TheDirectory.com Inc (SEEK)

[Carini]

Are SG’s chickens coming home to roost?

Okay, wow, what an 8k. Let’s unpack this, maybe sticky it for all to see. But first, some context...

Lest we forget, on February 23 and 27, there were about 2.2 billion SEEK shares dumped into the market. On February 27, SG also announced there would be a conference call on March 12 to discuss the Q1 financials that would be, according to SG, SEEK’s “best quarter in nearly a year.” Also, last month SG took to MoneyTV (a veritable petri dish of OTC scams) to pump his company and the purportedly-great Q1 numbers. No mention was made of the Q4 numbers, or the 2 billion shares that have been issued since Christmas, or the stock hitting no bid, or the investor relations website expiring, or any of the other questions that investors actually care about. But hey, positive shareholder equity, right? LOL.

So with that as context, let’s move on…

SEEK’s annual, audited financial report was due March 2. On that date, however, SG instead filed a Form NT-10K, stating that the financials would be up to 15 days late because he needed “additional time to complete the auditor’s review of the registrant’s financial statements in order to complete the Form 10-K prior to filing.”

On March 4, we now know, there was apparently some big fight between SG and his auditors resulting in the auditors either resigning or being fired (a material event which SG waited until the last possible moment to tell us about, by the way).

According to the auditor, their resignation was “due to management not providing requested documentation and our discovery of unethical practices causing us to determine that we could no longer rely on management’s representation and that we were no longer willing to be associated with the financial statements prepared by management.”

According to SG, it was because of “a variety of factors including substantial uncertainty and doubt by management as to the ability of the Former Auditor’s capacity to complete the audit in a timely manner as a brand new firm with only 2 employees. Additionally, the termination was based on unsubstantiated allegations made by Travis Green, the managing partner of Green & Company, CPAs, to our CEO Scott Gallagher about Mr. Green’s former employer.”

I don’t know about you, but after everything that’s happened here the past year, [sarcasm] I myself can think of no reason why SG would lie about this, and find it totally unfathomable that SG would be engaged in unethical business practices and be making false representations about his company’s financial health. [/sarcasm]

So what were these “allegations” that were made? The link SG provided in the 8-k is informative (http://pcaobus.org/Inspections/Reports/Documents/2015_DKM.pdf). Apparently, this was an investigation not of SEEK, but of the accountant, DKM (who SG has just re-hired to do his financials, according to the 8-k). On page 3, the report lists the specific areas of inquiry that it made about the accountant’s audits of certain unnamed “issuers.” Let’s guess which one might be SEEK…

A. Review of Audit Engagements

The inspection procedures included a review of aspects of the Firm's auditing of financial statements of four issuers.

The inspection team identified what it considered to be audit deficiencies. The deficiencies identified in all of the audits reviewed included deficiencies of such significance that it appeared to the inspection team that the Firm, at the time it issued each audit report, had not obtained sufficient appropriate audit evidence to support its opinion on the issuer's financial statements.

Those deficiencies were–

Issuer A
(1) the failure to perform sufficient procedures to test the occurrence and valuation of revenue from continuing operations, including the use of sampling with an inadequate sample size developed without consideration of appropriate factors;
(2) the failure to perform sufficient procedures to test the completeness, valuation, and presentation and disclosure of discontinued operations; and
(3) the failure to perform sufficient procedures to test the existence, completeness, and valuation of accounts receivable.

Issuer B
(1) the failure to perform sufficient procedures to test the existence, valuation, and rights of certain long-lived assets [like domain names???], including the failure to evaluate whether the assets were impaired; and
(2) the failure to perform sufficient procedures to test the valuation of common stock issued to settle debt [hmmmm…].

Issuer C
(1)the failure to perform sufficient procedures to test restricted stock awards; and
(2)the failure to perform sufficient procedures to test the accounting for an acquisition.

Issuer D
the failure to perform sufficient procedures to test the occurrence, completeness, and valuation of revenue, including the inadequate performance of substantive analytical procedures [false revenue reporting? Hmmmm….].

I’m going with Issuer B, maybe D. But anyways, here’s what I think is happening right now:

SG is desperate. His business is failing, his stock is flirting with no bid, his pumps aren’t working anymore and he has 8 billion shares outstanding and no choice but to keep issuing more. His Q4 numbers are likely terrible, and he is looking for something, anything, to get people to buy more shares so he can clear more debt before the R/S and then cash out with minimal liabilities (except for the whole problem of being able to sleep at night after scamming so many people out of their hard-earned money, but whatever...).

All told, my speculative guess is that SG was trying to cook the books for Q4 (and probably even Q1, to make the numbers look better than they actually are), maybe by trying to hide tax liabilities (as the 8-k suggests), or count share issuances as profit, or something equally ridiculous to up the net profit numbers. Basically rearranging the deck chairs on the Titanic, as the saying goes.

So then maybe his accountants, seeing 1.5 billions shares trade on February 27 and realizing that the jig is about up and there might very well be legal consequences for all involved, decided not to sign off on SG’s financials and instead to jump ship (“we were no longer willing to be associated with the financial statements prepared by management”). A fight ensued, with the accountants no longer willing to take SG’s word on things after finding evidence of “unethical practices” and demanding actual documentation, and when he wouldn’t come clean they ultimately resigned in protest. The March 2 deadline passes, SG files the Form NT-10k to buy some time, and then some angry phone calls and emails get exchanged, which the parties later dispute with regard to who fired who first. Then, to cover their own butts, the auditors fire off a letter to the SEC, saying who knows what (but I bet it’s not good!).

