NXTH & CLRH: Connected Like Siamese Twins

by Melissa Davis - 12/8/2009 8:46:04 AM

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Investors blinded by the pretty stock prices for NXT Nutritionals (OTC.BB:NXTH) and Clear-Lite Holdings (OTC.BB:CLRH) might want to take a closer look at other – less attractive – traits shared by these two companies.

After going public through reverse mergers with shell companies earlier this year, both NXTH and CLRH promptly hired the same part-time CFO to keep their books in order. They also retained the same auditing firm in Boca Raton – a region viewed by regulators as a hotbed for securities-related fraud – to bless their financial statements. They even chose the same tainted public relations firm to attract potential investors. (That firm failed to answer questions about the companies for this story.)

Meanwhile, both NXTH and CLRH have landed strong endorsements from high-profile television analysts – who are past targets of securities regulators -- making wildly enthusiastic claims about their prospects.

Take the latest bullish report on NXTH published by Charles Payne, a frequent commentator on Fox TV, for example. After NXTH had already doubled to hit $2 following his first recommendation this summer, Payne boldly predicted that the stock could rocket even higher – soaring another 150% -- going forward.

“I actually have a higher opinion of the company now than I did when I wrote my research report,” Payne stated in a recent email to The Street Sweeper, “which … involved lengthy research and time on my part.”

When recommending the stock, Payne pointed to NXTH’s “topnotch management team” as a driving force behind an expected rally in the shares. He gushed about CEO Michael McCarthy – and the executive’s reported accomplishments at Pepsi Cola – in particular.

On paper, at least, McCarthy looks like quite a star. According to his official bio, freely accepted and referenced by Payne, McCarthy previously served as vice president of fountain services at Pepsi Cola. While there, his bio claims, McCarthy built Pepsi’s “Juice Creations” line into a $63 million business over the course of a single year. In addition, the bio states, McCarthy played an instrumental role in integrating Hawaiian Punch into the Pepsi Cola system.

At Pepsi Cola itself, however, McCarthy apparently left no lasting impression at all.

“We are not familiar with a Michael McCarthy at Pepsi headquarters,” Nicole Bradley, an official spokesperson for Pepsi, stated when asked to verify the contents of McCarthy’s bio. “There are VPs at the bottling companies, but none of this is sounding familiar.”

Moreover, Bradley added, “to my knowledge, Pepsi has never owned Hawaiian Punch, which is mentioned as one of the products he managed … I think Michael McCarthy will have to give you more information. Sorry I can’t be of more help.”

The Street Sweeper asked NXTH for a detailed bio for McCarthy – including the specific titles and dates for positions he has held in the past – but the company ignored that request.

Filling in the Holes

Curious, The Street Sweeper decided to dig for answers on its own. It discovered that McCarthy had in fact served as vice president of a juice company acquired by Pepsi almost two decades ago. In more recent years, however, he drifted away from the beverage industry altogether.

By early 2006, McCarthy was working as a project manager for GDR International (GDRI), an obscure “strategic consulting firm” focused on assisting players in the healthcare arena. At one point, he counted Velocity International – a tiny penny-stock company promising a new treatment for AIDS – among his firm’s most valuable clients.

“The GDRI team has completed their due diligence,” McCarthy stated in a press release on his firm’s new relationship with Velocity International, “and believes this will be the most dynamic project that (our) team has undertaken.”

The same month that Velocity International announced that partnership, it hired a tout sheet to promote the company’s stock. The shares promptly soared more than 50% in a single day, recording their most active trading day in history. The company has long since changed its name and stock symbol, however, and now trades for a fraction of a penny a share.

Meanwhile, McCarthy has returned to the food and beverage industry without mentioning his role at GDRI – or his connection to doomed Velocity International – in his vague company bio at all.

Touting the Next ‘iPod’

Courtney Smith, a past markets commentator for CNBC, recently issued an even rosier forecast for CLRH. Touting CLRH as the perfect stock for investors ready to brave the market, Smith predicted that the shares could rocket 500% in two years or less.

