Most of GeoInvesting's screens consist of compiling lists of stocks to watch based on various fundamental criteria. However, we also follow stocks that we predict may be ideal pump and dump candidates or ones with stories that just seem too good to be true. We've published exposés on five stocks so far, Raystream (RAYS.OB), Sefe Inc. (SEFE.OB), Great Wall Builders (GWBU.OB), Dimi Telematics (DIMI.OB), and Organovo Holdings (ONVO.PK), all of which have seen their shares fall sharply shortly thereafter.
Once in a while we get lucky and make money by purchasing a speculative stock in the pre-pump phase, mindful that almost every one of these sexy stories will ultimately dump; the only wild card is when this will happen. We believe that Ld Holdings (LDHL.PK) will be the next stock to dump. LDHL popped up on our speculative screen on April 24, 2012:
After well over a year of no trading volume LDHL shares rose $0.04 to $0.06 on 24,000 shares. We could not find any press releases to account for the news. However, we were able to locate information in a couple of filings that could make this an ideal pump candidate. First, the company has outlined a new business strategy on page 5 of its 2011 10K that implies the company will grow to be a $420 million company in 5 years. Second, an April 19, 2012 8K implied that the company is about to embark on an investor relations campaign. Third, this same 8K disclosed that company just inked a consulting agreement with Financial Wellness, LLC. to assist the company in the development and implementation of its business plan. The consulting fee structure is highly dependent on near term stock performance.
Our article could not come at a better time as on September 17, 2012 the Wall Street Journal reported that:
The Securities and Exchange Commission said that it temporarily suspended trading in the shares of 16 more companies. The suspensions are part of a broader crackdown this year.
Although LDHL was not part of this batch of suspensions, it is possible that the company's story includes characteristics that the SEC considers when policing the pump and dump space. We believe that the LDHL story, commandeered by Chairman and CEO John Ayling, is based on a pipe dream with a business plan that embodies similar "pie in the sky" characteristics to LDHL's prior business plan, also put in motion by Ayling, under the name Leisure Direct and a different ticker symbol, LDTI. We believe that the company has been very clever by presenting detailed business plans based on industry facts to excite investors.
John Ayling, a self-dubbed "entrepreneur," should not be a stranger to what makes stocks go up and down. He was employed by brokerage firm Bell & Beckwith from 1969 to 1982. The firm entered bankruptcy in 1983 after it was discovered that its managing and general partner, Edward P. Wolfram, Jr., had embezzled approximately $47 million.
Leisure Direct was a manufacturer and direct marketer of swimming pools, spas and patio products. In February 2004, Ayling took his swimming pool company public via a reverse merger transaction. Around two years after becoming a public company. LDTI's revenues fell from $350,000 to nothing (as can be seen in the company's 2006 10K), the stock followed suit, eventually reaching sub-penny levels. In October 2008 the company changed its name to LD Holdings under its new symbol, LHDL.
After unsuccessful attempts to raise capital for his swimming pool venture (Leisure Direct, LDTI), and commensurate with the name change, Ayling did an about face and has since been talking up his plans for his second venture, LDHL, to build a diner restaurant empire as well as help small companies grow and raise capital.
Through its wholly-owned subsidiary, LD Financial, Inc., the company has started providing consulting services to corporate clients through its Business Services Division. Plans are to establish additional regional offices in the first half of 2009."
Another wholly-owned unit, has been launched with experienced management personnel and will source acquire and manage companies that operate in an underserved segment of the small business market. This segment is companies with sales between $2-20 million. It is LD Holdings goal to acquire 40-50 of these companies with an average $10 million in sales, over the next 5-7 years. These companies should be rampable and scaleable to drive organic growth after acquisition.
On September 10, 2010 LDHL added the ambitious of goal to enter the restaurant business and "open or acquire 22 diners over the next three years."
With one diner and recently reported revenues of just $46,000 for its 2012 second quarter, down from $107,000 in the 2011 comparable period, we think it's fair to say that LHDL has not successfully executed its new plan. Yet, the stock price has recently shot up over 400% on the heels of second pump phase, reaching a high of $1.57 in September 2012 and now boasts a market cap of around $30 million.
Below is a chart illustrating the historical performance of this stock, including the crash of Leisure Direct shares.
So far, during his tenure as CEO of a public company, he managed to
- Take his fledgling swimming pool company from minimal to zero revenues.
