Thursday, February 16, 2006

GigaBeam Corp--Communicating the Wrong Message?

GigaBeam Corp. (GGBM.OB-$9.00) was one of the first entrants into the emerging market for wireless point-to-point communications equipment designed to operate in the 71-76 GHz and 81-86 GHz radio spectrum bands, which were authorized by the FCC, in October 2003, for commercial use.

GigaBeam’s proprietary technology, utilizes these large blocks of authorized contiguous spectrum, enabling multi-Gigabit-per-second communications through use of Gigabit Ethernet and other standard protocols. The current speed achieved by GigaBeam’s wireless fiber (WiFiber) product lines is one Gigabit-per-second—equivalent to 647 T1 lines or 1,000 DSL connections.

GigaBeam’s WiFiber technology is similar to terrestrial fiber in terms of speed and reliability for deployment in Metropolitan Area Networks (MANS). However, WiFiber has a substantial advantage over terrestrial fiber for the “entire last mile,” because WiFiber can be deployed in a day and costs less to deploy than terrestrial fiber. Terrestrial fiber can take months to deploy and also require significant regulatory and environmental approvals prior to installation.

According to Cisco Systems’ exparte filing with the FCC (May 2003), less than 5% of the 750,000 commercial buildings in the United States have current access to fiber.

The 10Q Detective does applaud corporate for complementing its core strength in millimeter wave systems architecture and design with the intellectual property portfolios and trade secrets of leading component suppliers. This integrated approach of working with third parties to develop components that could be incorporated into the Company’s WiFiber technology has resulted in the rapid transition of products from drawing board to prototype to commercial-ready products in only two years.

The Company’s target customers are network providers, communications and IT service providers, Fortune 500 companies, government and military entities, and other enterprises seeking cost-effective “virtual” fiber solutions.

Sadly, however, as we have borne witness to—again and again—corporate insiders have rewarded themselves with riches before the hard work of digging up sustainable profits has been finished. The 10Q Detective unearthed an SEC 8-K, filed on February 9, disclosing that the Compensation Committee authorized the payment of discretionary cash bonus performance awards for calendar year 2005 to certain employees, including the following top executives: (1) $37,500 to Louis Slaughter, CEO; (2) $33,750 to Douglas Lockie, President and CTO; and, (3) $30,000 to Thomas P.Wetmore, Senior Vice President, Sales and Marketing.

Since GigaBeam’s inception in January 2004, primary funding mechanisms for the design, development, production, and installation of the initial product lines have been equity and debt placements totaling approximately $43 million.

The Company did not recognize its first revenues until the second quarter of 2005, which resulted from the shipment of its WiFiber 2 series GigE links. Accordingly, since commercial deployment of product commenced only recently, and the Company has not yet generated any meaningful revenues, corporate continues to be dependent on debt and/or equity financings to fund its cash requirements.

For the nine-months ended September 30, 2005, revenues of $479.4 K were swallowed up by operating losses of $9.5 million. Managements’ ability to maintain planned levels of activity and bring development stage products to a commercial sales level remains subject to the Company’s ability to access additional working capital.

If the Company is unable to obtain additional funding, corporate has already disclosed in SEC filings that they will need to change GigaBeam’s business strategy, which could include a reduction or scale back of existing operations to conserve cash and maintain operations as a “going concern.” GET WHILE THE GOING IS GOOD—the aggregate salaries of the senior executives (8) exceeds $1.6 million per annum (excluding cash bonuses, stock option awards, and other undisclosed benefits). Co-founders Louis S. Slaughter and Douglas G. Lockie had base salaries in 2005 of $240,000 and $216,000, respectively. Each Co-Founder also owns more than $9 million in company stock, too.

In order to commercialize its products, GigaBeam will have to develop an infrastructure and/or rely on third parties to perform these functions. To market products directly, corporate will have to develop a marketing and sales force with technical expertise, and a dedication to developing third party distribution channels—efforts which would require significant amounts of capital—monies that currently do not exist

Further, any agreement to sell its products through a third party, such as an established telecommunications provider or network services provider, could hamper GigaBeam’s ability to sell its products to that third party’s competitors.

The wireless communications industry in which the Company principally competes has a variety of firms with potentially competitive products and services, and some may offer broader telecommunications product lines. These companies include Terabeam Corp. (TRBM), Bridgewave Communications, Stratex Networks, Inc. (STXN), Ceragon Networks Ltd (CRNT), and Harris Corporation (HRS).

The ability of GigaBeam’s management team to integrate its WiFiber architecture with component suppliers is impressive. Unfortunately, the backbone of corporate to bring costs in line and to reach breakeven or profitability is equally unimpressive.

Looking ahead, GigaBeam is but one of many WiFiber companies with cost-efficient “bridging” technology. The Company has an enterprise value of $45.69 million—a valuation grounded solely on its potential promise. Terabeam Corp.—with a price of $4 per share—has an enterprise valuation of $79.0 million—and is forecasting profitability in its 4Q:05 on sales in the upper range of previously-provided guidance of $23 to $27 million. On a comparison basis, GigaBeam—like its payroll—is too expensive.

The 10Q Detective believes that there is no compelling reason to buy GigaBeam. SELL.

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