The Street Sweeper hoped to contact Smith about his recommendation, but its attempts to locate a phone number on his website – or send an email using his website’s form – ultimately failed.

In his glowing review of CLRH, Smith portrayed the company’s ArmorLite bulb as perhaps “the greenest and safest fluorescent bulb on the planet” and proclaimed that it could even become “the iPod of the lighting industry.” Meanwhile, he said, several retailers – including “online giants like Amazon.com” – have already started selling CLRH bulbs, with more lined up to follow suit.

As of last week, however, Amazon listed CLRH’s ArmorLite bulbs as “temporarily out of stock” despite their designation as a new offering. Amazon does sell some other CLRH bulbs, but even the most popular ones rank only 25,000 on the site’s list of bestsellers in the home improvement category. Since iPod occupies several spots on Amazon’s “Top 10” list for electronics, CLRH will need to sell a lot of light bulbs in order to catch up.

Lately, however, CLRH has focused more attention on selling stock instead. With management consumed by efforts to take the company public, in fact, CLRH failed to record any product sales during the first half of this year at all.

CLRH did raise $240,000 through a private placement in June, though, by granting investors the right to purchase up to 1.6 million shares of company stock for just 30 cents apiece. The company then followed up with a similar transaction last month, generating $420,000 in proceeds through a private placement that will allow investors to buy 1.4 million shares of company stock at 60 cents apiece and another 1.4 million shares at half that price.

With the same $420,000, ordinary investors could have purchased just 270,000 shares of CLRH on the day of that latest deal.

Keeping It in the Family

Nevertheless, Smith has portrayed the stock as a real bargain. When fawning over CLRH in his September report, he cited outstanding company leadership as a big reason for his confidence.

“I’ve spoken with Clear-Lite’s management team multiple times, asking probing questions and examining their operation,” Smith assured. “It’s important to remember that the quality of a company’s leaders is just as important as the quality of its products – and I believe Clear-Lite’s team has what it takes.”

Upon closer scrutiny, however, that celebrated “management team” looks more like a close-knit family running a small-time operation at best.

The CEO, Thomas Irvine, is also the father of Senior Vice President Lisa Niedermeyer. Together, the pair has incorporated two previous companies that sported the same Boca Raton P.O. Box that CLRH now calls home. Meanwhile, the duo has apparently welcomed another relative to its modest executive team.

Although CLRH identifies Irvine and Niedermeyer as father and daughter in its latest annual report, filed with the U.S. Securities and Exchange Commission in November, the company claims that no other family members serve as executive officers. On its official website, however, CLRH lists Paul Niedermeyer as the company’s vice president of operations. In his bullish report on CLRH, published two months before that filing, Smith identifies Paul Niedermeyer as a company executive as well.

Since a Paul and Lisa Niedermeyer registered for baby gifts together in Boca Raton earlier this year, the couple appears to be married.

Besides Irvine and the Niedermeyers, CLRH lists just one other executive on its company website. David Briones, a hedge fund manager at Bartolomei Pucciarelli, serves as the company’s part-time CFO. He also fills the same post at NXTH.

Both companies have promised Briones large blocks of stock – now worth about $1 million in total -- for his services.

Striking a Raw Deal?

To be fair, Briones clearly has his work cut out for him. For starters, NXTH suffers from weak internal controls that threaten the validity of the company’s financial statements. Like CLRH, NXTH also relies heavily on stock sales to finance its operations since it has recorded losses every year since its inception.

In fact, NXTH posted a net loss of $16.1 million for its most recent quarter alone. Most of that resulted from the early extinguishment of debt in August, when note holders began to exchange their debt instruments under “substantially different terms.” Those investors now hold warrants – allowing them to purchase NXTH stock for as little as 40 cents a share – that are worth about $15 million more than the modest sums they actually loaned to the company.

The total intrinsic value of warrants outstanding, exercisable for 22 million shares of NXTH stock at an average price of 50 cents apiece, came to $27.8 million at the end of September. Since the stock has since risen, those warrants are now worth about $40 million – almost half of the current market value for the entire company.

