The shelf life of small public companies that trade on the OTC Bulletin Board can be brief; performance all too often falls short of promise. But while businesses may fail, their corporate shells tend to survive, and to reemerge with a different plan and a new promise.
Such failures have fueled a cottage industry – reverse-mergers that allow private companies to gain control of existing public entities. After the dot com bubble burst, and brokerage firms lost their zest for initial public offerings (IPOs), reverse-mergers emerged as a viable alternative for private businesses seeking to enter the public marketplace. In such cases, the private company is acquired by the public corporation but, in the end, emerges with control of the surviving business. The public entity, however, often carries with it a troubled history. Its past record does not immediately disappear by virtue of the merger.
Reverse-mergers may seem like a godsend to private companies, but they serve another purpose as well: they offer failing public companies a second or third chance at success. Unfortunately, although the surviving public company has a new business to promote and build, it may well encounter the same obstacles that precipitated the demise of its predecessor, including insufficient funding and over hyped prospects. And, all too often, the new entity retains some, or all, of the old cast of characters.
A company called Dark Dynamite is the product of one such reverse-merger. In recent weeks, Dark Dynamite, Inc. has vaulted into the ranks of the most active companies listed on the OTC Bulletin Board. The Company, which describes itself as "an eccentric lifestyles company," plans to market a line of designer clothing and other signature products. Dark Dynamite features fashions created by Jared Gold, a recognized and respected designer known for his edgy work. Mr. Gold is the President of Dark Dynamite.
The Company's ultimate prospects remain to be seen. Its business plan and design concepts may blossom, but Dark Dynamite has yet to report any revenues. Challenges confront any company that is seeking to establish a niche in a highly competitive industry – and fashion is certainly one such arena - and the road to success can be bumpy. Dark Dynamite will be vying with well-funded, established companies as it attempts to create a market for its products. It may well succeed – but the obstacles are considerable.
Even if Dark Dynamite's operations prove viable, not every business is suitable for life as a public entity. Mr. Gold's talent as a designer and his ability to anticipate public tastes and trends may position the Company to succeed, but have they prepared him to run a public company? Has the Company assembled a management team that is experienced and familiar with the issues that routinely confront public companies?
These questions, which should be on the mind of potential investors, remain to be answered. Why then have investors flocked to Dark Dynamite? Volume for the Company's stock, which was approximately 39,000 shares on July 7, 2004, has risen steadily, hitting 425 million shares on July 27th. Throughout this period, Dark Dynamite stock has been priced at less than one penny a share.
We looked further, and discovered that Dark Dynamite had a familiar provenance. Dark Dynamite has had several notable previous incarnations, and a host of problems that its current management would, no doubt, hope to avoid.
In fact, we first wrote about the entity now known as Dark Dynamite in September 2002, when it was called Vector Holdings, Inc.
Hot Potatoes
Penny stock shells never seem to die – they are simply recycled.
In the summer of 2002, Vector was claiming that it was "uniquely positioned" to become a key player in the specialty food and hotel industry in South Florida. Vector Holdings Corp. Part I – Is This Spud Half-Baked?; and Part II – Headed To South Beach, Or Just Headed South? As StockPatrol.com discovered, and reported, at that time, those representations had little substance. Vector's principal operating business was a stuffed potato concession located in the food court of a Florida Mall.
Not long after our initial articles appeared, the Securities and Exchange Commission expressed its own concerns about Vector and its President and sole director, Allen Weintraub. On October 15, 2002 the SEC charged Vector and Weintraub with securities fraud, saying that the Company failed to disclose material information about Weinstein's "checkered past," including multiple felony count convictions dating back to 1992, and unsatisfied personal judgments. Update: Vector Holdings Corp. – A Hot Potato. As a result of that action, Weintraub was permanently enjoined from future violations of the securities laws and banned from serving as an officer or director of any public company. Update: Vector Holdings Corp. – Room At The Top. He resigned as President of Vector as of February 15, 2003.
It was time for the surviving shell to move on.
