I am not saying that D.H. Marketing is a complete fraud; I don't know that for sure yet. What I can say at this point is that the company certainly RESEMBLES a fraud. Anyone interested in DHMG, or scams in general, should take a look at the recently filed 10-Q for the quarter ending June. Here is the link:
sec.gov
Perhaps the company can answer these questions satisfactorily, in which case I will be glad to stand corrected. If not, then I think it would be in the public interest that the SEC be alerted and shut the company down ASAP. Here is what I want to know:
1. How come the numbers don't add up? The company claims to have 4,005,341 shares outstanding as of 6/30/97, of which 2,826,341 are restricted and 1,302,300 are freely trading. Well, maybe my calculator is faulty, but when I add those two together I get 4,128,641 which is 123,300 shares more than the total outstanding. Why the inconsistency?
2. How come the numbers don't add up, Part 2? The cash flow statement is completely bizarre, with false numbers for changes in inventories and accounts receivable. Add the figures yourself - they don't come close to the $485,010 positive cash flow from operations that is supposedly the total of that column. As much as I hate to do work for the company, I have calculated a correct cash flow statement (assuming that the balance sheet figures are correct), and the real cash flow from operations was actually NEGATIVE $229,639 for the six months, over $700,000 worse than the company is claiming in its 10-Q.
A question for Mr. Hagen: Is he aware of the penalties for filing false documents with the SEC?
3. Does DHMG, in fact, have any real revenues at all? The company claims sales in the June quarter of $4,423,605. Yet as far as I can tell, the company received very few actual US dollars for it purported products and services.
The company received !,825,000 shares in something called Universal Network, Inc. instead of cash, for an account receivable of $3,650,000. What reason is there to believe that those shares are worth $3,650,000? Is there anyone who would willingly write a check for that amount for those shares? Would someone even write a check for one tenth that amount? I checked the SEC database, and if Universal Network is public, it doesn't appear to have bothered to file anything with the SEC. If Universal Network is private, then this number, which represents most of the company's sales, appears to be completely arbitrary, and possibly imaginary.
One can make a good case, based on what DHMG says about Universal Network elsewhere, that $3,650,000 is a wildly inflated number, well beyond any amount that Universal could possibly have owed it. Universal Network appears to be some sort of multi-level marketing scheme for which DHMG purportedly acts as a sales representative. Dealers such as DHMG supposedly take gold coins, and artwork (real hot markets these days, right?) on consignment and earn commissions for selling them. In discussing the history of the company in the 10-Q, DHMG pats itself on the back for the growth of its sales since signing up with Universal in 1995, claiming it is now the number one representative in the system. DHMG claims revenues (commissions earned, presumably) of $536,000 for all of 1996.
How could commissions owed to DHMG from Universal possibly have soared to $3,650,000 in just the first six months of 1997? According to the 10-Q, the division of DHMG that has the relationship with Universal ("Network Marketing") had sales for the first half of 1997 of $282,249. So how could DHMG possibly have a receivable from Universal for five times more than the total amount Universal would have owed DHMG since day one, if it had not yet paid DHMG even one cent?
And whoever heard of a multi-level marketing system in which the sales force, people or organizations (DHMG in this case), turn over 100% of all proceeds to the parent company, and then have to ask for the commissions back? Normally, if there were a 20% commission, the representative would make the sales, collect the money, and then turn back 80% of the proceeds. There wouldn't be any account receivable, let alone one so bizarrely high.
Furthermore, if $500,000 in commissions earned makes a representative number one in the system, then it is unlikely that total commissions earned by all representatives at Universal amount to more than a few million dollars. Since Universal is in effect a wholesaler, its profits on those sales are unlikely to be more than a few hundred thousand. Yet if $3,650,000 represents 28% of the Universal's stock as DHMG claims, that implies a value of $13,000,000 on that company, a figure that, on the surface, looks about ten times too high.
DHMG claims that it is accounting for its ownership of Universal using the equity method, in which it would record into its earnings 28% of any profit or loss that Universal shows. Now we don't know exactly when DHMG acquired its 28% ownership other than it was some time in the June quarter. If it was any day other than June 30th at midnight, there should be some entry in DHMG's financial statements to reflect how Universal did during that portion of the quarter that DHMG was a part owner.
So either management forgot, in which case the financial statements will have to be redone correctly, or Universal made or lost exactly nothing during the period of DHMG's ownership. If Universal is just barely breaking even, then that fits in with the theory that 28% of it is worth a tiny fraction of the $3,650,000 that DHMG is claiming in its financial statements.
Finally, who owns the other 72% of Universal? It wouldn't happen to be insiders from DHMG, would it? And if not insiders, do the owners of Universal happen to own an awful lot of stock in DHMG, thus having an incentive to make it look as if DHMG is making lots of money, even if DHMG is nothing more than a phony shell?
Moving right along on the issue of whether DHMG has any real business whatsoever: During the second quarter someone gave the company 75,000 shares of its own stock rather than paying money for $681,250 of so called sales. Who would have 75,000 of the company's stock to give to it in lieu of cash, other than an insider? How come the company neglected to mention what percentage of its so called sales are to insiders? How do we know the prices charged to insiders were fair? (I'm not worried about an insider getting a special deal - if this is a fraud, it pays for insiders to overpay for products, create false profits in the company, and then make their money back many times over, as suckers pay up for the stock. This is what the Centennial fraud was all about.) What exactly did the buyer get in return for his $681,250 worth of stock?
And what is this "consulting" nonsense? Who, exactly, were the customers for $500,000 in "consulting" income this year? More insiders? What particular expertise does DHMG have that someone would pay nice round numbers for? What specific projects did the company "consult" on? Did the customers pay money? If the "customers" were other companies, who, exactly, owns them? Any chance the owner might be a Mr. Hagen or his buddies? And how come the consulting revenue seems to have no associated cost of goods sold? Is the company saying it did nothing for its money, not even send out a bill?
If you add the so called value of the Universal Network shares, the treasury stock and the "consulting", it totals $4,831,250 which is a significant percentage of the $6,287,747 reported as sales for the six months. That doesn't leave much room for real, non-insiders, paying real US dollars for whatever it is that this company purports to do. (As far as I can tell, the main thing DHMG really does is promote its own stock.)
4. Can't management get a little more creative about making up numbers out of thin air? Take a look at the General and Administrative expense line in the income statement. In both the first and second quarters, G&A expenses were identical: $382,183. This makes no sense, because during the year the company claims to have opened offices in Las Vegas and Vancouver, so presumably expense were rising, and the second quarter should be somewhat higher than the first. Or at least different.
How could the expenses be identical to the exact dollar? All it would have taken is one phone call more or less, or a few more stamps to pay for its never ending promotional news releases, to make the number at least one dollar different. This strongly resembles fraud. If management admits that it made up the number, suggest that they pick a different number for the third quarter, so it isn't so obvious. Even a really stupid crook doesn't usually make it so easy for the police.
It will be very interesting to see how the company responds to these questions. At the very least, I think it should submit an amended 10-Q where the numbers add up and are accurate. Again, if there are good explanations for these matters, I am willing to admit that I was wrong in my suspicions.
I really hope that this is not a fraud, because a lot of innocent investors will be left holding the bag. Sometimes the SEC can act very fast when it sees something it doesn't like. |
