Yesterday, February 19, 2013, we published a brief introductory article detailing several reasons why we believed Green Innovations (GNIN.OB) was a train wreck waiting to happen. After hitting a high of $3.35 in early trading the stock ended yesterday's trading session at $1.43, down 48%.
Our discussions points included:
- We learned that investors are claiming that GNIN is being promoted through an outfit that goes under the name Brighton Markets (AKA World Street Fundamentals) that appears to orchestrate boiler room operations.
- We became aware of at least two pump and dump follies Brighton has promoted that ended in a disaster for investors, Independence Energy (IDNG.OB) and Punchline Entertainment (PUNL.OB).
- Our negative bias toward GNIN is supported by at least seven reverse merged public companies that Bruce Harmon, President of GNIN, has been involved with that ended up as total flops, with at least two trading suspensions that are still in place today. The pre-public auditor of three of these companies [former symbols ACCY and ABCC, and Organa Tech Gp (OGNT.PK)] were involved in an SEC complaint charging the auditor "with violating the antifraud provisions of the federal securities laws.
- As luck would have it we just received an email from Brighton promoting GNIN. You can read the email alert here. You can also read a promotional email about PUNL here and IDNG here.
In this follow up article we expand on these and other concerns by highlighting 7 red flags.
- Red Flag One: Incentive for the Pump of a company with no revenues
- Red Flag Two: Ties to Pump and Dumps/penny stocks, including GNIN's President, Bruce Harmon
- Red Flag Three: Claims that GNIN can be traced to an elaborate boiler room operation
- Red Flag Four: Weak internal controls
- Red Flag Five: Too good to be true.
- Red Flag Six: Cancellation Of Common Stock Is A Farce
- Red Flag Seven: Dilution
GNIN's Brief Timeline of Events
- In March of 2012 public company, Winecom, issued 1 million shares of stock to undisclosed parties. Shares outstanding increase from 4 million to 5 million.
- On August 13, 2012 Bruce Harmon joined Mordechai David and Shamir Benita to become a director of a public shell, Winecom. Bruce is appointed as President, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Treasurer. Mordechai David resigned as president and Shamir Benita resigned as secretary and treasurer.
- On August 15, 2012 Winecom approved a 20 for 1 forward stock split, increasing shares outstanding from 5 million to 100 million.
- On September 26, 2012 GNIN was born. Green Hygienics, a company controlled by Bruce, completed a reverse merger with Winecom. Bruce received 49.5 million shares of GNIN stock. Mordechai David and Shamir Benita agree to collectively cancel 79.5 million of their 80 million shares, leaving GNIN with 70 million shares outstanding. The reverse merger document disclosed a licensing arrangement with American Hygienics Corp., a PRC company, that would give GNIN the exclusive right to sell Bamboo products such as baby wipes in North America.
- On November 14, 2012 the press release flow began, including one that stated that GNIN had entered into advanced negotiations with Xiamen C&D Paper Pulp Co., Ltd. ("C&D"), a subsidiary of Xiamen C&D, Inc., of Fujian, China. Following a successful conclusion of the negotiations, Green Hygienics expected to be appointed as the exclusive manufacturer's representative and wholesaler for C&D manufactured paper products throughout the United States, Canada and Mexico.
- On February 8, 2013 GNIN announced that it:
"completed a share capital restructuring transaction with Company's CEO Mr. Bruce Harmon resulting in the cancellation of 45,000,000 common shares of the Company in exchange for 5,000,000 newly issued multiple-voting preferred shares. Following the restructuring, there are a total of 25,000,000 common shares." (We will explain why we think this development is a farce)."
- On February 19, 2013 GNIN announced that it:
"Retires Debt with No Dilution and Issues Stock Dividend to All Common Stock Shareholders."
Red Flag One: Incentive For The Pump Of A Company With No Revenues
All told, at GNIN's high price of $3.35, $122 million of wealth had been created for GNIN insiders, pre-reverse merger shareholders and GNIN "financiers."