Dis-Surbering Developments
Once Weintraub was banished from the public arena, Vector moved in a different direction, abandoning its plan to capture the South Beach hospitality industry. On February 21, 2003, Diversified Holdings X, Inc.(DHX), a Utah corporation owned and controlled by an individual named Richard Surber, paid $25,000 to acquire control of Vector. Gino Carlucci became President and Secretary of the Company, which said it would begin the search for a new business.
On May 8, 2003, the Company changed its name to NCI Holdings, Inc. At the time, Surber, by virtue of his position as President of DHX, controlled a majority of Vector's outstanding shares. Shortly thereafter, NCI said it would attempt to identify business opportunities in the medical technology sector. The Company also disclosed that it had given the Sukumo Group, Inc., a British Virgin Islands corporation (Sukumo), the right to purchase up to 10,000,000 shares of NCIH pursuant to Regulation S of the Securities Act of 1933 at a substantial discount from the public market price. Regulation S permits U.S. companies to sell unregistered shares to non-U.S. residents. Those shares may not be resold into the U.S. market for one year, but can be traded overseas virtually immediately.
The divorce from Weintraub did not end the Company's troubles, or its association with questionable characters. On September 3, 2003, NCI said it was terminating the agreement with Sukomo because the SEC had raised questions about the propriety of Sukomo's conduct with respect to the sale of securities – particularly with respect to other companies associated with Carlucci.
The move proved to be prescient, but did little to protect the Company from another wave of claims by securities regulators. On October 16, 2003, the SEC filed a Complaint charging NCI, Carlucci, Sukomo, and 18 other parties (including an individual named David M. Wolfson) with engaging in a massive scheme to defraud foreign investors of at least $16 million.
The SEC complaint alleged, among other things, that Sukomo operated a boiler room in Laos and Vietnam, to sell securities to investors in the United Kingdom, Australia and New Zealand. A boiler room is a high pressure sales operation where misleading scripted presentations are used to sell securities at inflated prices for excessive commissions.
According to the SEC, the key U.S. players in the scheme were Wolfson, Carlucci, and a group of companies controlled by those two individuals. The SEC claimed that the two men arranged for micro cap companies, including NCI, to raise money by pretending to sell shares to legitimate overseas investors. Specifically, the SEC stated that Sukomo did not actually purchase NCI shares, but instead acted as a sales agent, receiving 70% of the proceeds as its commission. (Another small U.S. public company named in the Complaint, F-10 Oil & Gas Properties, Inc., soon became GFY Foods. See GFY Foods, Inc. - Healthy Food For Thought; Part II - Frullati Frenzy; and Part III – Fair Shares).
Carlucci's cohort, David Wolfson, has a noteworthy lineage. His father, Allen Z. Wolfson, is a notorious stock promoter and serial securities law violator who was convicted in March 2003 of defrauding public investors out of at least $7 million. [http://www.usdoj.gov/usao/nys/Press%20Releases/Mar03/WolfsonConvicted.pdf]. Father and son had also been named in a September 30, 2002 SEC complaint charging securities fraud. [http://www.sec.gov/litigation/complaints/comp17756.htm].
And, to complete the circle, Richard Surber is Allen Z. Wolfson's cousin.
Paint it Black
Which brings us to the Company's latest incarnation, as Dark Dynamite. NCI morphed into Dark Dynamite on March 22, 2004, after a reverse-merger with a private Utah company called Black Chandelier, Inc. In exchange for his interest in Black Chandelier, Jared Gold received 70 million shares of common stock of the public company – 96% of the outstanding shares. Mr. Gold became President and sole director of Dark Dynamite, the surviving public company.
NCI, the shell in search of a business, disappeared and was replaced by Dark Dynamite. By virtue of the merger, the company had a new business to pursue, but little indication that it would have more financial wherewithal than its predecessors. From the date of its inception (August 13, 2003) through December 31, 2003, Black Chandelier had no revenues. Its assets consisted of $1000 in inventory and $9,000 in equipment, including an electric clothing pattern data base, screen printing library, and historic design archives.
This placed it pretty much on a par with NCI, the corporate shell, which had approximately $11,000 in assets and no revenues as of March 31, 2003. NCI also had accounts payable of about $182,000 at the end of March.
