Knobias ClipReport (7-12-2007)

Submitted from Knobias ClipReport

Wednesday’s session saw the market fight off bad news throughout the day ranging from subprime housing woes to the yields in bonds. Hopes for a strong second quarter earnings season were the cause though a deterioration could be ahead if numbers don’t meet the already lowered expectations.

In the small cap space, many solar names were hot again, but another piece of news caught the attention of some attentive traders.

SBE, Inc. (SBEI) was focused on manufacturing and selling embedded hardware products including wide area network and local area network interface cards and central processing units to OEM’s who embedded their hardware products into their products for the communication market. The Company also designed and provided software based storage networking solutions for an extensive range of business critical applications, including disk to disk back-up and disaster recovery.

Following quarters of unimpressive numbers, management decided to sell their embedded hardware and storage software business and seek a merger candidate which is exactly what they did.

In early January, the Company and Neonode, Inc., a privately-held, Swedish mobile handset developer, announced the execution of a definitive merger agreement. SBEI was noted as paying 57 million shares for the shares of Neonode and the assumption of warrants and options. The board of Neonode would then become the board of SBEI and become a publicly traded company in the US giving them access to large amounts of capital.

Also in January, the Company signed an asset purchase agreement with One Stop Systems, Inc to purchase their embedded hardware business for $2.2 million cash plus the assumption of their corporate headquarters office lease and a lease for certain engineering equipment. In late March, they announced the completion of the sale and noted that the Company was completely divested of their embedded hardware business.

While the Company still has operations in the storage software business, the Company noted that they were actively seeking strategic alternatives there as well, leaving the merger with Neonode as their lone operating business going forward and in July, the Company filed the Definite Proxy statement that would allow the merger to be voted on by shareholders on August 10th. With approval, the shares authorized number would be increased to 40 million from 25 million and a reverse split would take place. It seems inevitable that the merger will take place with SBEI not having another business to fall back on if holders were to vote down the merger.

But the piece of news that caught the attention of traders was the release regarding Neonode’s new order from Telenor Sweden. Telenor Sweden is a complete communication service provider for mobile and fixed telephones.

The Neonode N2, which many have dubbed an iPhone clone, would be distributed in Telenor Sweden stores beginning in September of this year. With iPhone currently unavailable in the European countries, the product could receive similar attention following its release.

The Neonode N2 predecessor was the Neonode. Its release was met with tempered expectations because of the 2 year delay stemming from a lack of funds which caused employee layoffs and other cost cutting related issues.

In any event, the large announcement couldn’t have come at a better time for SBEI holders. With a successful launch of the N2 with similar capabilities of the iPhone, the European version of mobile mania could ensue.

While the expectations could be fairly high for many of the domestic producers for a response to the iPhone, the European version could be all that its cracked up to be displayed from the attention shares of SBEI received during the day. The name was up over 160% on over 1.6 million shares. Even NeoMagic Corporation (NMGC), the company suspected of producing the processor powering the N2, shares were in on the action. Shares were up some 19% on over 720 thousand in volume.

While the enthusiasm surrounding the iPhone has somewhat worn off, the European version could be just now beginning and with momentum names being many traders’ best friends, shares could begin a rally stemming over the next few periods. Investors would certainly be wise to watch.


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