (7/20/06). Stock dives after Lazard Capital downgrades stock to a “hold” on concerns about the fate of ADLS pneumonia drug Cethromycin.

NTN Buzztime (NTN) (7/5/06). Launches three new games.

ThermoGenesis (KOOL) (4/5/06). To announce quarterly results on February 6.

The Inventure Group (SNAK) (3/5/06). Provides updates on Burger King snack test market and share repurchase plan.

Lipid Sciences (LIPD) (2/20/06). Announces positive HIV results of vaccine used on “non-human primates”. There was once a time, not too long ago, when this sort of news would have sent a stock tearing into the ionosphere.

Adherex (ADH) (2/20/06). Announces Phase IIb expansion of ADH-1 combination study in Melanoma.

8×8 (EGHT) (1/20/06). To present at Security Research confab on February 11. Swings to a quarterly $1.4 million profit; balance sheet still looks decent. Why isn’t this stock higher?! Receives Internet Telephony Magazine’s 10th Annual Product of the Year Award. Issues statement underscoring recommendations of CA Broadband Task Force. Expands Packet8 virtual office service agreement with SupportWave Solutions.

Digital Angel (DIGA) (12/20/05). Secures $6 million three-year contract from Bonneville Power Administration.

Westell Technologies (WSTL) (10/20/05). Interprets services agreement with Language Learning Enterprises. To cut 58 jobs. Recent quarterly numbers not stellar, but passable; balance sheet still looks pretty good.

RAE Systems (RAE) (10/5/05). AreaRAE Sensor Network deployed at premier terrorism preparedness exercise. Adds new toxic gas tools for oil and steel workers and first responders.

EntreMed (ENMD) (9/5/05). Presents interim results for Phase II carcinoid tumor study. Commences Phase II study with MKC-1 in ovarian/endometrial cancers.

Zi Corporation (ZICA) (8/5/05). To introduce Qix Developments.

North American Scientific (NASI) (8/5/05). Reports FY2007 results. Closes $15.5 million private placement. This is on the “Endangered List”.

B.O.S. Better Online Solutions (BOSC) (1/5/05). Signs definitive agreement to acquire Dimex Systems.

Applied Micro Circuits (AMCC) (11/20/04). Gives upbeat quarterly report; balance sheet still looks very strong. Numerous releases on various products.

Aviza Technology (AVZA) (10/5/04). Releases quarterly numbers. We’re placing this on the “Endangered List”.

Network Engines (NENG) (6/5/04). Sets earnings call for February 7.

Palatin Technologies (PTN) (4/5/04). Announces litigation settlement with Competitive Technologies.

Our picks for this Newsletter are a broad line semiconductor and another drug maker, both listed on NASDAQ.

GSI TECHNOLOGY, INC. (NASDAQ: GSIT) – $2.50. Twelve-month hi-low has been $5.99 – $2.22. Based in Santa Clara, CA, with about 100 employees, this broad line semiconductor has 27.6 million shares outstanding, $50.68 million in total current assets, $84.21 million in total assets, little debt, and $10.26 million in total liabilities. Institutional ownership is about 15%. One analyst rates the stock a “strong buy” and two have it as a “hold”. gsitechnology.com

If you’re buying technology stocks in this market environment, the name of the game should be strong balance sheets and profitability. GSI Technology, Inc. seems to have both.

Founded in 1995 as Giga Semiconductor, and public for less than a year, GSI develops and markets static random access memory (SRAM) products for the networking and telecommunications markets. Its SRAM products are incorporated primarily in high-performance equipment such as routers, switches, wide area network infrastructure equipment, wireless base stations, and network access equipment. The company offers synchronous SRAM products that are controlled by timing signals, referred to as clocks; and asynchronous SRAM products, which enjoy a clock-free control interface. Its synchronous SRAM products include Burst and No Bus Turnaround SRAMs that implement a single data rate bus protocol; SigmaQuad products, which are quad data rate synchronous SRAMs; and SigmaRAM products, which are designed for use on large format printed circuit boards common in various networking and telecommunication products.

The vast majority of GSI’s products have random access times of nine nanoseconds or less, while its new products have random access times of less than five nanoseconds, and dock access times as fast as 0.45 nanoseconds with bandwidths as high as 48 gigabits per second.

The company also serves the ongoing needs for the military, industrial, test equipment, and medical markets for SRAMs. GSI sells its products primarily to OEMs, including Alcatel-Lucent, Cisco Systems, Huawei Technologies, and Nortel. It should be noted that the company’s largest customer is Cisco, and this could have a bearing on its future.

For the FY ending 3/31/07, revenue was $58.15 million with net income of $7.43 million. During the first nine months of the current FY, ending 12/31/07, revenue was $37.95 million with $3.96 million in net income.

GSI is not the most exciting of technology plays, but it looks as if it could withstand the current market whirlwinds.

Our 24-month target for the stock is $4.00 to $4.25.

For more information, contact GSIT’s Douglas Schirle at 408-980-8388.

NEUROGEN CORPORATION (NASDAQ: NRGN) – $2.00. Twelve-month hi-low has been $8.75 – $2.10. Located in Branford, CT, with about 160 employees, this drug maker has 42 million shares outstanding, $58.8 million in total current assets, $85.76 million in total assets, and $17.5 million in total liabilities, of which $7.87 million is long-term debt. Institutional ownership is around 53%. Three analysts give the stock a “strong buy”. www.neurogen.com

At first glance, one thinks that’s a lot of debt, but the nearly $55 million in cash/equivalents provides a nice cushion. Also, unlike many small biotechs Neurogen Corporation is generating some decent revenues. Then, there are the three analysts making “strong buys” on the stock, which is rare in small stockland.

Founded in 1987, and trading on NASDAQ since 2001, Neurogen develops small molecule drugs for treating disorders such as insomnia, obesity, pain, Parkinson’s Disease, depression and anxiety, and restless leg syndrome (RLS). The company has generated a portfolio of new drug programs through what it calls Accelerated Intelligent Drug Discovery (AIDD) system, which focuses on the target families of G-protein coupled receptors (GPCRs) and ligand gated ion channels. Small molecule drugs typically are suitable for oral administration as a pill, while large molecule drugs usually are given by injection.

Neurogen’s clinical development programs include NG2-73, which is in Phase 2 clinical trials for treating insomnia; NGD-8243/MK2295, a vanilloid receptor (VR1) antagonist, which is Phase 2 clinical trials for treating pain; Aplindore, a small molecule partial agonist for the D2 dopamine receptor for treating Parkinson’s and RLS; and NGD-4715 for treating obesity, which, after a Phase 1 trial, the company decided not to advance to Phase 2 but will consider out-licensing this program with a partner.

Neurogen conducts its R&D independently and under collaborations with pharmaceutical companies. It’s most noted collaboration is with Merck to discover and develop drugs targeting VR1 for treating pain.

For FY2006, ending 12/31/06, revenue was $9.8 million with $53.78 million in losses. Yes, that’s a big ouch, but this is usually the norm for small biotechs. During the first nine months of FY2007, ending 9/30/07, revenue was $15.43 million with $40.8 million in losses.

Several things loom large here. The Merck collaboration, the balance sheet, and, oh yes, those three analysts.

Our 24-month target for the stock is $3.50 to $3.75.

For more information, contact NRGN at 203-488-8201.

Look for the February 20, 2008 Newsletter to be posted on 2/18 or 2/19.

Thank you,
George

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