By Melissa Davis
Gold Resource Corporation (NYSEMKT:GORO) sure has raised some eyebrows with its curious spending habits.
Over the years, GORO has splurged on plenty of things – glorified promoters for its stock, hefty compensation for its insiders, expensive dividends for its shareholders – but the company has regularly cut corners, adopting a downright thrifty stand, in one critical area. Despite its evolution from a penny-stock company into a $1 billion corporation trading on a respectable exchange, GORO has long refrained from hiring accomplished experts to double-check the numbers that power its stock price.
For starters, as highlighted by TheStreetSweeper in a big investigative report already, GORO has yet to invest in a standard feasibility study that would replace its own bullish production estimates with formally established gold and silver reserves. The company has taken a frugal approach on other key services as well, records indicate, saving additional money (while further limiting outside scrutiny) by relying on a cheap auditor and a part-time CFO to oversee its books. In fact, records show, GORO spent more on the boardroom director who chairs its audit and compensation committees – identified as a “promoter” in outside corporate filings -- than it did on its auditor or its CFO last year.
Still, GORO has long rewarded the relatives who serve as its top executives with the biggest compensation packages of all. The company doubled the six-figure salaries for all three of those relatives last year, and then further sweetened the deal by issuing them “discretionary” bonuses equal to their newly expanded salaries. GORO spent more than $2.3 million in cash last year on those three executives, who scored another $12.5 million by dumping stock (most of it at much higher prices than those seen today) during a massive insider selling spree that began just a few months after they snagged their handsome raises.
Jason Reid, the son of CEO William Reid and the nephew of Vice President David Reid, walked away with two new fancy titles as well. He became president of the company last July, when GORO finally launched commercial gold production after numerous delays, and then joined his father (the chairman) on the board before the year came to an end.
GORO welcomed Jason Reid to the company back in May of 2006, records show, when the junior miner hired him to serve as its “corporate development assistant” and issued him 600,000 stock options (vesting immediately and priced at just $1 a share) upon appointing him to that new post. He exercised all of those options over the course of the next few years, without officially reporting a single stock sale during that period, and scored a fresh batch of options – plus his first major promotion – along the way.
GORO named Jason Reid vice president of the company in 2008, assigning him the same rank always afforded to his uncle (an original founder) over the years, and then followed up with a notable move that still stands out today. That spring, records show, GORO actually hired an accomplished industry veteran to fill a key management post at the company. Specifically, in a feat loudly celebrated by management at the time, GORO lured Reynaldo Jimenez Salazar away from Goldcorp (NYSE: GG) – one of the largest players in the industry -- to oversee the operation of its own Mexican gold mine.
“The mining industry’s workforce is a competitive environment, and we are pleased to have such an experienced professional join Gold Resource Corporation,” CEO William Reid gushed when announcing the appointment. “We believe Mr. Salazar’s joining Gold Resource as a key member of our management team speaks well of the potential of GRC’s flagship El Aguila project.”
GORO soon found itself hunting for a new project manager, however, with Salazar changing his mind – and sticking with giant Goldcorp instead – just a month after the junior miner proudly announced his appointment to that crucial management post. Although GORO quickly located a replacement and later went a step further by hiring a countrywide manager for all of its projects in Mexico, records show, the company continued to rely exclusively on members of the Reid family to fill every position on its tiny full-time executive team.
Jason Reid currently ranks as the second-highest executive of the company, records show, even though he arrived on the scene with a relatively thin resume. He holds a degree in anthropology (rather than geology, engineering or business administration), records show, and spent a decade running a tiny fencing/construction firm before joining his relatives at GORO and following them into its exclusive executive suite. Notably, Internet records indicate his original company (known first as Reid Fencing and later as Reid Farrier) lost its corporate registration the year after he changed jobs, and reportedly operated with a two-person staff at last count.
For its part, however, GORO proudly trumpets the credentials held by the youngest executive and director of the family-led mining company:
“Prior to joining the company, Jason was the founder and president of two successful businesses he ran for 13 years,” GORO has stated publicly. “Our board believes that Jason Reid’s experience founding and operating his own business, as well as his significant participation in the development of business strategy and decision-making for our company over the past several years, provides him with the appropriate experience and qualifications to serve as a member of our board.”
Since 2008, when GORO first promoted Jason Reid to an executive position, the company has given him $2.16 million in cash and stock options for his service to the company. Despite his new role as president, however, he actually ranked as the lowest-paid member of the company’s full-time executive team last year. But thanks to his big raise and hefty bonus, records show, he still made almost twice as much the company’s auditor and its CFO combined. GORO failed to answer questions for this story.