1. Bruce Harmon, CEO, CFO, and Chairman: $15 million incentive.
The obvious beneficiary from a pump belongs to the sole director of GNIN, Bruce Harmon. He received 49.5 million shares of GNIN in the reverse merger transaction that created GNIN, the public entity. On February 8, 2013, after "graciously cancelling" 45 million of these shares in lieu of 5 million preferred stock, Bruce currently owns 4.5 million common shares worth about $15 million at GNIN's high. (we will revisit this issue later).
2. Tray Harrison, National Sales Manager of Green Hygienics, Inc., a wholly-owned operating subsidiary of Green Innovations: $1.7 million incentive.
On November 21, 2012 Tray received 500,000 warrants to purchase GNIN shares at $0.01. These shares were given to Tray in return for the sale of a trademark "Sensational Brands" to GNIN from a company Tray controls (Sensational Brands). These shares were worth $1.7 million at GNIN's high.
3. Mordechai David and Shamir Benita, Shareholders of the shell that GNIN merged into: $1.7 million incentive.
The GNIN reverse merger transaction resulted in Mordechai and Shamir owning a collective 500,000 free trading shares of stock worth $1.7 million at GNIN's high.
4. Phantom Free Trading Shares: $67 million incentive.
Six months prior to GNIN's reverse merger, 1 million shares of stock were issued in a $39,466 "financing" transaction to undisclosed parties. Adjusting for a 20 for 1 forward stock split on August 15, 2012 these shares were worth $67 million at GNIN's high.
5. Kachess Financial Corporation: $16.4 million incentive.
In three separate transactions from August 29, 2012 to October 4, 2012 Kachess "loaned" GNIN's subsidiary, Green Hygienics, $49,300 in return for notes convertible into 4.9 million GNIN shares at $0.01, worth $16.4 million at GNIN's high. (GNIN claims that it has repaid this obligation in cash with no dilution).
6. Coventry Capital, LLC: $20 million incentive.
In two separate transactions, one on August 15, 2012 and one on October 17, 2012, Coventry "loaned" the pre-merger shell $60,000 in return for notes convertible into 6 million GNIN shares at $0.05, worth $20 million at GNIN's high.
Red Flag Two: Ties To Pump And Dumps/Penny Stocks, Including GNIN's President, Bruce Harmon
GNIN is not the only company Coventry Capital has provided financing to in return for lucratively valued shares of common stock. It has also "provided financing" to at least three other stocks we consider to be Pump and Dumps;
Reverse Merger Completion
VuMee Inc. (VUME.OB) completed its reverse merger on May 17, 2012 and began trading in January 2013 at around $0.17. The stock now trades at $0.05. The company entered into a line of credit with a stock conversion feature with Coventry on November 26, 2012.
The Digital Development Group Corp. (DIDG.OB) completed its reverse merger on July 31, 2012 when the stock was trading at $0.80 and now trades at $0.10. The company entered into convertible promissory note agreements with Coventry in September and May 2012. (see pump)
Global Stevia Corp. (GSTV.OB) completed its reverse merger on June 14, 2012 when the stock was trading at $0.18 and now trades at $0.03. The company entered into a convertible promissory note agreement in May 2012. (see pump)
Per GNIN's reverse merger filing, it is clear that Bruce Harmon has ties to a slew of penny stock reverse merger failures. Mr. Harmon claims to have had extensive experience with Fortune 500 and startup companies. We found it amusing that Mr. Harmon did not list the names of the Fortune 500 companies he has had "extensive experience" with, but was eager to list his affiliations with numerous penny stocks:
Bruce Harmon's Role
2005 to 2008
formerly ABCC.OB, now WhereverTV (TVTV.PK)
Interim CFO & director of Accelerated Building Concepts Corp, Director, Audit Chairman, Interim CFO
formerly ACCY.OB, no longer listed
Interim CFO and director of Alternative Construction Technologies, Inc.
