What a difference a year makes. It was this time last year that I posted my first detailed analysis of DHMG's financial statements. Then, the company was reporting spectacular numbers and sending out letters to its shareholders nearly every week about how great things were going, and how the stock would be much higher if it weren't for evil short sellers holding it down.
Yet it was obvious to anyone looking at the financial statements, even an accounting amateur such as myself, that the supposed earnings were phony. I argued that if DHMG eliminated rigged transactions designed to make the company look profitable, it would be shown to be a minuscule outfit that probably never made an honest nickel in its history. With the authorities, in the form of a formal SEC investigation, looking over its shoulder, DHMG can no longer book phony sales and earnings. Thus its reported numbers in the 10-Q covering the June 1998 quarter confirm my worst suspicions.
You would think that at least revenues would be strong, since this year DHMG owns 100% of Universal Network, a direct sales outfit that purportedly has 25,000 sales reps in the field, while the same quarter last year DHMG owned less than a quarter of it. Yet sales dropped by 91.3% (!) in the quarter to a mere $384,282 which works out to barely $5 in sales of DHMG's "valuable collectibles" per rep per month. One can only laugh at the thought of the various collectibles that these reps must be selling at those prices. Rare bottle caps? Used Cabbage Patch dolls? Crackerjack prizes?
Last year all of the company's "sales" were very profitable (of course, DHMG actually sold virtually nothing--it was primarily rigged trades of near worthless so-called collectibles for shares in near worthless private companies, or other pieces of paper, that DHMG valued at a lot more than nothing). This year, with the cops looking on, DHMG can't do that. So the new 10-Q shows that DHMG could barely get its cost back on the stuff it sold this year; gross margin is a glorious 5%.
Despite doing 91% less business than last year, DHMG's operating expenses were up 53%, leading to a loss in the quarter of $567,000.
DHMG is, IMO, in desperate shape and may not survive much longer. Cash and equivalents are down to $186,770 and falling fast. The company is delinquent, as it has been all year, on $319,000 in sales taxes owed by Universal, and hasn't even yet filed the correct forms. As Note 9 says, "Additional penalties may be assessed by the taxing authorities for this delinquency. Any punitive action by the taxing authorities have not been reflected in these financial statements." So the real amount owed is going probably going to be a lot more. If I were the state of Florida, I would move fast before all of the company's remaining assets go down the drain.
DHMG has recently come up with a new pitch to suck in gullible investors, that its Universal sales force and its website will now be selling health and beauty products, many containing aloe and 24K gold flakes. According to the 10-Q these products were introduced in the June quarter, yet Note 2 lists all the company's inventory as being "Artwork and Collectible" with zero inventory of health and beauty products. One wonders whether they existed at all during the quarter.
Of course, maybe the gold flakes in the cosmetics will come from DHMG chopping up its "valuable collectibles." Since the cash flow statement reports no money at all spent on equipment this year, presumably Hagen will jam his collectibles through an old office trash shredder to create the ingredients. I wish I could be there to watch this happening.
So when will DHMG go belly up? That depends on just how bogus the company's only significant asset on the balance sheet is, the inventory of collectibles. It is listed at over $5 million, but much of it was bought, not with cash, but with DHMG's always overvalued stock, from people with some other connection to the company. Moreover, DHMG now claims that the big thrust of its Universal operation is no longer selling its "valuable collectibles", but peddling a new line of cosmetics and health and beauty products.
So how are these collectibles going to be turned into cash, if they even exist? (Given how thoroughly corrupt is nearly every statement, legal and otherwise, that has ever emanated from this company, a reasonable observer would conclude that, audit from a Salt Lake City accounting firm to the contrary notwithstanding, there is a good chance that most of this inventory either does not exist, or is worth a tiny percent of what is claimed.) So DHMG's best, and probably only, hope of survival is for it to turn its inventory into cash.
Happy, no doubt, with sales dropping 91%, the board has just awarded the management team and its own members with an extra 450,000 shares of stock, which, if you look at the insider filings, they are selling as fast as they can. Fortunately DHMG has had the good sense to hire various outfits to help pump the stock onto innocent victims so management can unload their own shares and not drive the price (yet) to zero.
So while the current stock price under $4 seems a bargain compared to the teens where it was selling a year ago, if you annualize the current sales level the company is selling at a price to sales ratio of 20, which is higher than most of the fastest growing honest companies in the world, let alone most crooked scams. A fair price is probably in the pennies, although that may depend on just how phony the inventory figure is.
Fortunately, the SEC has escalated its investigation to the status of "formal." The evidence is so strong that I think the odds are near 100% that the DHMG and its management will be convicted of cooking its books and defrauding shareholders. A good chunk of the millions that insiders have raised by selling their shares will be forced to be "disgorged." I am hoping that the SEC refers the case to criminal prosecutors so that Hagen and his cronies get some serious jail time, but the odds of that, while significant, are probably less than 100%.
I'll update this after the September quarter, assuming DHMG still exists then. |