Hall of Shame
From the day it first surfaced as a brand-new penny stock five years ago, records show, GORO has always counted on StarkSchenkein (formerly Stark Winter Schenkein) – a favorite among fly-by-night companies in the microcap space – to audit its financial statements. StarkSchenkein has otherwise catered almost exclusively to hopeless penny-stock companies, records indicate, which languish on the OTC Bulletin Board or the lowly Pink Sheets if they’re lucky enough to keep on trading at all.
At least three obscure companies backed by Bill M. Conrad – the chairman of GORO’s own audit committee – rank as past clients of StarkSchenkein, historical records show, including two companies that officially indentified Conrad as a “promoter” when they operated under different names. One of those companies also shared a part-time finance officer with GORO for years, records show, before wooing him away this spring with a permanent job offer despite its more limited resources. That company – which actually dismissed StarkSchenkein as its auditor well ahead of its own move to a larger stock exchange --looks like a resounding success, however, compared to the crowd of disasters that have surfaced on the firm’s client list over the years.
Take Skyway Communications, for example, a notorious microcap outfit that hired StarkSchenkein in mid-2004 after the company’s previous auditor resigned in the middle of an alleged pump-and-dump scheme. Less than a year later, records show, Skyway wound up with more nominations for so-called “Scammy Awards” than any other company that landed on that shameful list. Skyway walked away with two of those dubious honors (including “Worst Overall Scam of 2004”), records show, finally scaring away StarkSchenkein, which expressed a newfound doubt in management at that point.
Despite the fresh stain on StarkSchenkein’s record, however, GORO soon embraced that same firm as its own auditor of choice. The Public Company Accounting Oversight Board has conducted at least two formal inspections of StarkSchenkein since then, records show, and released horrible reviews of the firm on both occasions. The first report, issued when GORO still traded on a penny-stock exchange like other StarkSchenkein clients, revealed major deficiencies in all four audits the PCAOB reviewed. The second report, this one published after GORO had already “uplisted” to a major stock exchange, identified significant deficiencies in five out of seven of the audits inspected by the PCAOB when it returned to check on the firm’s progress a few years later.
Just months after that second disturbing PCAOB report, records show, GORO nevertheless chose to retain StarkSchenkein – with the unanimous support of its audit committee – to serve as its independent auditing firm once again. GORO spent a mere $37,000 on its latest audit, a figure that has barely risen (from $31,750) in recent years, while its competitors – sporting similar market values and trading on the exact same stock exchange – typically pay hundreds of thousands of dollars for Big Four auditors to verify the accuracy of their financial statements instead.
Moreover, when TheStreetSweeper reviewed a list of public companies that currently identify StarkSchenkein as their outside auditing firm, GORO jumped off that short page. While many of the firm’s past clients have long since disappeared, records indicate, StarkSchenkein still serves as the auditor for about 15 public companies at the present time. Excluding GORO, records show, all of those clients rank as microcap companies that trade – most of them for a nickel or less – on penny-stock exchanges.
Coincidentally, records show, the most valuable of those microcap companies,Santa Fe Gold (SFEB.OB), operates in the mining space as well. Unlike GORO, however, Santa Fe sports a modest market value ($83.4 million) and a low stock price (88 cents a share) despite its own celebrated status as a young but growing commercial gold producer.
Compared to GORO, in fact, Santa Fe looks downright poor. Despite its limited revenue and meager cash balance (less than $175,000 at last count), however, Santa Fe somehow found enough money for a feasibility study that allowed the company to at least establish some probable reserves.
Although both companies use the same cheap auditing firm, records show, GORO paid StarkSchenkein about half as much (on average) as Santa Fe did for the most recent audits it received. GORO actually spent far more money on extra “audit-related” services than it did on its mandatory audit last year, corporate filings reveal, even though most public companies abandoned that risky practice following the notorious collapse of Enron and Arthur Andersen about a decade ago.
For its part, StarkSchenkein initially told TheStreetSweeper that it would try to answer questions for this story but -- after seeking permission from GORO to grant that interview -- apparently changed its mind in the end.
Meanwhile, corporate filings indicate, GORO has never employed a full-time finance chief at all. For years, records show, GORO kept appointing Frank “Monty” Jennings to serve as its CFO on a part-time basis (paid by the hour) instead. GORO clearly saved some money in the process, records show, with its CFO receiving a fraction of the salary -- and none of the stock -- awarded to the three relatives on its full-time executive team.
Jennings spent five years at that part-time job before he finally resigned this spring, records show, when he landed a full-time position at an obscure energy company that counts the chairman of GORO’s audit committee among the members of its own board.
