This was posted on another iHub stock I have on my watch list.
What is the reason for this "panic"?
This is going to be a long reply,
Here is my tale of woe!
This all takes place towards the end of my adventures in world of small cap investor relations and is big part of the reason I left it behind. I had enough of the lies and scams and tried to find a real, honest and legitimate company that I could do a serious IR (investor relations) campaign for. There were plenty of legitimate small cap companies the just wanted some honest IR services and I was trying to cater to this market.
One fine morning I was contacted by some big shareholder in a company that seemed to be very interesting, and legitimate!
The company in question had a nice product, it was a telescopic pole that you attach a camera to. The camera could be infrared or thermal and you would use it to look around corners, underneath cars, all kinds of situations where police and border patrol would need to see things.
I called up the secretary and made an appointment to meet them the following week.
The offices were in a nice building and had the entire floor to themselves. The secretary was young and pretty, she welcomed me and directed me to the fancy board room.
It was a small company, about 5-8 employees I believe, the CEO and one of the engineers met with me and we hit it off pretty well.
They were very nice people and were excited to show me their product.
It was a very nice gizmo, you wear this vest with the LCD screen facing up at you on your chest so you can hold the extendable poll with the camera with two hands. The camera had a very cool infrared mode and a thermal camera was in the works they said.
The CEO explained that US and Canadian border guards were being introduced to this product and that if they get a contract to supply them, it would be in the millions!
For a penny stock like them a big multimillion dollar deal would have sent them +1000% easily.
This all sounded great! Actual physical offices, an actual product I was very interested in working with them so we agreed to take them on as a client.
My job was to put together a nice PDF presentation on the company that potential investors could download. I got to work using all the notes from our meeting and pictures I had taken of me meeting the CEO and testing out their camera.
This was all completely legit, the company was legit, the product was real and legit and had a very real and practical use for the border police and SWAT teams.
What could possible go wrong?
The company had already made their contacts with the US and Canadian border police that were eager to see this camera unit and test it in the field, it was simply a matter of landing a contract, any contract with any government body, that would open the doors to huge sales.
I was proud to put my name to the research report and laid out the facts as best as I could. This was after all, a completely binary event. Either a) the company gets a huge government contract and everybody makes money, or b) no contract comes through and its down the tubes. These were the risks and everybody involved knew it.
What we all failed to realize was that there was an actual option "c".
Fast forward a few weeks and the stock is starting to climb, there had been no news about any contracts, but it seems some investors were loading up ahead any possible news (buy the rumor, sell the news). If there was a contract coming, then somebody on the inside could have leaked the news to their friends, but after asking the CEO if there was a leak on any potential news, he insisted he had no idea and there was no word about any contracts coming through.
There were several other IR firms working the stock, so it is possible their efforts were bringing in buyers.
Then one morning, I get up, turn on the computer and see that their stock is down 60% !!! :O
What had happened? Did a contract fall through? Was the camera rejected?
It turns out that the CEO, the engineers, the IR firms and everybody got side swiped by the companies largest shareholder which was a guy that owned the original public shell they reverse merged into.
If you watched the movie The Social Network (the Facebook movie), you would remember how they restructured the shares so that Zuckerberg retained the majority but his other partners were squeezed out?
What happened here is that behind everybodys back, the original shell owner pulled a restructuring and began dumping millions of shares onto the market.
Day after day, millions of share kept hitting the bid and the stock dropped down to 3c, 2c, 1c and lower.
With their shares knocked down to worthless, the company could not afford to raise any capital and fund further R&D. The mere act of knocking their shares down could have spooked the government agencies away from making a deal since they did not want to be involved with a company like that. No deals were coming, it was all over.
The only person who walked away with anything was this one big shareholder. I would later learn that he would do this two or three times a year with different companies every time. Each time he would make a few million dollars.
The company would delist, the public shell would restructure, get a ticker change and the next company would get sucked in. This was all perfectly legal, apparently he had been doing this for years.
A few months later I drove past their offices, I could see through the dusty windows that the office space they once occupied was empty. It was sad to see a little company with such potential get wiped out by some unscrupulous shell scam.
This story just goes to show that no matter how legitimate the company may be, or how good the fundamentals are, there is always something that can change the entire story in a matter of minutes.
These days, when somebody asks me "what do you think of penny stock WXYZ? The last Q1 filings were pretty good!" I just say its a scam, they are all scams. Treat them as such and you will not be disappointed.
So to answer the original question:
Do you have any idea how the process goes about? Are people really this easy to fool?
Yes, people are easy to fool, everybody got fooled in this case. No matter how savvy or experienced you think you are, when it comes to penny stocks, there will always be a larger fish with sharper teeth in your pond. The problem with low volume penny stocks is that no matter how much you think you may know about the company, at any point in time some big shareholder can dump his shares and send the stock into a death spiral.