- Buy a company called Avalon in July 2004,a direct importer and wholesaler of wicker baskets, whose mention was mysteriously omitted from company filings with no explanation we could find, despite being touted by the company as "well known in its industry as a reliable supplier of products with outstanding customer service."
- Enter several letters of intent to initiate acquisitions that never materialized, as we will show later in this report with associated links.
- Dilute shareholder interest from the time of the Leisure Direct merger, as evidenced by a 65% increase in LDHL's share count from 15.09 million as of April 12, 2004 to 24.9 million as of August 20, 2012. This increase was the result of conversions of company debt to equity, share-based compensation fees and the issuance of shares/warrants to "consulting" companies. And we calculate that another round of significant dilution appears to be on the way. This is possibly unbeknownst to the casual investor and we calculate can potentially increase shares by at least another 30% (around 8 million more shares, maybe as much as 16 million). This is due to in the money warrants, as explained in an April 2012 8K that discloses a "Management and Business Development Consulting Agreement with Financial Wellness LLC., to assist the company in the development and implementation of its business plan." All this dilution has occurred with little to no revenue generation and little capital raised compared to the increased number of shares.
As of June 30, 2012, LDHL's balance sheet is a mess and on life support:
- Current Ratio is .0017
- Current Liabilities amount to $4 million
- Shareholder value stand at negative $3.9 million
This basically renders its current business plan, centered on raising mounds of capital to acquire over 40 revenue and EBITDA generating companies within five to seven years, as useless. As of June 30, 2012, the company generates quarterly revenues of about $45,000 from one Diner in Ohio, and is losing money. As will be show later in this report, it appears that the company has missed numerous operational goals it has set.
On June 23, 2010 John Ayling voluntarily surrendered his firm's investment advisor license.
The Ohio Department of Commerce's division of securities said Tuesday it has abandoned its effort to revoke a Perrysburg firm's investment adviser license. The firm's president voluntarily surrendered it April 28.
John Ayling, president and chief compliance officer for Capital First Management Inc. of Perrysburg, terminated the license after the division formally sought its suspension or removal in 2009, spokesman Dennis Ginty said.
Yet ironically, he wants to help companies raise money and as we will discuss, solicit customers in his diners to buy into LDHL's business plan and stock.
We are not going to ramble on about accusations and insinuations of fraud. This is a unique circumstance where we only need to look at LDHL's insane business plan, conclude how utterly ridiculous and hilarious it is and realize that John Ayling has played this game in the past under LDTI, which ultimately resulted in a destruction of investors' capital.
LDHL has not followed the usual pump and dump road map, often heavily influenced by "third party" promotional material talking about billion dollar industries and market opportunities. One look over SEC filings reveals that LDHL has taken this task upon itself. We will show that LDHL is touting its new "venture capital type business plan" the same way it touted its previous endeavor to basically build a swimming pool empire. Both strategies throw out multi-billion dollar industry references, lofty sales/EBITDA goals and bold acquisition strategies.
We think that LDHL is being even more cunning this time around. We noticed that while the company was operating under LDTI, there was an amateurish attempt at a pump campaign by a "third party", accompanied by the company's fairly aggressive approach of issuing press releases divulging its operational plans. Today, we believe it is telling its plan quietly in SEC filings to build a first wave of share momentum before the flow of press releases begin to hit the news wires.. That being said, we intend to lend our opinion to investors that an imminent disaster is likely.
This story is eerily similar to the Great Wall Builders (PINK:GWBU) hype we wrote about on June 21, 2012. GWBU rose from $0.40 to 1.95 in less than a month on the heels of the same pump campaign that took place under a previous symbol using the same business plan just a few years prior. The stock now trades at $0.015.
The LDTI/LDHL story is quite similar, just under a different ticker symbol and industries.
Here's what happened to GWBU over the last 6 months:
Let's take a look at the hype that the company wants to sell to investors - a company with a history of little to no revenues, failed business ventures, negative equity and mounds of debt.
The Leisure Direct (LDTI) Hype
If you had invested in LDTI between 2004 and 2008 and recently came across LDHL you would probably be asking yourself, "where did I hear this story before?"
Shortly after John Ayling reversed merged his "budding" pool company into a public shell on February 2, 2004 he wasted no time describing the billion dollar opportunity he planned to take advantage of.
We perused past SEC filings and Googled "LDTI letter to shareholders" only to discover that the company was using hype tactics similar to the ones he is using today to excite investors about LDTI's business plan
Just like LDHL is doing now, as we will show later in this report, LDTI discussed an opportunity present in a multi-billion dollar industry, an acquisition strategy and alluring sales/ EBITDA goals..