2006 to 2008
Organa Technologies (OGNT.PK)
Interim CFO and director of Organa Technologies Group, Inc.
2009 to 2011
WWBU.OB, now VRDT Corporation, (VRDT.OB)
Interim CFO and director of Winwheel Bullion, Inc.
Currently, Mr. Harmon owns and operates Lakeport Business Services, Inc. and serves as a corporate consultant to various companies:
Bruce Harmon's Role
eLayaway, Inc. (ELAY.OB)
CFO, then as Director in November 2009, and as CEO in Dec. 2011 of eLayaway, Inc.
Omni Ventures, Inc. (OMVE.PK)
CFO and director of Omni Ventures, Inc.
Immunovative, Inc. (IMUN.OB)
CFO of Immunovative, Inc.
When reviewing Bruce's associations with past public companies we were in awe at the destruction in capital that has occurred for those who invested in these companies. We have yet to see a director of a public company with this many ties to what many would consider P&Ds with track records as bad as Bruce's. At the very least, it appears that Bruce has made a plethora of bad choices.
WWBU ended its tenure as a public company with zero revenues when it became the vehicle for a reverse merger transaction in May 2011.
Those who feel confident that Bruce is the CFO of GNIN should read the following excerpt from an 8-K filed by OGTK in August 2008:
"On May 30, 2008, the Company received a comment letter from the Securities Exchange Commission. The SEC Comment letter addressed numerous inconsistencies in the Form 10 and previously filed periodic reports. In addition, the SEC staff also highlighted errors in the financial statements and notes thereto. The registrant and its independent accountants are reviewing these comments and the registrant expects that changes will be made to the previously filed financials statements as a result of this review. The registrants previously issued financial statements for the year ended December 31, 2007 and for the periods ended March 31, 2008, should no longer be relied upon because an error in such financial."
Bruce failed to mention that he was:
"Chief Financial Officer for SinoFresh HealthCare, Inc. (SFSH.PK), a pharmaceutical company, from September 2002 to September 2003 prior to completion of a reverse merger with a publicly-traded entity."
We are not sure why Bruce omitted this fact from his current biography but it may have something to do with the following event that occurred on April 5, 2011.
"SFSH.PK announces that yesterday the SEC, by order, imposed a temporary suspension in the trading of the company stock. The order imposes a suspension period from 9:30 a.m. EDT on April 5, 2011, through 11:59 p.m. EDT on April 18, 2011. The Company respects the intent of the Securities and Exchange Commission (SEC) to require current information and filings for the benefit of the shareholders and the public at large."
As far as we can tell trading in SFSH is still suspended. Speaking of suspensions, trading in ACCY shares was suspended in 2011, a suspension still effective today:
"As noted in the Form 8-K filed by Alternative Construction on January 3, 2009, the audit report in Alternative Construction's 2007 annual report was withdrawn by the audit firm, thereby rendering the 2007 annual report, filed March 7, 2008, insufficient to satisfy Alternative Construction's Exchange Act reporting requirements for 2007."
As we continued to look into Bruce's past we noticed that an ACCY subsidiary had less than fruitful dealings with ABCC while Bruce was involved with both companies (see note 7 of the 2008 second quarter 10-Q).
And just like Bruce's past ventures, trouble did not evade ABCC.
"Based upon the recent retraction of its report for the Company's 2007 consolidated audited financials by Liebman, Goldberg and Drogin, LLP and the lawsuits filed in Brevard County, Florida disputed control of the Company thereby freezing all of the Company's funds, the Company will not be able to engage a new independent accountant therefore, it will be unable to file its Form 10-K for 2008. As such, the Company has failed to continue to meet its listing requirements and expects that it will be delisted from the OTC Bulletin Board."
ABCC's tenure as a public company ended with the birth of a new reverse merger on May 25, 2012.
As far as Bruce's remaining three public company projects, ELAY, OMVE and IMUN…well a picture is worth a thousand words.
