A shareholder in Harmonic Energy (OTCPK:ASUV) has spent considerable sums in recent weeks to send out a missive to tens of thousands of UK investors headlined "the one stock you must own before the New Year" with bold claims about how the shares could gain 3200%. In very small print, it is noted that the shareholder is himself looking to sell the shares. Since the company is, according to the latest SEC Filing of December 14, technically insolvent, yet at $1.05, is capitalized at $66 million, this promotion is misleading in the extreme. But it has worked, in that the shares have been heavily traded and have gained 20 cents in the past two weeks. If you hold the stock, this is your chance to sell. Grab it.
This company was established in Nevada in 2007. It was originally called Fairytale Ventures. It then became Aviation Surveillance Systems. In both these incarnations, it failed to generate a cent of revenues. In July 2010, it changed its name again, to Harmonic Energy and in March 2012, it announced a new business mission: to develop and operate plants that could recycle tires into oil, rubber crumb and base metals. To this end, it agreed to license in the American and European rights to technology developed by a Japanese company, Kouei Industries. Harmonic has, however, not been able to raise the capital to pay Kouei for these rights. The Japanese have already agreed to one deferral of payment, but are still expecting to receive $175,000 by next June 30, and the same again by September 30, 2013.
That is the least of its problems. But before analyzing the financials, you should visit its website (which contains no financial information, but instead a picture of a vast shiny office complex). That is the sort of place a $66 million capitalized company might operate from.
Except that it does not. The registered office is 3rd Floor, 207 Regent Street, London. That sounds impressive -- it is the main shopping street in London's West End. But that address happens to be a small, cramped serviced office used as a mailbox by dozens of firms. Harmonic pays $2,500 a quarter to use that mailbox. Where it is actually based is something of a mystery.
But thanks to that SEC filing of December 14, we do have some idea on the financials. As of October 31, cash was $31,633. Current liabilities (accrued expenses) were $37,180, of which $30,000 were fees owed either to the CEO Jamie Mann or to Seahorse, a Marshall Islands-based firm that is paid $15,000 a month to raise capital for Harmonic. There is also the little matter of $175,000 due on June 30 and another $175,000 due next September to Kouei Industries.
In the three months to October 31, revenues were nil and cash burn (all administrative expenses rather than actual product development) was $24,813. Three months later, no new funds have been raised, the company has no tangible assets to borrow against and revenues are nowhere in sight. As such, it is hard to see how the company can even meet its next rent check, let alone deliver a 3,200% return for investors or, as the UK financial promotion claimed be a "gold mine" that could "generate $100 million per year in revenue."
Not surprisingly, the auditors seem to have noticed that there is an issue, noting in the quarterly return:
The accompanying financial statements have been prepared in conformity with generally accepted accounting principle, which contemplate continuation of the Company as a going concern. However, the Company has an accumulated deficit of $409,035 as of October 31, 2012. The Company currently has a working capital deficit, and has not completed its efforts to establish a stabilized source of revenues sufficient to cover operating costs over an extended period of time. Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund operating expenses The Company intends to position itself so that it may be able to raise additional funds through the capital markets. In light of management's efforts, there are no assurances that the Company will be successful in this or any of its endeavors or become financially viable and continue as a going concern.
The last time Harmonic raised money was $500,000 in March 2012. Given that it appears to have no tangible assets to speak of, where has that all gone? Mann and Seahorse account for a portion of it, but most seems to have gone to another firm, Wilkerson Marketing which, according to the UK financial promotion, has been paid $630,000 to "raise public awareness of Harmonic."
Given that the company's accumulated loss on zero revenues was $409,035 as of October 31, 2012, and that it has raised only $500,000 (pre-expenses of $68,000), it is clear that certain of its debts have been written off, but it is also clear that the sole purpose of raising capital has been to promote the shares in order to raise more capital.
But time is running out for the next capital markets operation. If one assumes that the cash burn in the current quarter is little changed on the prior quarter, then even if Mann and Seahorse continue to simply accrue fees, this company will by Christmas Day have cash of less than $10,000 or six weeks of expenses
(ignoring Mann and Seahorse). Revenues are nil. There are no signs of product development, and the Japanese need $175,000 by June. And yet the market capitalisation is $66 million.
If British investors are beguiled into buying shares in Harmonic, that is perhaps the last and best opportunity that American investors will have to sell. They should not hesitate to do so.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.