Buying penny stocks is a lot like buying a lottery ticket, says Marv Painter.
There is a chance the stock can take off, allowing lucky investors to recoup their investment in spades, said the University of Saskatchewan commerce professor.
But there is a strong risk that the stock will be grounded.
Consolidated Growers and Processors Inc. is a penny stock company, said Painter, who examined the company’s available financial information for The Western Producer.
But he didn’t find much indication within the documents that the company’s stock and fortunes are set to fly.
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Whether supplying capital or supplying hemp, investors in CGP need to know what their risks are, he said.
“This company has no money,” said Painter. “The financial statements don’t show any money.”
The professor reviewed financial information CGP has filed with the U.S. Securities and Exchange Commission.
The documents show the company lost $544,410 in its first year, and $1.9 million in its second year, for an accumulated deficit of $2.5 million as of June 30, 1999 (all figures in U.S. dollars).
The bulk of the company’s income last year came from farmers, who bought $1.18 million worth of seed for planting.
The company spent $1.9 million on general and administrative expenses, and less than $160,000 on research.
It’s possible CGP has obtained significant capital since its June 30 year-end, but that is unlikely, since it is late in payments to farmers, said Painter.
CGP’s documents indicate there is “substantial doubt about the company’s ability to continue as a going concern,” according to the Securities and Exchange Commission website.
Company officials have not responded to repeated requests for interviews.
Painter described CGP as a shell company. It owns no hard assets, he noted.
“Since it’s only a virtual company, it’s not hard to fold up the tent and walk away: there’s not much to fold,” he said.
The company rents office space in Winnipeg, and has invested just over $300,000 in a German hemp processor.
While CGP is based in the United States and operates in other European countries, it shares office space with other ventures owned by its directors.
Penny stock companies are often started by venture capitalists who have several ideas on the go, said Painter.
Their strategy is to invest small amounts of money in risky but potentially profitable ventures in return for large numbers of shares. If the company takes off, the venture capitalists make profits.
Generally, these types of investors are quick to cut losses, Painter noted.
CGP’s documents show the company was started in 1997 by Ohio venture capitalist Susan Brana, California consultant Gero Leson and Winnipeg hemp enthusiast Martin Moravcik.
They put in $200 and gave themselves more than six million shares, assigning them a starting “par” value of $0.0001 per share.
Two years later, the company had sold and given out more than 32 million shares to 197 shareholders.
Company directors and officers hold 47 percent of the shares. Brana, chair of CGP, holds almost 37 percent.
“It’s her company,” said Painter. Since the company’s inception, Brana has invested a total of $1.36 million, documents show.
CGP officials raised about $3 million selling 14.4 million shares for prices ranging from eight cents to $2.50 per share, the documents show. About 20 percent of its shares belong to a Hong Kong money management firm.
The company also gave 10.7 million shares to consultants and employees as payment for goods and services. The total value assigned to these shares is just under $240,000.
Difficult to pinpoint
It’s difficult to determine the true value of penny stocks because they are so thinly traded, said Painter.
“There is no established marketplace here that is telling us what the fair market value is every day,” he said.
Eight farmers took $41,293 worth of shares in exchange for part of their 1998 harvest, according to the Manitoba Securities Commission.
Joe Federowich, who farms near Gilbert Plains, Man., decided to take some shares because he figured they would be a good long-term investment.
At the time, the shares he paid $1 for were “trading” for $3 per share, he said.
That was the bid price shown on the Over The Counter Bulletin Board, a service for U.S. investment dealers to buy and sell penny stocks.
CGP was removed from the OTCBB on Oct. 8, 1999, said a spokesperson. The company missed its deadline to file reports with the SEC.
The SEC is a national regulator which makes sure companies selling shares to the public provide investors with adequate information.
CGP filed reports with the SEC on Oct. 4, Dec. 6 and Jan. 5. CGP wants to become re-listed on the OTCBB, according to the company’s website.
A spokesperson for the SEC said filed reports are reviewed by accountants and lawyers, who deem the reports “effective” when they are satisfied with the level of disclosure.
To date, CGP’s reports have not been made effective by the SEC.