Not to mention, SG surely knew that the resignation/termination of the auditor who was supposed to be completing his 10-k after the filing deadline was a material event, but he waited until the last possible moment to file the 8-k. My guess on the CC is that SG either planned to cancel it all along, or that he chickened out at the last possible moment today, realizing that it would be extremely reckless to present fluffed-up, positive, yet questionable and unaudited Q1 financials to the public on a CC at this time, given everything that’s happened, and then to turn around and watch debt holders dump hundreds of millions (if not billions) more shares that he issued only to file for a reverse split in a few days or weeks.

In the end, maybe SG’s biggest mistake in this whole scam was becoming a fully-reporting company. Non-reporting scams get away with this kind of crap all the time, but once you put yourself out there as legit you can’t resort to your old tricks when things don’t go as planned. I’m not sure rinse-and-repeat will work this time. At some point, your chickens come home to roost, as the saying goes.

My question now is whether we will even see the financials by Tuesday, or if SG is going to become a delinquent filer. From the 8-k it sounds like he has hired on a new (actually, an old) accounting firm to do the reports, but can they get it done in time? To be honest, I would not be surprised to see SEEK get halted for a bit sometime in the next few weeks while the SEC looks into it. SG may also have a tough time getting FINRA to sign off on his R/S, which is surely coming. At long last, I think this story may be coming to an end…

P.S.: As for the Fife rumors… let’s be clear, Fife does not invest in penny stocks. He finds OTC companies who are desperate for cash and lends them money in exchange for convertible notes with ridiculously one-sided terms, and makes bank doing it.

Just like this guy: http://www.bloomberg.com/news/articles/2015-03-12/josh-sason-made-millions-from-penny-stock-financing

What Sason discovered is a way to get shares in desperate and broke companies at big discounts by lending them money. Magna has done deals with at least 80 companies. Of those, the stocks of 71 have gone down since the investment. He can still turn a profit, because the terms of the deals allow him to turn debt into equity at a fixed discount. No matter where the stock is trading, he gets it for less.

Magna functions as a pawnshop for penny stocks—shares of obscure ventures that change hands far from the rules of the New York Stock Exchange. His customers have included a would-be Chilean copper miner, an inventor of thought-controlled phones, and at least two executives later busted for fraud. They come to Sason to trade a lot of their stock for a little bit of money. Often they’re aware the deal is likely to be bad for their shareholders.

Ya think???

If the share price goes lower before Magna can unload its investment, the companies have to give up even more stock, all but eliminating the risk for Sason. Critics call it “death-spiral financing” because it drives stocks into the ground. Others in the field say they sometimes make double, triple, or even 10 times their investment in just a few months.

Here is Fife’s business plan in chart form:


And more from the article, explaining Fife’s M.O.:

Paul Riss’s deal with Magna in July 2011 was typical. The New York entrepreneur’s company, Pervasip, was developing a communications app to compete with Skype, but it was down to its last $100,000, barely enough to last a month at the rate the company was losing money. When Magna’s “Michael Goldberg” called offering cash, he didn’t even ask to look at the app, Riss says. “All they care about is the liquidity of the stock,” he says. “They want to see how many dollars are trading a month.”

On the surface, the $75,000 loan Magna offered seemed all right. It was in the form of an “8 percent convertible promissory note,” meaning it asked for an 8 percent return and gave Sason the right to convert it into stock. The fine print explained that if Pervasip didn’t pay back the money within six months, the lender could convert at a 45 percent discount to the market price. So, no matter where Pervasip’s stock was trading, the company had to give Magna shares that were worth more than $136,000—an 82 percent return in just six months. Essentially, Magna locked in a fixed return.

The lower the shares went, the more Pervasip had to give up so Magna could get its money. The only risk Magna took is that no one would buy Pervasip’s stock at any price.

When a stock hits no-bid, lenders get pissed. That’s the logic for a R/S. PPS doesn’t matter, just volume and liquidity.

This is EXACTLY what Fife did with SEEK. SG had a $250,000 balloon debt payment due October 1, 2014, which he couldn’t pay, so in swooped Fife to the rescue. Sure, I’ll lend you $250k, just sign these loan agreements right here…

An analysis of 80 public filings shows that a company that does a deal with Magna sees its shares plummet 55 percent over the next year, on average. Most never recover and wind up trading for thousandths of a penny or less.

And now it doesn’t matter what the PPS is. Fife gets his profits regardless. The only risk is no bid, which can only be (temporarily) solved by a R/S, which is exactly what SG is going to do here shortly.

I feel both sad and happy that this scam is finally coming to an end. Especially for you longs still doing all kinds of speculative, contorted, increasingly-delusional mental gymnastics to somehow come up with theories to explain how this is all actually/maybe/somehow a good thing for shareholders -- theories which are all, I suppose, technically within the realm of ultimate possibility because “we don’t know anything for sure!” and we must “wait and see!” what SG really has up his sleeve...

So said the turkey the night before thanksgiving lol… I mean, “come on people, the farmer has been into the coop many times the past year and never once has he lopped off our heads, and sure we have seen him sharpening his axe the past few days, and talking to that guy who drives the ‘we buy dead turkeys’ truck, and bringing out a bunch of towels and buckets and other stuff that you would need if you were to, say, slaughter a turkey, but we don’t know 100% that that’s what he is actually planning to do for sure, right? Let's just give him the benefit of the doubt and wait and see. Nothing to be alarmed about here...”

Again, here is what, IMO, is about to happen: We will not hear from SG for a few weeks, and then a Form 14-C will be filed announcing the reverse split. SG will claim it was necessary in light of acquisition discussions, and that news about said acquisitions will be forthcoming soon. No acquisition will actually take place, and the stock will tank form its .01 R/S price back to trips. Longs will be decimated, people will threaten lawsuits and say "how could this happen???" as if the writing hasn't been on the wall for months. SG will cash out and be fine. Such is life in the OTC... caveat emptor.