According to a Form 8-K filed on March 22, 2004, Black Chandelier, the private corporation, could not be judged by its limited assets and brief track record alone. Its other principal asset was Mr. Gold, who designed and sold clothing under the Black Chandelier trademark from 1998 to 2003. The Company noted that Gold has designed items and promotional goods for firms such as Nik and Dermalogica, and has shipped goods to leading retailers, including Barneys New York and Brown's London.
Not everything about the Company was fresh and new. Dark Dynamite had retained at least one vestige of its earlier – shall we say darker – days, a relationship with Richard Surber.
Dark Dynamite's website describes Surber as a "Corporate Advisor" with "more than ten years of experience as a consultant to micro and small cap companies." The Company goes on to say that "[o]ver the last ten years, Mr. Surber has played an integral role in arranging and negotiating mergers, acquisitions, and reverse takeover transactions which have brought numerous private companies public."
Mr. Surber's biography does not mention one notable event from his recent past. On June 8, 2004, the Securities and Exchange Commission instituted an Administrative Proceeding seeking to suspend or revoke the registrations of fourteen small public companies associated with Surber. Each of those companies was delinquent – by one year or more – in its obligation to file periodic reports and financial statements with the SEC. They include Oasis Resorts International, Inc., which has been featured on StockPatrol.com. (See Biosecure Group Corp. (OTCBB: BSUR); Airtech International Group, Inc. (OTCBB: AIRG)); Newbridge Capital, Inc. (Pink Sheets: NBRG); Nuoasis Resorts, Inc. (OTCBB: NUOA); and Oasis Resorts International, Inc. (Pink Sheets: OSRI), Part I – There's No Place Like Homeland; Part II – Air Today, Where Tomorrow?; Part III – Balance Sheets Or Balancing Acts?; and Part IV – Still Gambling After All These Years).
Surber had been instrumental in registering six of the companies named in the Administrative Proceeding with the SEC, incorporated another, provided financial or merger consulting advice to six others, and allowed one company to use his office as its contact address.
The SEC described Surber as a shell company promoter whose "consulting business," consists of taking private concerns public through reverse-mergers with public shell companies. According to the SEC, Surber acquires control of the shells, and then receives cash fees ranging from $100,000 to $350,000, and two or three percent stock ownership, in exchange for putting together the reverse-merger transaction.
Dark Dynamite's public filings do not indicate whether Surber played any role in the merger with NCI, what consulting services he is expected to perform in the future, or what compensation he will receive for those services. At the time of the reverse-merger, Surber's firm, Diversified Holdings X, held approximately 200,000 NCI shares.
The Heart of Darkness
None of these events explain the sudden surge in trading of Dark Dynamite shares. What has the Company been doing since its most recent reverse-merger?
According to a Form 10-Q for the quarter ended March 31, 2004, which was filed on May 19, 2004, Jared Gold is "re-engineering the Company as a lifestyle company that intends to produce clothing, candles, body products and various confections." The Company explained that it would attempt to distinguish itself by offering a concept it describes as "mass personalization," producing products that enable consumers to personalize themselves, their space and their image.
The Company said that it intended to begin shipping products by the third quarter of 2004. It noted that Mr. Gold had completed design work for Black Chandelier's Spring 2005 collection and that a small group of "screened t-shirts" would be shipped for the 2004 holiday season. The Company said that its children's wear division, Pink Chandelier, was expected to ship goods in fall 2004, and anticipated gross sales of $150,000 by October 1, 2004 and $250,000 from its spring shipment.
The Company also stated that it was planning to develop a line of candles, body products and confectionery under the name "The Genevieve." The Company indicated that it was already testing scented candles and projected revenues of approximately $225,000 from the sale of "15,000 pieces" (presumably candles) during fiscal 2004. The Company acknowledged, however, that it was seeking an additional $80,000 so it could produce the initial "pieces."
Finally, the Company said that it had created another subsidiary, Fontanelle Consulting, to help other companies develop their identity and marketing plan. In a May 25th press release, Dark Dynamite indicated that Fontanelle already had two clients, identified as Luxlab and Hair Concepts. The Company said that it would receive a percentage of sales from Luxlab (although it did not specify the percentage) and projected a value of $120,000 for the Hair Concepts contract.
