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Hello Readers,

To be succinct, 2012 was not a banner year for us. It wasn’t a bad year, but it fell short of what we expect from ourselves. During 2012, we closed 52 positions; 36 for gains and 16 for losses, if we count correctly. In previous years, it seems we have had more gains and fewer losses. The one bugaboo has been that for the last several years there has been a nice rally in big and mid-cap stocks while small caps, though not withering, have not kept the same pace. We feel that this has been due to the dominance of mutual funds, hedge funds, and ETFs, and other similar financial instruments, which have had little room for small stocks in their portfolio.

We start 2013 pretty much the same as we end 2012. The markets are in a funk due to uncertainty about the Fiscal Cliff, and, yes, we, too, hate this phrase. Our feeling is that no real deal in D.C. will occur until a major teeth-chattering market sell-off kicks in. Remember the old adage, “Don’t fire until you see the whites of their eyes”? However, the markets may not be happy with the end result, which would mean a slowdown in government spending.

Here are the headlines since the last Newsletter about companies in the Current Portfolio; dates in parentheses are when we first recommended them. We are not giving updates about companies on the “Endangered List” unless we feel the news to be significant. Also, don’t be disgruntled over the lack of news updates in this particular issue since news mostly grinds to a halt over the holidays.

Horizon Pharma (HZNP)(12/20/12). Gets UK nod for its arthritis drug.

Limelight Networks (LLNW)(11/20/12). Chosen by Grand Prix Entertainment to implement its studios network.

TeleCommunication Systems (TSYS)(11/5/12). Sells two single gesture map navigation patents to IP Cube Partners of South Korea. Enters into a patent licensing alliance with Acacia subsidiary. Announces support for FCC, Carriers’ commitment to implement text to 9-1-1 technology nationwide. Launches first national end-to-end suite of next generation 9-1-1 emergency communications solutions. To present at the Raymond James technology summit on January 8.

Lionbridge Technologies (LIOX)(11/5/12). Selected by Thomas cook as partner for Web localization.

Anthera Pharmaceuticals (ANTH)(10/5/12). Gets NASDAQ delisting notice, which we are not too concerned about, right now.

Zynga, Inc. (ZNGA)(10/5/12). The usual several dozen releases and news items with the most significant probably are that the company is trying to enter the UK online gambling industry.

Novatel Wireless (NVTL)(8/5/12). Ships its three millionth 4G LTE device.

Metabolix (MBLX)(7/5/12). Now shipping 16001 PHA-based polymeric modifiers for PVC.

Vermillion (VRML)(6/20/12). OVA1 test designated “investigational” in Blue Cross policy update.

Capstone Turbine (CPST)(5/20/12). Receives NASDAQ delisting notice, which does not worry us, just yet.

Echo Therapeutics (ECTE)(3/20/12). To present at the Biotech Showcase on January 7. Announces full exercise of over-allotment option. Closes secondary stock offering.

Majesco Entertainment (COOL)(3/5/12). Partners with Zumba Fitness.

Synthesis Energy Systems (SYMX)(8/20/11). Extends agreement with Crystal Vision. Initiates engineering study using its coal gasification technology.

On Track Innovations (OTIV)(6/20/11). CEO and chairman resign.

Gleacher & Co. (GLCH)(6/5/11). Gets NASDAQ delisting notice, which does not bother us, right now. The NASD loves to send these around Christmas time.

Idera Pharmaceuticals (IDRA)(6/5/11). Announces positive top-line results from Phase 2 trial of IMO-3100 in patients with moderate-to-severe plaque psoriasis.

GSE Systems (GVP)(4/20/11). Receives $9.1 million change order from Slovakian customer. Names new COO.

Oculus Innovative Sciences (OCLS)(3/5/11). Receives new U.S. patent for using Microcyn technology in treating ulcers. Expects expanded label claim for European formulation of Dermacyn wound care. Gets NASDAQ delisting notice, which does not concern us, at this time.

Real Goods Solar (RSOL)(1/20/11). Secures more than 5.0 megawatts in public and commercial solar power projects across the Southwest.

Inovio Pharmaceuticals (INO)(10/20/10). To present at the BioTech Showcase on January 8.

NovaBay Pharmaceuticals (NBY)(4/20/10). Will present at the Biotech Showcase on January 8.

Our picks for this Newsletter are a medical device maker and another biotech, both NASDAQ-listed.

