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Promotions 101
The Perils Of Investing In Companies With Delinquent Financials

While we maintain that purchasing the shares in any promoted penny stock is hazardous to your financials heath, we're going to take a particular look at the dangers of buying stock in a company without current financials.  Many Pump & Dump subjects are delinquent in their filings, which by several statutes, both Federal and State, are required quarterly. As a publicly traded company, the officers and directors have a duty to keep their investors up to date with a report on the financial heath and cash flow.

The financials are akin to a company blueprint.  Not only do they contain updated discussions of the operations, but they report the quarterly income, cash on hand, asset value, liabilities and an expense report, acting as an executive summary of the company's story. Generally, quarterly financials from reputable companies are generally expected within 30 days after a fiscal quarter ends. The financials for any over-the-counter stock can be found on the OTCmarkets website , and are listed as Form 10-Q for quarterly filings or Form 10-K for the more comprehensive annual filing.

Ask yourself the following questions:
  1. Would a builder build a house without blueprints?
  2. Could an assembly line worker manufacture a car without blueprints?
  3. Would you buy any car without test driving it?
  4. Would you buy a used car without knowing the mechanical condition of the car?
  5. Would you go agree to go on a date with someone you met online, without knowing what that person looks like?
  6. Would you lend money to someone you don't know?
  7. Would you hire someone without looking at their resume or job application?
  8. Would you order from a foreign language menu without knowing what you are ordering?
  9. Would you buy a cardboard box where the contents were not disclosed?
The answer to the above questions, for most of you would be, "of course not". So why would you buy stock in a company that is delinquent in their financials? The risk of financial harm is identical to those scenarios posed in those questions. In the case of investing in the stock of companies with delinquent financials, you will more than likely lose some or all of your investment, especially if the regulators issue a trading suspension, a very real possibility.

Now we're not suggesting that a slight delay past the due date is inappropriate. There are times that a delay in filing is beyond the company's control, for example, if the auditor or accountant is behind schedule.  The SEC makes allowances for that possibility and permits companies to file a Form 12b-25, designed to buy the company a single 15 day extension beyond the due date. Still, we would be wary of a company that habitually files for these extensions.  We'd especially be concerned of companies that become the subject of a Pump & Dump campaign during the extension period. This happens quite often and is almost always a sign that insiders/financiers want to divest themselves of stock before bad news gets out. Often that bad news consists of a significant increase in the number of shares issued and outstanding since the last 10-Q or 10-K, thereby diluting the shareholders asset value per share.  It is important to remember that any reported figure, including asset value, cash on hand, liabilities and especially number of shares issued and outstanding is only valid on the day which is the subject of the report, i.e the last day of the reported quarter or sometimes the day of the report itself. From the very next day on, these numbers are subject to change.  The more days that have past since the last filing, the more unreliable the latest reported figures are. After several weeks of delinquency, there is just no reason to rely on the numbers and who knows how many shares are out there. The bottom line is that, if the company's filings are delinquent, you have no idea what it is you are buying and before you buy these shares you should reconsider the 9 questions above.

So why do public company's file late? Well in our opinion, there is no acceptable reason for a public company to file late financials beyond the normal 15 day extension, ever! Delinquent financials should always set off alarms. Some of the more common reasons given by companies for being late are:
  • the accounting requires an unreasonable amount of work in order to be complete on time or the workload is more than available personnel can handle
  • the company cannot afford to complete its filing at this time
  • the filing could not be completed in time for an audit review
  • the company choose to opt out of its reporting requirement
So which of these reasons gives you a warm fuzzy feeling? Can you imagine the bank giving you any money towards a loan for a house or a car if you could not provide your financial details for any of the above reasons? No? Then why would you buy stock in a company who gives these flimsy reasons.

These are the actual reasons that most delinquent companies fail to file financials:
  • the officers and directors don't care about anything but being able to sell their own stock
  • the company is broker, probably insolvent, and cannot afford to spend the money to keep their books and filings up to date
  • there is no business and the company is nothing more than an empty shell
  • the whole thing is a sham
One of the ways you can tell that the failure to file financials is a deliberate attempt to withhold information from the public is by its participation in a Pump & Dump scheme. We'll take a look at two examples of  how delinquent financials spell trouble.

