Implant Sciences (IMSC.PK) has historically been a sub-$1 Pink Sheet penny stock. The company makes devices to detect trace amounts of explosives. It sells the vast majority of its devices in Third World countries. Its products are not approved by the Transportation Security Administration in the U.S.
In the last few weeks it has gained 50% to 100%, depending on the day of the week, giving it an astonishing $50 million market capitalization. The recent move has come on the following press:
- Company releases
- A non-investigative trade journal story which interviewed only the CEO
- Multiple articles by Seeking Alpha author VFC's Stock House.
- Coverage by Forbes columnist Gene Marcial
VFC's Stock House is a Seeking Alpha Certified author. To his credit, the author disclosed a long position. However, the articles are entirely promotional with no citations, and have titles including language like:
- Another Buying Opportunity (Jul 3)
- The Surge Continues (Jun 28)
- Huge News (Jun 26)
- Potential Validated by Another Key Move (Jun 19)
- Positioned To Lead The Next Generation... (Jun 14)
Gene Marcial's writeup is similar in that all of the information comes from one source: the company itself. Marcial's main expert is Goldman Small Cap Research. What Marcial doesn't tell the reader is that Goldman is a penny-stock promotion operation. It does "sponsored research" (i.e. companies pay it to be favorably covered). Its disclaimer states:
Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, or other firms. Goldman Small Cap Research relied solely upon information provided by the Company. ...
Here's a sampling of Goldman's analytical writing:
- The moment you have all been waiting for is here...
- The Most Disruptive Technology in Energy in Years...
- [a flurry of news] will move the stock close to the $0.10 level... a company that we believe will dominate..."
Furthermore, Marcial and Goldman are both affiliated with an entity called CPreports, a sister site of Corporate Profile. CPreports describes itself as "a one stop resource for the hottest stock news and stock picks." It too is a sponsorship-based service:
Since Corporate Profile, LLC has been compensated in many instances for its services, investors should evaluate the information on the Site with that in mind and should always perform their own independent analysis. Corporate profile or its affiliates may from time to time aquire [sic] stock in companies that it covers. This compensation could be in cash or/and issuance of securities of the profiled company.
Needless to say, the homepage of CPreports links to Marcial's column in Forbes. This hard-hitting YouTube video ought to erase any doubt over whether CPreports was paid to pump the stock. Mutual back-scratching and possible conflicts of interest are common in this story.
Marcial's other expert is "Gregory MacArthur, president of investment consulting firm ViewPoint2000." He says nothing that isn't straight from a company press release. ViewPoint2000 has no Internet presence, making it hard to research. MacArthur has no detectable track record, although there is a Gregory MacArthur registered on Amazon.com with just one book review. That one review is of Gene Marcial's book. Mutual back-scratching everywhere you look.
Maybe all this coverage is legitimate, and it's not shady for Marcial to promote a Pink Sheet penny stock by citing his buddies. Maybe there really is a company that will dominate and could trade for close to $0.10. However it is rather odd to have so much "independent" analysis of Implant Sciences, and no mention of the company's bankruptcy warning:
We will be required to repay all of our borrowings from DMRJ on September 30, 2012. Our obligations to DMRJ are secured by a security interest in substantially all of our assets. ... As of April 30, 2012, the outstanding balances due to DMRJ under these instruments were $3,440,000, $1,000,000 and $23,907,000, respectively. If we are unable to repay these amounts as required, refinance our obligations to DMRJ, or negotiate extensions of these obligations, DMRJ may seize our assets and we may be forced to curtail or discontinue operations entirely and/or file for protection under bankruptcy laws.
Implant Science is in hock to DMRJ Group, which also approved some directors as a condition of financing. Any new capital has to come on DMRJ's terms. So, can the company meet its debt obligations? The balance sheet shows negative working capital and negative shareholder equity:
- Current assets: $5.5 million
- Current liabilities: $35 million
- Shareholder equity: ($29 million)
The company has lost between $12 and $16 million in each of the last three years. It has had negative operating cash flow every year. It owns $3 million in cash-equivalents (subtracting inventory from current assets). It cannot produce the $28 million that it has to repay on Sept. 30. Also troubling to any thesis about a growth stock is that its revenue is unstable and in decline:
- 2009: $8.7 million
- 2010: $3.5 million
- 2011: $6.6 million
Marcial reported this as "Last year, Implant's revenues doubled..."
The promoted hope for the company is that its trace-explosive detectors will be approved for use by the TSA. According to the company, that could happen in August. Currently, the majority of its sales are to the Third World. However, the only information about the chances for that approval comes from the company itself. And, approval doesn't mean winning contracts in any case. It will still have to compete against larger and more reputable companies. Given that its revenue topped out at less than $9 million (3 years ago), mere approval to bid won't get Implant Sciences out of its $30 million hole.
According to Goldman, who is paid to be optimistic, the government has allocated $40 million to "hand-held explosive trace detection devices", Implant's specialty. Suppose that's true. Suppose Implant is approved to bid on that. Goldman says there are two other, much larger and well-established competitors: Smiths Detection and Morpho Detection. It's surprising GE (GE) isn't in this game, but suppose Goldman is right. Suppose Implant Sciences competes as an equal with just two others, and gets 33% of the pie. That is $12 million in revenue. Suppose its profit margins are 10%. That is $1.2 million in profit. It is losing $15 million/year, and needs $28 million by Sep. 30 to remain solvent.
It's hard to see how this stock can be anything but a rip-off. The company has sold itself to DMRJ Group and has no ability to buy itself back. While DMRJ has an interest in supporting the business, that is quite different from supporting the common shareholder. If it is a bankrupt business with a viable product, DMRJ can seize the assets. If it is a bankrupt business with no viable product, the common shareholder still loses. If it is to survive, it must do so through dilution of the common shareholder by issuing new shares on DMRJ's terms.
The most interesting thing about this, to me (maybe I'm naive), is not the pump and dump. That's as old as the hills. It's that reputable media like Forbes pump Pink Sheet penny stocks. At least VFC's Stock House disclosed a long position in his articles (no excuse for failing to mention the miserable financial condition, however); Seeking Alpha requires it. Does Forbes? If little investors can't trust Forbes columnists not to exploit them, who can they trust?
Disclosure: I am short IMSC.PK.