Smoky Market Foods, Inc. (fka SMKY)

[Bucks4Buckeyes]

I am definitely pulling for SMKY to do well and for the financing to come through. I think it will and I am playing a strong hunch.

However, I will never say "never" in the OTC market.

HANGOVERTRADER, I sure hope you will be right - I'll be thrilled; but I'll be happy at .25 first and then .40 where we were before. I do, however, think that strong financing news may set us up there quickly again.

FARRAGO, Great post earlier. I have taken the position that some dilution is not always a bad thing - in particular situations.

From a blog I wrote a few months ago:

That Dirty "D-Word"
November 27, 2011

There is a dirty word whispered in acidic tones in the penny market. It can incite panic and fear in the most seasoned trader. It is the biggest contributor to the pockets of crooked CEO’s and their minions. One little word can cause a sell-off in a solid company and diagram a chart so deadly that even the cliff divers of Acapulco would avoid it. It is a word which I want to hold under scrutiny and illuminate with the spotlight of common sense: the dirty word of “dilution.”

Essentially all dilution is company-initiated, it is their responsibility; so direct your anger toward them. Dilution occurs when the company issues additional shares, thus lessening the proportional ‘ownership’ of the company held by each investor. Companies in the average penny market are nanocap companies – they hold a market capitalization of less than $50M. However, it is vital to understand that all companies are potential diluters, from the large cap companies (over $10B market capitalization) down to the nanocaps.

I guess I am a bit unusual because I do not consider dilution to always be a dirty word; sometimes it is necessary. I never appreciate it, but I don’t always oppose it.

1. As long as it is minimal

There are occasions when financing cannot be obtained due to either time constraints or simply being unnoticed or unattractive to investors. A small amount of shares issued – in relation to the shares already outstanding – is not going to cause a great decline in the price per share. There are some occasions when minimal dilution actually makes fiscal sense: nearing the completion of a project essential to the company, after large shipments of inventory when the cash flow is squeezed or sudden, unforeseen obstacles to production. Again, allow me to reiterate that, to me, minimal dilution is a very small percentage of the outstanding shares, say less than 5%.


2. As long as it is useful

Companies can issue shares for services rendered or private placements to provide working capital, sometimes a very necessary and unattractive part of doing business. Often companies in the R&D stage have extremely high expenses with little or no revenue at all. If the money from the shares are going into the operation of the company, it may be necessary. However, when the asset-to-liability ratio on the balance sheet is very low and the profits from dilution are going to the CEO to enable him to buy sports cars and yachts – dilution suddenly becomes a dirty, filthy word.

3. As long as it is not habitual

Sooner or later, every company must arrive to the place when they must stand on their own revenues. All of the previous dilution will eat into the revenue stream, ultimately taking large bites out potential profit. Dilution has the potential to become addictive. Once done, it becomes easier to do each successive time. In many cases, all it takes is a contract and a filing. But no conscientious CFO or Chairman of the Board will place his company and the shareholders at risk by repetitive dilution. Consistent dilution will cause the share price to sink like a rock – even if it is minimal.

Unfortunately, many penny stocks – regardless of the company’s business statement – are actually all in the same business: they simply manufacture shares. These companies, all too common in the pink sheets, only exist to swap investor’s money for disappointed dreams and debt. They cast a long shadow on the few legitimate companies treading water in their swim to the island of profitability. Few and far between are the executives who are responsible in their dilution – hence the immediately negative response when dilution is opined.

Whether the company is Apple or just manufactures apple peelers, there are some significant signs that dilution is imminent. Watch for these main indicators (especially in penny stocks):

1.Any company which is not transparent in their filings. Just stay away from them. They are both capable and liable to do anything at any time in any manner which they desire. Companies wearing the “Pink Sheets Current” label are very liable to be downgraded at any time – so be extremely cautious. Any label on a lower tier than that, I would absolutely avoid.
2.Shares paid for PR/IR/newsletter firms. There are some legitimate firms (there has to be some…somewhere) who do not accept shares as payment for their services. Often these ‘awareness programs’ are paid by a ‘third party’ – this is another usual sign that heavy dilution is imminent. If a stock you are trading has one of these types of publicity, just grab your money and run for the doors.
3.More than three services or private placements in a year. A legitimate company in the R&D stage usually has a fairly clear idea of their costs for the year and makes a deal to fund that research a year at a time. Even if the services were from legitimate operating expenses, three or more dilutive events may be an indicator that at the best management has poor judgment and at the worst it is crooked.
4.Consistent negative asset-to-liability ratios. You had better read the entire filing very, very carefully and follow the money trail. Unless some preferred shares are sold, the normal course of events will be to issue more shares – thus diluting your holdings.
5.When securities with options are due. These could be issued to employees or paid for services. If enough have been awarded, the effect will be negative on the pps.
6.When a new company is being acquired or the company is expanding, they often will make a secondary placement (sell new shares). If their balance sheets are strong with a healthy amount of cash on hand, it may be a great opportunity. If the company is not even profitable, and they are purchasing other companies seeking to make a profit with them or if they are seeking to expand before being profitable, the likelihood of dilution is very great.

Let’s be reasonable and sensible about using this “dirty word” in stock chat rooms and message boards. Simply because someone posts “dilution” is no reason to race out of the company as though someone shouted, “Fire,” because the person who shouted may simply be attempting to create a panic. In any stock you are invested or trading, you should have already read the filings and studied enough to know the company’s history and trends. Perhaps they are diluting – why and how much? Are they transparent about it? Is it going to eventually strengthen the pps or immediately destroy it?

Dilution should be avoided and guarded against, to be sure; it’s just not always a dirty word.

Just My Honest, Open Opinion