Sorry about getttin' back to you on this dog. I was gone for most of the day.
You forgot to factor the R/S into the original transaction by the MM. When they do a R/S, all the shares on yours, mine and a MM's account reflect the change in number of shares, even if you are short.
Example:
MM shorts 1000000 shares at say today's price.
1000000 x .0006 = $600.00
The MM has to eventually cover that 1000000 share commitment. Currently, the lowest price that MM can buy back those 1000000 shares would be .0001. But if he waits for a R/S...
Company does say a 1 for 50 R/S
A) Share A/S (all shares, everywhere...longs, shorts, treasury) gets divided by 50
B) Share price gets multiplied by 50. (.0001 goes to .005)
C) The equity remains the same.
So those million shares short position in the MM's account will also reflect that R/S. He's now no longer 1000000 shares short, he's now just 20,000 shares short.
Since the price very, very rarely rises on these Pinks and Pennies after a R/S but continues to drop, the MM eventually can cover his short liability at shares cheaper than the .0001 floor before a R/S...
Still using our above example, if the price continues to drop after the R/S, let's say to .0025 when the MM eventually covers, he is theoretically paying .00005 per share in pre-R/S price if you were to adjust for that 1-50 R/S.
So now on the MM books, we have this:
Original pre R/S transaction:
Sell 1000000 x .0006 = $600.00 credited to account
1000000 share liability
Post R/S transaction:
20000 share liability
Buy 20,000 x .0025 = $50 debited from account
Profit = $550.00
Now multiply this by millions, hundreds of millions of shares, and you can see why the MM's will try and short the crap out of a stock and keep it at that .0001 level once it hits that floor. It's very lucrative for them to get that R/S. You will see this happen more if the company is transparent, and everybody can read what the convertible debt conditions are in their quarterly and annual SEC reports. If they see that there is a minimum price threshold, the stock will go to no-bid status. As for EFLN, I have no clue what their debt structure is since nobody knows jack about this company. They are a non-reporting company, one of the riskiest, just a tad bit above a Caveat Emptor labled Pinkie.
This ability to short makes for a very uneven playing field for the little guy. Most retail won't allow you to short a penny stock, thus you automatically are at a 50% disadvantage to the rest of the players in the game. That's a huge disadvantage. About the only way I can think of around this would be to create your own hedge fund, and then sign up with a MM, thus creating sort of your own private brokerage firm, but you need some big bucks, millions, to do this.
Hope this helps,
OZ
