To All: DHMG finally filed its 10-Q for the September quarter, audited this time in the vain hope that the NASD will allow the company to move onto the NASDAQ Small Cap market. Here is a link to the 10-Q:
sec.gov
My reading of the 10-Q is that it confirms every negative thing I have said about the company in the past, and adds new negative things which I was only able to guess at previously. I continue to feel that anyone thinking of buying the stock consider the risk that the SEC could halt trading in this stock at any moment, and charge management with cooking the books.
In addition, despite the company's claims of huge profits this year (actually, because of them), its finances look extremely shaky. I'm not sure how much longer it can survive without some injection of cash.
In the press release where DHMG announced that it was going to have its numbers for the quarter audited, CEO David Hagen said "...our financial statements are clean, as we expected..." Nothing could be further from the truth.
The Auditor's letter had this critical statement in it: "In accordance with the terms of our engagement for the nine months ended September 30, 1997, we did not audit the financial statements for that period of Universal Network of America, Inc., a 24% owned affiliate. The Company's investment in that affiliate is stated at $3,331,800 at September 30, 1997, and its equity in the loss of that affiliate of $318,200, is included in net income for the nine months then ended. We were unable to satisfy ourselves as to the carrying value of the investment in the affiliate or the equity in its earnings by other auditing procedures. See Note 5 for condensed Universal Network of America, Inc., unaudited financial data."
To audit DHMG, and not audit its creature Universal, is a complete waste of time. Of the $9,555,044 in sales that DHMG claims for the nine months ending September, $4,098,400 was sold to Universal. In addition, Universal purchased $500,000 in consulting services from DHMG, and provided other payments resulting in an additional $231,400 in income to DHMG. Together, that comes to more than half of DHMG's sales.
But Universal, as I had guessed previously, is a money losing joke of a company, incapable of paying real American dollars for what it supposedly bought from DHMG. Through September it has paid DHMG a mere $355,502 in cash. It handed over some of its own stock to DHMG, which the latter happily valued at many times what any objective outsider would think it is worth. And it still owes DHMG $924,298 as of 9/30/97.
Keep in mind that Universal is a private company, and there is substantial overlap between the shareholders of Universal and those of DHMG, over and above the 24% of Universal that DHMG owns. In these situations there is a tremendous incentive to effect transactions between the private company and the public company, with the sole purpose being to create "earnings" in the public company, which the stock market values at some multiple times the imaginary profits. This is what the Centennial fraud, earlier this year, was all about.
By not auditing Universal, and by disclaiming any opinion about the carrying value of the Universal stock that DHMG was paid, the auditor is implicitly raising a major question about DHMG's sales and earnings for the year. That was not a "clean" opinion, as Hagen would like people to believe.
But there is a lot more self dealing going on than just with Universal. DHMG had sales of $1,631,500 to a shareholder (I can guess who) who also didn't pay any cash, just handed over DHMG shares and more Universal shares.
And DHMG traded its shares to a mysterious private company named Frama, Inc., which then proceeded to "purchase" exactly $1,000,000 worth of goods or services from DHMG and pay in--guess what?--its own stock, rather than cash. Is Frama stock worth anything at all? There is no way of telling and, given all the other shenanigans, no reason to believe that it is.
Add up the business this year with Universal, Frama, and the shareholder, and you are at $7,461,300 out of the supposed sales of $9,555,044. That doesn't leave much for real outside customers paying real money, does it?
And who knows how much of the remaining $2,093,744 in sales was also with insiders at inflated prices? In his November 21, 1997 press release, Hagen said that the auditors were called in two weeks earlier at the request of the NASD. Yet the Auditor's Letter was dated November 3, 1997 That must have been one tough audit, done several days before it started! I wouldn't be surprised if more questionable transactions escaped notice.
The flaw in this whole scam is pretty obvious. DHMG has been reporting great sales and earnings, but the source is transactions in which the buyers don't pay real money. Yet when there are earnings, the IRS wants to get paid, and it wants coin of the realm, not shares in bogus private companies.
But DHMG may have to struggle to find the cash to pay its taxes, since so little of its so-called sales generate any. The Accrued Income Taxes Payable figure is now up to $1,082,400 and has been rising rapidly each quarter.
DHMG might avoid having to pay any taxes by admitting that its books were cooked, and withdrawing any claim of earnings for the year. That strategy, while perhaps saving the company (such as it is), would put CEO Hagen on a collision course with the law. It will be very interesting to see how this unfolds. |
