------August 7, 2013: GRILLIT, Inc. (GRLT) shares have been skyrocketing thanks to several pimps who have been making hay out of nothing. For example, one tout has been highlighting that, "GRLT is establishing itself in a sector tipped to grow by double and triple digits rates in the coming years. Current sector value is estimated at $27B annually". The problem is that we don't know what portion of that sector can be attributed to GRLT, since the announcement of the reverse takeover conveniently left out financials. So now investors are left to guess at whether they can look forward to double and triple digit rate increases of $100 in sales, $1,000 in sales, or who knows what. Most definitely, the revenues from two restaurants is never going to justify today's market cap of $24.75 million, set to quintuple just if the share price stays at this level (it won't). What we do know is that as of March, GRLT listed $93K in assets, $84K of which is labelled as undefined, "other" assets. Maybe the company has $84K in coal with which to stuff shareholders stockings this coming Christmas. One thing is for sure, today's shareholders could be looking forward to a miserable Christmas. Here's why:
The latest frenzy is over the company's announcement that shareholders would receive a dividend of 4 additional shares for each share of GRLT they hold. Today's irrational 89% run can be attributed to yesterday's announcement that the record date of shareholders who would benefit form this dividend, was extended from July 15 to today, August 7. In other words, insiders wanted a little more juice to able to sell more overpriced stock. And boy, did they ever succeed, generating over half a million dollars of trading, and surely pocketing the lion's share of cash changing hands.
Now the announcement of a stock dividend is a common ploy used in penny stock schemes, designed to make the naive believe that they are getting something for nothing. In other words, and using the GRLT example, if I own $100 of stock today, then surely I own $500 worth of stock tomorrow? Right? Wrong! Although they are called "dividends" in an attempt to deceive, the scheme is usually nothing more than an attempt to veil a stock split. In other words, if you own $100 worth of stock today, you still own $100 worth of stock tomorrow. The share price will reflect the split, so that if the share were valued at $3.00, they would be worth 60 cents after the 5 for one split. The shareholder gains nothing.
Unfortunately for the GRLT pigeons, they aren't going to be so lucky. The GRLT dividend really is a dividend. Each shareholder will get a certificate for 4 additional shares for each share they hold at the end of today's trading. The problem is that these shares will be restricted from trading for a period of one year, under Rule 144. So everybody is stuck with them.
OK, so you wait a year and then sell, right? Not so fast! Once the shares have become free-trading, the shareholder will have to go to a qualified securities attorney and obtain an opinion letter, stating that the shares are qualified for trading and why. Expect that to cost between $250 and $1,000. Then there's the matter of finding a brokerage house that will allow you to deposit the certificate. This is a pink sheet stock, which we expect to be worth almost nothing in a year. The few brokers that will accept such a certificate will charge several hundred dollars to accept the certificate for deposit, more if the company is not DTC eligible in a year, which is very possible. Then you have to pay their retail brokerage fees to sell the stock. And even then, all this depends on the company not executing a reverse split before these shares become free trading. Do not pooh, pooh that possibility.
OK, so now everybody has held onto their shares for a year, gone through the opinion letter hassle, and found a broker to take their certificates. Now there's 33 million new shares for sale. What do you think happens to the share price, which we assure you will be beaten down to nothing in a year, when there is 33 million freshly tradeable shares ready to go? Can you guess?
Sound appealing so far? Well everything we've told you is nothing compared to the ultimate slap in the face shareholders are expected to endure starting tomorrow. Unless the company announces another extension of the date of record of course.
Naive shareholders are expecting the same level of interest in GRLT shares tomorrow as there was today. Oh no, no, no. Do you think that new investors will be interested in purchasing stock at an 80% disadvantage to what they could have had one day before? That would make them second class shareholders in a company that has very little, if anything. On top of that, current shareholders, having locked in their "fantastic" dividend, will be looking to the exits. All at once. It may be a stampede. With few buyers consisting of maybe a couple of short coverers, and a lot of sellers, these $3 shares will be worth pennies in the blink of an eye.
Well at least they'll have certificates to use for kindling. But those won't be available to burn for a year.