As you read the next following pages keep in mind that the company never executed its goals to conquer the aquatic industry. But it did successfully convince some investors to buy into its story which resulted in a brief pump episode that ended horribly, sending the stock to sub-penny levels. Don't fall into the same trap today.
The Industry Hype reference in the 2004 10K as LDTI
Leisure Direct currently sells above ground pools which it manufactures at its plant in Perrysburg, Ohio. It is the mission of the Leisure Direct, Inc. ("Leisure Direct" or "LDI") to become the premier, highest quality and most nationally recognized manufacturer and direct marketer of pool, spa (commonly known as "hot tubs") and patio products in the United States. LDI also intends to increase its product line to include a wider range of backyard entertainment products for cross selling opportunities in conjunction with its core products.
The retail channels in this industry are extremely fragmented with only a few companies having any sort of nationwide presence. This fragmentation of product distribution channels and retail outlets creates the ideal opportunity for funneling and directing consumer demand with a direct marketing approach.
The multi-billion dollar opportunity "acquisition strategy" to build a pool empire is referenced in past SEC filings.
The total pool and spa industry is a multi-billion dollar per year industry.
Direct will implement its strategy through first building a direct marketing distribution network through consolidation by acquiring existing dealers of competing products and converting each location to direct sales points of Leisure Direct's products. The next step will be to acquire existing manufacturers of other backyard entertainment products and marketing these products through the same distribution channel.
This strategy will also cause the transformation of Leisure Direct from a manufacturer of leisure products to a manufacturer and direct marketer of these products.
Here are some past press releases we found on the web echoing the same sentiment as SEC filings, and the subtle pump tactics that are similar to the current LDHL tout.
Thank you for your ongoing support of Leisure Direct and our vision. We are excited with our near-term growth prospects and the long-term potential of our growth strategy. Consequently, our outlook is optimistic. Leisure Direct's mission is to become the premier, highest quality and most nationally recognized manufacturer and direct marketer of swimming pools, spas/hot tubs, patio and other backyard products in the United States.
The total pool and spa industry is a $30 billion industry and Leisure Direct will initially be targeting a segment that is more than $12 billion of that total. The retail channels in this industry are extremely fragmented with only a few companies having any sort of nationwide presence. There are more than 6,300 dealerships for pool and spa products east of the Mississippi River (in excess of 10,000 nationally), all competing with each other for local sales with no coordinated approach to either customers or suppliers. This fragmentation of product distribution channels and retail outlets creates the ideal opportunity for funneling and directing consumer demand with a direct marketing approach. The industry is ripe for consolidation through acquisition.
Dear Shareholders and Other Members of the Investment Community Corporate acquisition candidates were identified possessing aggregate revenues exceeding $50 million annually and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) topping $5 million. In addition, our due diligence on these companies (all privately held) was partially completed. And, strong interest in becoming acquired by LDTI was expressed by the principals of all of these target firms. While we hasten to state that no acquisitions have yet been closed, important spadework has been done that would be necessary to obtain any facilitative financing and/or to consummate any such transactions. A key letter of intent has been signed which we believe would become definitive, subject to obtaining adequate financing. It is noteworthy that we employ a sophisticated set of criteria by which we evaluate potential corporate acquisitions. It is "bottom-line" oriented and we will not make acquisitions just for the sake of making them.
I trust you can tell from the facts in this Chairman's Letter and its surrounding tone that I am "bullish" about LDTI's prospects, based on the business model we have created in response to the present composition of the backyard recreational industry. We have been working very hard to obtain strategic financing and launch our acquisition program, with its multi-faceted dimensions. I believe we can become successful and thereby create very high investment returns to our shareholders from the present price of our shares (about $0.50), especially over the longer term.
Leisure Direct, Inc. (OTCBB: LDTI) announced today that it has initiated its acquisition strategy and has signed a Letter of Intent to purchase a profitable manufacturer of spas and other products. John R. Ayling, LDTI's Chairman and CEO, stated, "This acquisition represents one giant step forward in implementing our growth strategy of acquiring and integrating profitable companies in our industry, and will substantially increase our revenue base and EBITDA. The earnings from the acquisition will be immediately accretive."