Red Flag Three: Claims That GNIN Can Be Traced To an Elaborate Boiler Room Operation
An I-Hub post by Rupert Miller goes into great detail on how GNIN can be tied to an organization that he estimates cost investors in excess of $300 million over the past 5 years. It's a long read, but we recommend that investors should read the following passage slowly and read the entire post at I-Hub.
Here is an excerpt:
My name is Rupert Muller from the town of Roll, Bavaria.
I have come into information that may be pertinent to you as it relates to Green Innovations, Ltd. (GNIN) a USA orchestrated Stock Scam. The group behind this fraud are the same group that orchestrated: PUNL, IDNG, and others. [one of the 10 promotional websites Rupert references that has ties to this group is Brightonmarkets.com].
The way this group works is by operating phone rooms where high pressured sales tactics are used to place phone calls to investors referring them to the referenced websites. The phone calls are followed by emails sent to potential investors daily. In all cases the company that is being promoted is of no value and the group controls the trading through manipulative methods.
Members of the group are of Canadian origin but have relocated offshore for the purpose of engaging in these schemes. The group is served by Gutenberg Bank AG in Zurich, specifically Daniel Weinmann, Marc Peter, and Maria Zaffaroni. The group proceeds to setup a BVI or Panamanian Corporation with a Trustee (making the ultimate beneficial owner anonymous). That corporation then sets up a bank account with Gutenberg in Zurich. The group then arranges for free trading share certificates to be sent from the transfer agent of the company to the Bank and sign the back of the certificates allowing the Bank to deposit the shares into their global custody account.
Gutenberg maintains what's known as a Custody account with a large US Institution. This allows the group to skirt the DTC chills and various enforcement mechanisms in place. By depositing the shares with such a large custodian they come across as legitimate and do not set off any alarm bells at DTC.
Additionally, Gutenberg under the instructions of its clients opens what are known as Delivery vs. Payment (DVP) accounts at the following US Brokerage Houses:
1) The Vertical Group
2) Finance 500 Inc.
3) Spartan Securities
4) Agis Capital
5) Vandham Securities
6) Ascendiant Capital
The multiple accounts are integral to the scheme as it allows the Bank to circumvent US securities regulations when they deposit over 5% of an issuers shares. In all cases these frauds are orchestrated with complete control of the freely trading shares. Gutenberg also facilitates the manipulative trading that allows the group to maintain control of the stock fraud while it is being promoted through the phone rooms and emails. By maintaining separate DVP accounts Gutenberg can have different brokerage houses on the bid or ask as the brokers (wink wink) don't really know what they are doing. This gives the brokers what's known as plausible deniability when regulators come in after the dump and ask "what were you doing there? to which the answer is undoubtedly: "I was just taking DVP orders."
Red Flag Four: Weak Internal Controls
When GeoInvesting began looking for potential time bombs in the ChinaHybrid space we viewed weak internal controls as a potential detonator. Given Bruce's past history we think it's worth mentioning that GNIN does not currently maintain effective internal controls.
"As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are not effective as of such date."
The additional hirings needed to remediate our internal controls is contingent upon The Company's efforts to obtain additional funding through equity or debt and the results of its operations."
Red Flag Five: Too Good To Be True
Two alleged licensing relationships have helped establish a perception of legitimacy for GNIN:
- A five year exclusive licensing relationship with American Hygienics Corp., a PRC company, that will give GNIN the exclusive right to sell Bamboo products such as baby wipes in North America.
- GNIN has entered into advanced negotiations with Xiamen C&D Paper Pulp Co., Ltd. ("C&D"), a subsidiary of Xiamen C&D, Inc., of Fujian, China. Following a successful conclusion of the negotiations, Green Hygienics expects to be appointed as the exclusive manufacturer's representative and wholesaler for C&D manufactured paper products throughout the United States, Canada and Mexico.
Our team finds these arrangements, even if "technically signed" by an "agent" to be very suspicious. There is no doubt that American Hygienics and C&D Paper Pulp are well established PRC companies.