After that, records indicate, GORO found a way to further reduce its costs. For the next two months, a period that would see GORO report its first quarterly profit ever, William Reid – already doubling as chairman and CEO at the time -- stepped forward to assume yet another critical role at the company. He temporarily served as interim CFO, despite his lack of documented accounting experience, until GORO located another CFO willing to work for the company on a part-time basis.
‘Men Who Make Mistakes’
In contrast, corporate filings show, GORO has always rewarded Conrad – the longtime chairman of both its audit and compensation committees – quite well over the years.
Conrad launched a string of ill-fated penny-stock companies before he finally hit the jackpot in mid-2006, historical historical records show, when he landed a boardroom seat at GORO that now looks like the most lucrative -- by far -- of his entire career. Conrad helped take GORO public shortly after he joined the company’s board, records indicate, and soon wound up as the lucky owner of 100,000 shares of the miner’s brand-new stock and cheap options to purchase another 500,000 shares. By its first anniversary as a public company, records show, GORO had almost quadrupled in price and pushed the value of those 600,000 shares to roughly $2 million.
In total, records indicate, GORO has issued Conrad the equivalent of 850,000 shares of stock (including options) for his service to the company over the years. If Conrad still owned all of that stock, records suggest, he would be sitting on a paper fortune worth $16.8 million right now.
Instead, records show, Conrad chose to cash out most of his options by the end of 2009 – when the highflying stock had barely reached half its current price – and wound up sacrificing the gigantic, if unforeseen, gains that followed in the process. By the time that GORO filed its latest proxy statement this spring, corporate records show, Conrad held just 407,500 shares of company stock (most of that in the form of unexercised stock options) – or at least 442,500 shares fewer than the total he had received – even though he has publicly reported the sale of just 45,000 shares of that stock instead.
Conrad scored more than $1 million on the sales he did report, records indicate, dumping all of those shares at better prices – ranging from almost $25 at the low end to more than $30 at the high – than the stock, at $21.47, currently fetches today. Even with his stake in the company dwindling, however, Conrad could net another $7.8 million (if GORO maintains its current price) by cashing in the stock and options that he still holds.
Conrad did not respond to a message from TheStreetSweeper seeking input for this story.
Despite his big windfall from GORO (both realized and potential), records show, Conrad is now pursuing yet another venture in the penny-stock arena where he has operated throughout most of his career. This August, just as GORO began its recent dive, “Liquid Spins” – an obscure company listing Conrad among its boardroom directors and its largest shareholders – filed a registration statement revealing plans to go public on the OTC Bulletin Board (like GORO and other Conrad-backed companies before it) and become a brand-new penny stock.
Liquid Spins boldly claims that it “developed the concept” of lyrical greetings cards, even though regular Hallmark stores have been selling similar cards quite successfully for years. Perhaps sensing that formidable competition, the company recently decided to adjust its business model. Specifically, records show, Liquid Spins is now banking on an exclusive agreement with the former lead singer of Little Texas – a group that disbanded more than a decade ago – to somehow distinguish itself and give the company a better shot at success.
Originally known as Malemark, records show, the company first tried to carve its own niche in the greeting card market by simply targeting an unusual audience. When Malemark launched operations in 2009, records show, the company initially hoped to capture a brand-new market by creating standard greeting cards (minus the tunes) for “Men Who Make Mistakes.”
If nothing else, history suggests, that company could theoretically attract business from investors who purchase stock in outfits backed by Conrad (including some recent buyers of GORO itself) and then later wind up with a deep sense of regret. But they better hurry, records indicate, because Malemark has already reported the disposal of its website – writing off that entire investment due to tepid greeting card sales – although the site still seems to operate, despite that write-down, at the present time.
For now, at least, the company (like other Conrad-led ventures before it) is still trying to reinvent itself. Although it has yet to even go public, records show, the young company is already chasing a brand-new rainbow – just pretty enough to woo future investors – toward its own magical, but potentially elusive, pot of gold.
Disclosure: Prior to the publication of this article, TheStreetSweeper established a new short position in GORO with the intention of profiting on future declines in the stock price. Since Aug. 31, TheStreetSweeper has sold short a total of 40,506 shares of GORO at an average price of $22.08 a share. It repurchased 3,389 shares due to a forced buy-in on Sept. 15 before this story appeared. Going forward, TheStreetSweeper may choose to adjust its investment in GORO -- by increasing, decreasing or covering its short position -- and will promptly disclose the details of any future trades as they occur.
As a matter of policy, TheStreetSweeper prohibits members of its editorial staff from taking financial positions in the companies that they cover. To contact Melissa Davis, the editor of TheStreetSweeper website and the author of this article, please email firstname.lastname@example.org.