In order to move forward with these ambitious plans, the Company has assembled a creative team, and entered into the following series of "Advisory Agreements:"
• On March 25, 2004, the Company entered into an Advisory Agreement with an individual named Douglas Little. Mr. Little agreed to assist Dark Dynamite with general marketing, image identity design, branding and art direction. In consideration for those services he will receive an initial fee of $20,000 and payments of $3,000 for a term of 12 months. Little's fee is payable in registered shares of Dark Dynamite stock. Little also received options to purchase up to an additional 18 million shares of Dark Dynamite common stock, most of which he can acquire at a discount to market prices.
• On March 25, 2004, the Company entered into an Advisory Agreement with an individual named Donald Decker. Mr. Decker agreed to provide web design services, for which he was to receive an initial payment of $1,000, and $1,000 a month for twelve months. Here again, the Company reserved the right to pay Mr. Decker with shares of registered common stock. Mr. Decker also was granted options to acquire up to 6 million shares of stock, again, much of it can be purchased at a discount.
• On April 29, 2004, the Company entered into an Advisory Agreement with Juliann Law. Ms. Law was also to provide web design services, and would receive compensation consisting of an initial $1,000 fee and $1,000 a month for twelve months. Her fee also can be paid with registered shares of Dark Dynamite common stock. Ms. Law received options to purchase up to an additional 3 million shares of the Company's common stock.
• On April 1, 2004, the Company entered into an "Independent Client Service Agreement" with a San Diego, California-based investment banking firm called Alexander Wade, Inc. (AWI). Under this agreement, AWI would receive $45,000, in cash or stock, for helping Black Dynamite develop business contacts designed to aid in the sale of products and other management and infrastructure services. The agreement provided that AWI could elect to convert its consulting fee into shares of Dark Dynamite stock at a discount from the public market price.
The various agreements gave the Company access to a group of consultants – but it also obligated it to issue a significant number of common shares. The Company addressed this concern almost immediately.
On April 23, 2004, the Company changed its name from NCI to Dark Dynamite and amended its articles of incorporation to increase its authorized common stock from 600 million to 5 billion shares. Now there would be plenty of stock to go around.
In a Schedule 14C Information Statement filed with the SEC on April 13, 2004, Dark Dynamite explained that the additional shares would afford "flexibility to issue equity for other proper corporate purposes [including] raising equity capital, adopting Employee Stock Plans or making acquisitions through the use of stock." At the time, the Company claimed it had no immediate plans to issue shares. It had, however, already entered into the agreements with Little, Decker, and AWI.
Less than one month later, on May 20, 2004, the Company filed a Form S-8 registering 50 million shares of common stock for the "The 2004 Benefit Plan of Dark Dynamite Inc. the "Plan")" Under the Plan, shares could be issued to officers, directors, employees, and "other individuals," including consultants and advisors, who render bona fide services to the Company.
The Form S-8 did not identify any of the individuals who would be receiving the newly registered stock. Presumably, however, it included shares designated for Little, Decker and Law – and perhaps AWI as well.
Could the S-8 shares, including stock issued to these consultants, account for some of the recent spike in trading volume for Dark Dynamite stock? The Company itself seems puzzled. On July 28, 2004, Dark Dynamite issued a press release for the principal purpose of announcing "aggressive development and market dates for its Black Chandelier and Pink Chandelier fashions." The Company outlined its schedule for Autumn 2004, saying that it anticipates revenues from its Pink Chandelier collection by November 15, 2004.
The Company was not too busy designing its fall lines to notice the sudden spurt in stock trading. As the July 28th press release noted:
a staggering 424 million shares [traded] Tuesday [July 27th]. In response to overwhelming inquiries regarding the massive spike in trading volume, the company is enthusiastic about the interest in the stock, but has no information regarding this activity."
In other words, Dark Dynamite is in the dark.
But surely, the Company must wonder what has attracted such interest – and who is selling all of those shares. Does the Company's consultant, Richard Surber, have any role in the increased activity? Are Mr. Gold's design ambitions going to stay on track, or will they be derailed by the stock maneuverings that plagued this Company in its prior incarnations? Can the recycled shell shed the sorry baggage of its predecessors?
Shell games are not for the faint of heart.
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