"AHC is one of the world's largest manufacturers of bamboo-based wet wipes, is internationally certified (ISO9001:2008, BRC-CP, EPA, Nordic swan, cGMP and GMP) and a member of the world Private Label Manufacturers Association. Exporting to over 45 countries, AHC supplies a number of Multi-National brands and retailers on all continents including customers such as 3M, Carrefour, Tesco, Wal-Mart, and Goodyear."
"Founded in 1992, Xiamen C&D Paper & Pulp Co., Ltd., a sole subsidiary of Xiamen C&D Inc., (Shanghai Stock Exchange - 600153), has developed into the largest paper supplier in China. C&D is dedicated to supply high quality packing papers, and a variety of finished products with regular paper pulp and bamboo pulp. In 2010, C&D sales volume was 800,000 tons of paper and 800,000 tons of paper pulp. The C&D parent company has total assets in excess of $8.3 billion and revenue (2011) in excess of $12.8 billion. In 2012, Xiamen C&D Inc. was listed among China's Top 500 (#57 in 2012) listed companies. In 2010, Xiamen C&D Inc. was listed in China's Top 100 Investment-Worthy Public Companies and China's Top 100 Most Competitive Public Companies. C&D is FSC Certified by the Forest Stewardship Council. Our main products are including bath tissue, facial tissue, hand towel, and napkin tissue etc, and are mainly exported to North America, South America, Australia, Europe, Africa, the Middle East and Latin America, receiving warm praises from our customers."
We could possibly begin to accept that these firms might consider some type of non-exclusive arrangement with a fledgling firm. But given their sizes, global foot print and global relationships with a diverse customer base, why would these enterprises consider giving an exclusive license to a company with no sales led by a President with a questionable record of running public companies? Why do they even need GNIN?
Furthermore, GNIN's "agreement" with AHC allegedly extends the 5 year exclusive relationship another 5 years if GNIN achieves some relatively meager sales targets:
- $150,000 in sales of absorbent pad based products, including diapers, panty liners and sanitary pads during the first year followed by a 25% increase during each subsequent year;
- $100,000 in sales of plates and cups, produce platters, dryer sheets, and stationary during the first year followed by a 25% increase during each subsequent year; and
- $150,000 in sales of miscellaneous branded products, followed by a 25% increase during each subsequent year.
These points become even more relevant considering that GNIN admits it is not planning on meaningfully increasing its employee count (and thus we assume sales staff) anytime soon.
Per the reverse merger 8-K:
"We do not expect any material changes in the number of employees over the next 12 month period. We do and will intend to outsource contract employment as needed until such time as we require and are able to sustain the employment of dedicated employees." (see Page 7)
"Other than as described above, we do not expect any other individuals to make a significant contribution to our business." (see Page 19)
We also visited the LinkedIn (LNKD) site to look up Arno Wang, the alleged North American sales manager of Xiamen C&D Paper & Pulp Co. mentioned in a January 15, 2013 press release. We are stunned that the profile of a regional sales manager of a multi-billion company is essentially empty with no contact information and only 19 connections.
We performed some research on Tray Harrison's company, Southwest Tissue and Paper (now Sensational Brands). Recall that Tray sold the trademark "Sensational Brands" to GNIN for warrants to buy 500,000 shares of GNIN at $0.01. Tray Harrison is also the National Sales Manager of Green Hygienics. In 2011 his company reported revenues of $2 million. We believe that it is possible that GNIN is attempting to secure purchase orders from Tray's relationships to build some legitimacy through press release flow. In any event, at its high price of $3.35, GNIN's fully diluted market value of 250 million clearly overplays this "opportunity."
Red Flag Six: Cancellation Of Common Stock Is A Farce
On February 8, 2013 GNIN announced that it:
"completed a share capital restructuring transaction with Company CEO Mr. Bruce Harmon resulting in the cancellation of 45,000,000 common shares of the Company in exchange for 5,000,000 newly issued multiple-voting preferred shares. Following the restructuring, there are a total of 25,000,000 common shares."