The company to be acquired is a well-established manufacturer with annual revenue of approximately $10.5 million and EBITDA of about $1.26 million. The company sells its spas through company-owned stores and an established dealer network. The purchase price of the company will be less than five times earnings and well under one times revenue. Mr. Ayling further stated, "This acquisition is the first of many and will help enable us to become a major player in the pool, spa and backyard leisure industry. The company will release additional information regarding the acquisition as things progress."
Leisure Direct, Inc. (OTC BB:LDTI.OB) announced today that it has signed a Letter of Intent (LOI) with a dealer that will become its "MODEL DEALER" as the company rolls out its plan to acquire 50-60 dealers over the next 3-5 years. With sales of over $5 million and an EBITDA of between 15-20%, this will become the Flagship Dealer against which all other acquisitions will be measured. The standardization and processes under which this dealer operates, will shorten the due diligence time for other acquisitions.
Now let's fast forward to the LDTI of today: LDHL
The LDHL Hype - Eerie Similarities between The LDHL Business Plan And Its Old One While Trading Under the Symbol LDTI
The following are excerpts of the extensive details of LDHL's new "alluring" business plan is first introduced in its 2008 10K, Page 3:
LD Holdings, Inc., (Symbol LDHL), has adopted a business model that seeks to capitalize on the massive transfer of generational assets as the "Baby-Boomer" generation transitions from the ownership of small businesses into retirement. The Baby-Boomer generation is represented by individuals born between 1946 (currently 62) and 1964 (currently 44). There are currently about 80 million Boomers in this age group."
Over the next 20 years as these Baby-Boomers are retiring, there are going to be businesses worth trillions of dollars that need to be sold by this Boomer generation. Baby-Boomers make up at least 25% of the population in every state except Utah.
The company then goes on to discuss how it is going to fill a funding gap for the "Boomer Generation" that it concludes is largely unable to obtain growth funding or sell its company.
The lack of liquidity makes it difficult to raise funds privately from anyone but relatives. This is where the real void exists. Owners of these businesses have a difficult time getting full value.
Next the company defines the companies it will seek to join its stellar organization to drive revenues and profits.
The Financial Services Division (LD Financial, Inc.) will concentrate on businesses with sales between $2 million and $20 million and EBITDA between $500,000 and $3 million.
The company plans to focus its efforts on becoming a "known buyer" of small companies that meet its acquisition criteria, which it intends to widely distribute to business sellers directly and to others on its websites. The 5-Year Plan is to accumulate at least 45 of these small companies and to slowly meld them into cohesive business units whenever possible. Using $10 million of revenues as an average, this will result in consolidated total revenues of $450 Million by the end of 2013.
Now here comes what we consider a subtle hint that at some point it will orchestrate a company-sponsored pump campaign
The company's objective, through aggressive use of the Internet, is to put an outside investor base in place that shares the company's vision and objectives while the search for acquisitions is being conducted. The company will stress on its affiliated websites and in its investor information that it is looking for long-term investors who are willing to hold their positions for a year or more.
And finally the icing on the cake:
In our first full year of operations (2009) the company plans to acquire at least 3 companies with
- $25 million sales and
- EBITDA of $2.0 million.
At 8X EBITDA this would place a market capitalization of $16 million on the company.
A look into the history of LDTI/LDHL shows that Leisure Direct never closed on its proposed acquisitions and never built its pool empire. We were unable to locate 8Ks discussing the terminations of the 2006 and 2007 LOAs under LDTI's realm. We are just not buying the company's current operational plan.
Warren Buffett on Steroids: LDHL to Build a Diner Empire
Still can't resist investing in the LDHL dream? Before you do, you may want to consider these tidbits of information:
- Providing lofty operational goals has been a common tact of past pump and dump companies such as Sefe Inc. that now trades at $0.15 after hitting a high of $2.96 earlier this year.
- LDHL stated that it planned to acquire 3 substantial companies in 2009 and that its 5 to 7 Year Plan is to accumulate at least 40. Well, it's almost 2013 and what have they acquired? A couple of diner operations; one in late 2010 that was producing quarterly revenues of about $100,000 before the LDHL shut it down and another in late 2011 generating even less sales with a current quarterly revenue run rate just shy of $50,000.
- Obviously, LDHL has not been able to raise the necessary funds from the capital markets, so why should it expect differently from you?
- Even if we were to give an ounce of credence to LDHL's plan, the dilution from the amount of shares that would need to be issued to purchase 40 companies by 2014 thru 2016 would be staggering. And the company is not hiding its dire need for capital:
LD Holdings is seeking additional financing to continue to develop its business plan and to begin its implementation. Management believes this amount will be substantial.
