Broke Out (OTC-Pink: BRKO) has been floating on hot air from a well-oiled hype machine over the last few days but the inevitable is just ahead: This stock is ready to deflate.
TheStreetSweeper sent a detailed email to securities regulators late last week about the actions surrounding Broke Out. The company appears to be in the "pump" stage of what in our opinion will ultimately become a particularly egregious pump-and-dump tactic. We believe this tactic is poised to leave many Broke Out investors flat broke.
We've seen many pump-and-dump maneuvers over the years but seldom have we seen anything quite this appalling.
The apparel retailer with just eight different articles of clothing last year made a desperate pivot to offering apps. But loses have continued to rocket, leaving the company with only $3,762 in cash at the end of the year.
Yet nearly 100 times that amount - $315,000 to be precise - has gone into a four-day Broke Out promotional campaign. And who is the sugar daddy who paid promoters big bucks in recent days to hype Broke Out?
The group shelling out over $300,000 to promote a company with a fraction of that in cash is a two-man fund called Bullseye Asset Management. We can assure you we'll be keeping our eye on this Denver hedge fund with such an incredible heart.
Primarily thanks to Bullseye-funded promotions, the stock exploded by more than 146 percent, handing Broke Out an unbelievable market valuation of $105 million.
The company has not responded to TheStreetSweeper's request for comment. In this, the second installation of our Broke Out report (check out the first report here), let's look more closely at the ridiculous hype and other issues investors must consider with this stock:
*1. Most Promoted Stock
Broke Out now holds the dubious distinction of becoming the most heavily promoted stock in March, according to Hotstocked. That's right. It's number one of the top 20 most promoted stocks.
Subscribers were treated to 25 emails by a group of newsletters that form Elite Penny Stock. Elite is the same outfit that promoted CLOW ($0.07), EURI ($0.09) and AREN ($0.01), all of which started at pennies, briefly exploded, then collapsed when the promotions stopped.
The Broke Out promotions over the last few days included:
"BRKO's moment to shine is right now and if you don't buy shares of it today you may look back in regret once its shares are trading at around 10 dollars," crooned SmartStockChoices in a widely distributed March 9 email.
The fine print at the bottom of the email explains, "We do not publish research or due diligence and only publish favorable promotional information about the Profiled Companies because we are paid to do so."
And ... this:
"BRKO is the stock you want to buy now!" shouted BestAmericanStocks.
Noting its $70,000 payment from Bullseye, the March 7 email warned investors: "The Newsletter is a one-sided advertisement that only provides positive information... we do buy and sell during campaigns. We even sell shares of Profiled issuers during the dissimenation of the Newsletter while the Newsletter recommends that you buy the same shares we intend to sell.
"Individuals should assume that all information contained in the Newsletter is not trustworthy, accurate or complete ..."
And this from Finest Penny Stocks:
"Here is why this company could go up from $3 to $20."
The email is signed by Keith Richie, Editor. But the fine print says he's a fake!
"Any first, middle, and/or last name referring to our "editor," ... or any other title or name is purely fictitious."
Kind of rips away that warm and fuzzy feeling, doesn't it?
*2. Ranking: Skull And Crossbones
Broke Out's unusual level of promotional activity seems to have attracted attention from an unexpected and unwelcomed source - the OTC Markets themselves. That's bad news since OTC is the only way people can trade Broke Out.
Indeed, OTC Markets slapped the skull and crossbones designation on the stock to warn investors of the additional risk posed by Broke Out:
OTC Markets reserves the skull and crossbones designation for the riskiest of thousands of risky stocks.
The Securities and Exchange Commission's warning about heavily promoted stocks is worth repeating:
"Often the promoters will claim to have “inside” information about an impending development or to use an “infallible” combination of economic and stock market data to pick stocks.
"In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is “pumped” up by the buying frenzy they create. Once these fraudsters “dump” their shares and stop hyping the stock, the price typically falls, and investors lose their money."
*3. Promoters' Dream
Broke Out has been perfectly positioned to become a promoter's dream. Here's why:
*Insiders Hold Super-Cheap Shares: The company sold 12.2 million shares in June 2015 for less than a penny per share - precisely $0.004 apiece.
That's right, prior to the promotional blitz, Broke Out sold millions of shares for less than one cent apiece.
*Multiple Foreign Ties: Investors face additional risks because of extensive foreign influence on Broke Out (see page 11).
First of all, foreign residents control the company:
(Source: Company SEC filings)
Sole executive and sole board member Chan Set Kuan bought 15 million shares in a private transaction from the former CEO on Jan. 27, 2016. The same day, the apparel company traded 4.625 million shares for Digitrade Developments, organized under the laws of Belize, and controlled by Mr. Kuan. Filings state CEO Chan Set Kuan resides in China, and also state he resides in Malaysia.
Mr. Georgi Tanmazov is a German resident who sold his app business to the company, retaining 20% of any resulting profits while he remains with the company.
Second, Broke Out is based in a rented home office in Frankfurt, Germany.
Third, the assets are located in Germany. So, with both assets and executives located outside the United States, "it may be difficult for an investor to enforce any right based on U.S. federal securities laws ... or to enforce a judgment rendered by a United States court against us..."
*4. Negative Net Worth; Going Concern
Another key red flag for potential Broke Out investors is that the company has negative net worth (-$8,696) and almost no money ($3,762).
These stresses are building on the company to the point that auditors say Broke Out is unlikely to survive, according to the 10-K filed on March 3, 2016.
"Our future is dependent upon our ability to obtain financing or upon future profitable operations. We reserve the right to seek additional funds through private placements of our common stock and/or through debt financing," say SEC filings. "Our ability to raise additional financing is unknown. We do not have any formal commitments or arrangements for the advancement or loan of funds."
*5. Unable To Survive The Year
All funds available to the company cannot see it through 2016, filings state.
"In order to fund our operations, we believe that we need $120,000 in order to continue to conduct our current business activities for the next twelve months. Our available funds combined with revenues will not fund our activities for the next twelve months."
So such vulnerable companies become so desperate that they or third parties turn to promoters as a last-ditch effort, thus taking one staggering step toward becoming just another pump-and-dump.
More than $300,000-worth of hot air is just about to seep out of the Broke Out balloon and this stock is ready to flutter helplessly to the ground. Broke Out remains, in our view, an absolute zero.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in BRKO and stand to profit on any future declines in the stock price.
* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to email@example.com.