A quick read indicates that Bruce has reduced his stake in the company to 4.5 million shares (49.5 million shares issued to Bruce in the merger minus the share cancellation). Variations of share cancellations are a common move in the P&D world to portray a management team that is shareholder friendly. One only has to reference DIMI that followed a similar tact that helped fuel its shares from around $1.00 on June 14, 2012 to $1.96 on May 7, 2012. The stock now trades at $0.01.
Indeed, the share cancellation news is what put the GNIN pump into overdrive. But when we look deeper into Bruce's "gift" we deem it to be a farce. This view is supported by an excerpt from pumpanddumps.com that outlines characteristics of a pump and dump:
The cancellation of shares, usually involving an insider's return of some of his common stock to the company treasury, is usually meaningless because the insider(s) will never give back enough stock to relinquish control of the company. And as long as the insider(s) have control, they are free to reissue themselves stock under a number of schemes, once they have sold enough to put their control in peril. They also probably hold enough preferred shares, options and warrants to give themselves all the future shares they want.
While GNIN would like investors to believe that 25 million shares outstanding is the appropriate number to reference when valuing the company's shares, any seasoned investor would factor in future dilution into a valuation scenario. As we will discuss in the next section, future dilution is a certainty according to the company.
On a side note the preferred shares puts Bruce in a higher position on the priority ladder in the event of a company's liquidation or bankruptcy.
Relatedly, GNIN just issued another "investor friendly" press release:
"Green Innovations Ltd. (OTCQB: GNIN) (OTCBB: GNIN) ("Green Innovations" or the "Company") is pleased to announce that it has successfully repaid four (4) Convertible Promissory Notes (the "Notes") issued to Kachess Financial Corporation ("Kachess") for a total amount of $51,967 ($49,300 plus accrued interest of $2,667). The Kachess Notes had originally been issued by Green Hygienics, Inc. ("Green Hygienics"), now a wholly-owned subsidiary of the Company, prior to its acquisition by Green Innovations in September 2012."
We are taking a closer look at Kachess Financial. We have not been able to locate much information on this outfit, but have learned that three individuals are directors of several thousand Panamanian entities:
- Delio Jose De Leon Mela - over 6000 Panamanian companies.
- Lilia Judith Tovar De Leo - over 5000 Panamanian companies.
- Vernon Emmanuel Salazar Zurita - over 5000 Panamanian companies.
Investors who follow the P&D space should know that Panamanian ties raise red flags.
Red Flag Seven: Dilution
Just as GNIN would have us believe that its capital structure is now shareholder friendly, management fails to mention, in the related press release, that dilution is a certainty.
"We believe that our cash balance is not sufficient to finance our cash requirements for expected operational activities, capital improvements, and partial repayment of debt through the next 12 months."
From the auditor:
"The Company is highly dependent on its ability to continue to obtain investment capital from future funding opportunities to fund the current and planned operating levels. The unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to bring in income generating activities and its ability to continue receiving investment capital from future funding opportunities."
We won't be fooled by the inferences of legitimacy that GNIN is spreading. That is how we believe a cunning P&D works: look legitimate enough to increase the price of a stock to generate hundreds of millions of dollars of easy money for the P&D puppeteers and possibly slowly fade away instead of dealing with the challenges of building a viable operating entity. Investors who bought into the Pharmagen (previous symbol SNPK) rhetoric that included a vitamin product with distribution ties through major retailers like Walgreen (WAG) were fooled in this fashion. Indeed, we ordered PHRX vitamin from its website and received a product. Within 29 days the PHRX pump ended. PHRX now trades at $0.04 after hitting a high of $2.40 in April 2012.
P&D schemes are becoming better at aligning themselves with sprinkles of legitimacy. Investors who try to look at P&Ds objectively will likely get fleeced. Unlike as in a courtroom setting, we choose to approach a P&D as guilty until proven innocent. And it looks like GNIN will be guilty as charged.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in GNIN.OB over the next 72 hours.