Meanwhile, with just $163,263 left in the bank, NXTH has already warned shareholders that its resources “may be insufficient to meet its cash needs for the near future” without additional fundraising.

Berman & Co., the Boca Raton firm that serves as NXTH’s independent auditor, has raised substantial doubts about the company’s ability to continue operating as a going concern in the meantime. The same firm began auditing CLRH’s books this summer, replacing a firm that has since lost its license, and has issued a similar warning for that company as well.

Shooting the Messenger

Both NXTH and CLRH have retained the same public relations firm, too. NXTH hired Stern & Co. in late August, and CLRH followed suit less than two months later.

In a press release announcing Stern’s appointment, CLRH touted the firm’s “impressive record of gaining attention” for its clients. Stern, in turn, promised “an aggressive communications program” for the company.

In the past, however, Stern has attracted some unwanted attention from securities regulators as well.

About a decade ago, The Wall Street Journal reported, Stern began handling public relations for Cyber-Care and put Paul Bornstein in charge of the account. Bornstein also worked as a research analyst for another firm during that same timeframe, the Journal stated, and issued bullish recommendations for Cyber-Care’s stock in that capacity. Fueled in part by those reports, the newspaper noted, the stock soared before Bornstein’s ties to the company finally surfaced.

Although Stern promptly fired Bornstein for his actions, according to the Journal, the scandal left a stain on the PR firm. The U.S. Securities and Exchange Commission later sanctioned Bornstein for his misconduct, mentioning Stern by name in its complaint. It ultimately banned trading in Cyber-Care stock, which had fallen from a high near $40 on the Nasdaq to mere pennies on the Pink Sheets, as well.

Connecting the Dots

In the past, the SEC has also taken aim at the big-name promoters who have since gone on to tout NXTH and CLRH shares. Smith, a loud fan of NXTH, came under fire earlier this decade for accepting shares in GenesisIntermedia – worth a reported $3 million – and then recommending the stock on major on-air business shows.

“That’s okay,” Smith told Bloomberg News when his stake in the company came to light, “because everyone made money on this thing.”

The stock crashed a few months later, however, leaving shareholders with devastating losses. The meltdown even crippled several brokerage firms, The Globe and Mail later noted, triggering the biggest government bailout the brokerage industry had ever seen.

Nevertheless, Smith wound up cleared of wrongdoing when he finally went on trial for securities fraud in late 2005. His attorneys promptly celebrated the jury’s decision, insisting that Smith “genuinely believed in the accuracy of his statements and predictions” about GenesisIntermedia and all the other stocks he endorsed.

The SEC actually managed to punish Payne, who favors CLRH, however. In 1999, the agency fined Payne and his firm – which publishes the newsletter that recently touted CLRH – for failing to disclose that he had received stock in companies that he then recommended to investors. Without admitting or denying the SEC’s charges, Payne agreed to refrain from violating securities laws in the future.

Payne now publishes an official disclaimer at the end of his newsletter. In that disclaimer, he stated that he received no “direct compensation” for his report on NXTH. Instead, he said that he chose to profile NXTH based on his due diligence on the company.

After that, however, Payne revealed that he had received almost $54,000 from an outfit known as Dynamic Global Media LLC to cover the costs of generating and distributing his report. Nevertheless, when asked for details about Dynamic Global Media, Payne told The Street Sweeper that he’s “not involved with the company.”

To be sure, Dynamic Global Media keeps a low profile for a so-called media firm. The company appears to operate no website and – with one telling exception – commands no real Internet presence at all. Virtually absent from the rest of the World Wide Web, the company’s name shows up in newsletter disclaimers published by Payne and Smith alike.

Those disclaimers, with their identical wording, achieve a remarkable feat: They actually share more in common than do their authors’ favorite penny stocks.

* Editor's Note: The Street Sweeper hired an independent fact-checker to verify the accuracy of this story. Whenever possible, it has also included links to the actual documents used during the course of its research. To contact Melissa Davis, the author of this story, please send an email to editor@thestreetsweeper.org.

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