Warren Buffett has to be calling by now!
Still want to believe in the LDHL story? Well maybe that is because you got wind of Ayling's twist of genius that really puts his plan to take advantage of a "multi-billion" industry into motion!!!
As discussed in a May 20, 2010 8K, about a year and a half from when it was supposed to have already acquired three companies generating cumulative revenues of $75 million, the company decided it also wanted to operate diners and that doing so would finally put the company in front of investors that would possibly invest in LDHL's "baby boomer" plan.
Here is an excerpt from the May 20, 2010 8K discussing this goal:
The initial business unit is anticipated to be a "Local" Diner Concept, which has proven successful over the last five years, located near the company's headquarters in Perrysburg, Ohio. The Diner Concept appeals to local repeat customers who are known on a first name basis and are greeted by attractive personable waitress staff and served consistent value-driven food items in generous portions. The atmosphere has a local, "what's happening around town" flavor.
Apparently, LDHL plans to solicit diner patrons for capital and acquisition targets to help execute its business plan. Management states that the new diner sets the stage:
for the company to get its tentacles into the local community and has its loyal customer base as a source for finding businesses that are for sale. Some of these customers will also become shareholders in the parent company.
Here are some more comments from the 8K that are sure to excite the casual investor:
"It is anticipated the company will open or collaborate to have 10 -12 locations operating over a three state area (Ohio, Michigan, Indiana) over the next 12 - 18 months.
It is anticipated that each Diner will average sales of $720,000 per year with a profit of about 16% of sales.
We intend to open or acquire 22 diners over the next three years. . We conservatively estimate the financial results to yield total revenues of $15.8 million with a profit of about 16% of sales. In our first full year of operations, the plan is to acquire or start at least 4 restaurants that total $2.9 million sales with a net profit of over $.5 million.
We intend to take financial advantage of the empty facilities that are a result of the recent down-turn in commercial building demand. We will also be looking for those "Baby Boomer" restaurant owners who are looking for a way to sell or improve their business.
The new diner outlets will preferably be located in towns with a college or university from which to expand staff and within 250 miles of Perrysburg, Ohio. A target acquisition restaurant should have a manager in place that can continue running the business on a post-acquisition basis with additional experienced staff."
Then in the September 10, 2010 8K, the company divulged the following:
Boomer's Diner, Inc., a Michigan corporation and wholly owned subsidiary of LD Holdings, Inc. (LDHL), signed a Letter of Intent to acquire [and allegedly eventually did] the assets and lease the facilities of a former Johnny Rockets Restaurant in Monroe , Michigan.
Once again the related 8K spews identical verbiage as the one in May 2010, except for a few changes we believe were designed to give the company more time to tout its unresponsive stock and extend its operational deadlines.
"The plan is to open or collaborate to have 10 -12 locations operating over a three state area (Ohio, Michigan, Indiana) over the next 24 - 36 months."
There is one problem. This company's first diner did not even come close to meeting the revenue standards of $720,000 set by the company when considering diner acquisitions targets defined in the May 20, 2010 8K.
Both 8Ks reveal the following table which we believe is an attempt to legitimize the business plan.
We intend to implement our acquisition pace as shown in the table below:
As already mentioned, as fate would have it in late 2011 LDHL closed its first diner and opened up a second (although an 8K was never filed discussing the innate details of this second transaction) generating half as much revenue with a whopping quarterly run rate of about $45,000.
Not only has LDHL missed its initial goal to acquire 3 substantial companies in 2009 and is nowhere on track to meet its 5-7 Year Plan to accumulate at least 40 firms; with only one small revenue generating diner in operation, it has clearly missed its year one and year two diner start-up projections that should have been achieved in 2011 and 2012. This shows management's hypocrisy or just lack of attention to detail.
By now investors should begin to surmise that LDHL is just putting out fluff to pump its shares.
We will continue to delve into LDHL and are likely to put out another update dissecting other aspects the company's story as we learn more. More topics to be covered include:
- The motivation and clues surrounding the pump
- Details on individuals disseminating information on the LDHL transformation
- Details surrounding a "business consulting agreement" inked on April 17, 2012 with Financial Wellness LLC.
- More details regarding the company's diner operations and the absurdity of its overall business plan.
- Additional details of lack of disclosures regarding business dealings.