UNILIFE CORPORATION (NASDAQ: UNIS) – $2.25. Twelve-month hi-low has been $5.17 – $2.01. Based in York, PA, with about 125 employees, this this medical device maker has 83.3 million shares outstanding, $22.63 million in total current assets, $88.52 million in total assets, and $36.77 million in total liabilities, of which $20.92 million in long-term debt. Institutional ownership is around 35%. Four analysts rate the stock a “strong buy”. www.unilife.com

Usually when we see this much long-term debt, we turn the page, but Unilife Corporation has some compelling reasons to add it to the Current Portfolio. Besides the four “strong buys”, the company has nearly a half-dozen device platforms in the hopper, and a nice pile of cash to help it get to the next level.

Public for nearly three years, Unilife develops and makes injectable drug delivery systems. Their principal product is the Unifill ready-to-fill syringe, which is designed for pharmaceutical manufacturers in a ready form for filling their injectable drugs and vaccines. It also offers Unifill Syringe, a staked (fixed) retracting needle that is designed for use with liquid stable drugs; Unifill Select glass prefilled syringe, which facilitates the use of liquid stable drug or vaccine, or a diluent to reconstitute and deliver a lyophilized drug supplied by a vial; and Unitract 1mL syringes for use in healthcare facilities and by patients who self-administer prescription medications, such as insulin.

In addition, Unilife provides Rita disposable auto-injector that is designed to inject the prefilled dose from single Unifill syringe; and Lisa reusable auto-injector, which automates the removal of the needle shield and enhances needle insertion and retraction, as well as EZMix dual or multi-chamber prefilled syringe for the reconstitution and delivery of injectable therapies. The company also provides the Precision-Therapy range of bolus injectors for use with bolus-based therapies that require short or long duration injections; and the Flex-Therapy range of bolus injectors for use with rate-based therapies that require infusion over a longer duration of time where the delivery rate in controlled for hours or days. Additionally, Unilife provides specialized device technology platforms comprising devices for targeted organ delivery, low dose delivery systems, and implant deployment systems for administering implantable drugs through an intravitreal or intraocular injection.

This is a company that sees little revenues compared to its hefty losses, i.e. for the quarter ending 9/30/12, revenues were zilch with $12.5 million in losses. However, the company is now in negotiations with a significant number of pharmaceutical customers and expects long-term revenue streams over the next year.

We are counting on those revenue streams and, we suspect, so are those analysts mentioned above.

Our 24-month target for the stock is $3.50 to $4.00.

For more information, contact UNIS’S Jeff Carter at 717-938-9323.

CODEXIS, INC. (NASDAQ: CDXS) – $2.14. Twelve-month hi-low has been $6.12 – $2.00. Based in Redwood City, CA, with about 340 employees, this biotech has 37.6 million shares outstanding, $74.8 million in total currents assets, $119 million in total assets, little debt, and $26 million in total liabilities. Institutional ownership is around 54%. Five analysts have the stock as a “hold”. www.codexis.com

With a balance sheet like Codexis, Inc. one would think that more of those analysts would switch from “hold” to “buy”. But, that is because the company is transitioning with more emphasis on its pharmaceutical business, which seems to be a good move at this point in its history.

Founded in 2002, and public for nearly three years, Codexis produces custom industrial enzymes for use in the making of biofuels, chemicals, and pharmaceutical ingredients. The company offers Codex Biocatalyst Panels and kits to pharmaceutical companies engaged in drug development and the marketing of approved drugs to allow them to screen and identify possible enzymatic manufacturing processes for their drug candidates and their marketed products. It also provides enzyme screening services, enzyme optimization services, and enzymes, as well as supplies intermediates and active pharmaceutical ingredients to pharmaceutical companies.

Codexis also develops CodeXyme cellulose enzymes to convert cellulosic biomass, a non-food plant material into affordable sugars, which can then be converted into renewable fuels and chemicals; and CodeXol detergent alcohols that are used to manufacture surfactants, which are used as cleaning ingredients in consumer products, such as shampoos, liquid soaps, and laundry detergents. It intends to market CodeXyme cellulose enzymes to chemical manufacturers; and CodeXol detergent alcohols as a drop-in substitute for the detergent alcohols market.

During the last year, the company took a hit when it lost its Shell funding, putting a major crimp into its biofuels sector. However, the CEO recently said they were encouraged by solid developments in their pharma business, having recently finalized a new business arrangement with their manufacturing partner, Arch PharmaLabs. So, expect a decline in 2012 revenue.

For FY2011, ending 12/31/11, revenue was $123.86 million with $16.55 million in losses. During the first nine months of the current FY, ending 9/30/12, revenue was $80.38 million with losses of $15.32 million.

We like the company’s quick response in moving more toward the pharma business, and we like the fact that the balance sheet seems strong enough to help them pull it off.

Our 24-month target for the stock is $3.50 to $4.00.

For more information contact CDXS’s Matthew Hargarten at 312-377-4136; media@codexis.com

Look for our January 20, 2013 Newsletter to be posted on 1/16 or 1/17.

Happy New Year!