We first look at Multi-Corp International, Inc. (MULI), which as of the end of November 2013, last filed financials on December 5, 2012, for the quarter ending September 30, 2012. As of this writing, the company has not filed financials for one year and is severally delinquent. OTCmarkets has tagged the ticker with a Stop sign, as it has no information on the company. We've also outlined several reasons why we believe this ticker is an absolute scam, in a previous advisory.

OTCmarkets Info Page for MULI <click to enlarge>
Under its severe delinquent status, there is no way to know if the company has any asset value or money in the bank, what its liabilities are, or how many shares are issued and outstanding.  In fact the novice trader, relying on year old information, could be led to believe that the company only has 75 million shares outstanding.  During 2013, MULI underwent 5 separate Pump & Dump campaigns, during which newsletters promoting the stock were disseminated on at least 45 separate days, and the stock traded over 50 million shares. It is almost a certainty that there are many more shares outstanding that those reported a year ago. The actual number can only be speculated upon until the company finally updates its financials.

On April 5, 2013, MULI filed a Form 12b-25, indicating that its Form 10-K filing of annual financials would be late. At that time, the annual report was already significantly delinquent, but MULI was preparing to undergo the first of its Pump & Dump campaigns for the year and insiders were trying to ease concerns for those buying stock that would soon soar as high as a $1.69.  Those very same shares have since declined sharply and were trading below 20 cents at the time of this writing.  The Form 12-25 indicated that,
"The Form 10-K for the fiscal year ended December 31, 2012 will not be submitted by the deadline due to a situation where the workload exceeds available personnel. We were not able to complete all of the financial information required to allow sufficient time for our independent auditors to be able to finalize their review and provide their consent by the filing deadline of April 1, 2013."
Apparently, MULI still has not had the personnel or auditor time because six months later we are still waiting for financials. The company did issue a press release on May 28, 2013, in which they noted that their new auditing firm, M & K CPAS, PLLC, was working on the audit which would be forthcoming "in the very near future".  The "very near future" has long come and gone without further update as to when we can expect the audit and financials. It should be noted that M & K CPAS, PLLC, seems to be the auditor of choice for many companies which are the subject of promotions. Of course, the May 28, 2013 press release was nothing more than window dressing for the continued Pump & Dump campaigns, which the company seems to have plenty of available personnel and time to support with 19 press releases issued during 2013. These include announcements of purported acquisitions of properties and leases and most recently a producing oil well. One would think that such a seemingly active company would find it important to keep its shareholders and prospective investors up to date on the financial status of the company. Of course if it is a sham, the less the public knows, the better.

The second example we'll look at is Drinks America Holdings, Ltd. (DKAM), which last filed financials for the quarter ending January 31, 2013, making it delinquent in its filings for two quarters at the time of this writing. OTCmarkets has tagged this ticker with a Yield sign, for supplying limited information and will change the Yield to a Stop sign if financials are delinquent for much longer. DKAM provides us with a perfect example for the importance of current financials.  Within its last financials, the company reported having 29,405,304 shares outstanding. That is the number OTCmarkets continues to show on the Company Info page, below.

OTCmarkets Info Page for DKAM <click to enlarge>

On November 20, 2013, DKAM conducted the seemingly aboveboard act of Filing a Form 8-K to make public the number of shares currently outstanding.  We're not sure why the company suddenly felt compelled to make this information public, but it could have been at the behest of the SEC, as a Pump & Dump campaign was just ending.  Apparently, the company didn't feel like a 500% increase in the number of shares was worthy of a press release, in spite of the fact that it had issued 7 press releases in November coincident with the promotion. Instead it took the easy way out with the 8-K filing, where it knew that the less sophisticated investor, so relied on during a Pump & Dump campaign, would be less likely to discover the increase to 171,398,373 shares. And of course, the gesture did nothing to help those who had already bought into the two week old Pump & Dump campaign, many believing that there were only 29 million shares outstanding.

The point that is well illustrated with the two examples above is that it is especially foolhardy to invest in a penny stock with delinquent financials. The dual deception of a Pump & Dump campaign with a lack of full disclosure is a fraudulent and negligent act whose responsibility is shared by the officers that fail to keep the filings current, the perpetrators of the Pump & Dump, and the regulators who should not even allow these companies to trade without current filings.  It is up to you the investor, to be vigilant and protect yourself from these unscrupulous acts.