How do you grab hold of a two-edged sword? Very carefully.
A double-edged sword could also describe the NASD’s decision to kick companies off the OTC Bulletin Board (OTCBB) unless they file timely reports, including financial statements, with the SEC. The new policy is a boon to investors in OTCBB companies since they will now have access to more complete (and verifiable) information about companies trading in that marketplace. On the other hand, where do investors go for dependable facts about those companies that are delisted from the OTCBB?
Therein lies the dilemma. Those delisted companies now trade on the "Pink Sheets," a service that reports prices for thousands of stocks that are not listed on any exchange or on the OTC Bulletin Board. The "Pink Sheets" (which earned that name because they used to be printed on pink paper) are published by the National Quotation Bureau, a private company that is not part of the NASD or any other regulatory agency. Although the NASD requires market makers to review certain information about a company before it can be listed in the "Pink Sheets," those companies are not required to file reports with the SEC, or share that information with investors. (For more on the Pink Sheets, see BUYER BE WARY – IN THE PINK).
As a result, investors in "Pink Sheet" companies find themselves back where they were before the new OTCBB rules came into place – searching for accurate information. For the most part, they are forced to rely upon "facts" contained in company press releases and Internet web sites, which are not qualified by the cautionary language used in SEC filings.
Do press releases and company profiles tell the whole story? We decided to look at one former OTC Bulletin Board company that is now traded on the Pink Sheets and see just what kind of information the average investor has access to.
Spectrum Technology says it "helps bring to market technologies that have breakthrough potential in water, energy or life sciences." During the past year, Spectrum has devoted most of its efforts (at least according to a stream of press releases and information on the Company’s web site) to the promotion of a laser-based desalinization technology called PIMA.
Spectrum claims that PIMA (short for Photonic Ionization Manipulation and Augmentation) can remove salt from seawater at a lower cost, and using less energy than existing, proven desalinization methods. It even plans to produce desalinized water on a fleet of converted tankers.
As a bonus, according to the Company, PIMA will lead to "mining profits." Spectrum says that the process removes valuable minerals, like magnesium, from the seawater – thereby creating yet another source of revenue.
As if that were not enough, Spectrum also maintains that PIMA is environmentally friendly.
Is there any basis for these claims? What can investors learn about Spectrum and its plans for PIMA? For the most part, they are limited to the information provided by the Company on its web site, through press releases and in sound bites on Internet interviews. Financial details? Not just yet.
Is PIMA ready for the marketplace? Spectrum’s web site and frequent press releases offer no reason to conclude that it is not.
Investors might gain a slightly different impression, however, from some recent remarks made by PIMA’s inventor, Mark Benza. Mr. Benza is associated with a Canadian company called Bencor Technologies, Inc.
In a speech before the "Global Desalinization Conference" in San Diego on June 29th, Benza described the laser-based PIMA process – but he did so cautiously. Outlining the complexity of his proposed desalinization process, Benza stated "[t]o create such a complex system, not surprisingly, considerable time must be spent on computer modeling before very substantial funds are spent on the bench-top hardware and physical models."
Benza went on to concede that despite "some mistakes" he believes that laser-initiated desalinization is "not only possible, but that it can successfully surpass" other processes "on many technological and economic fronts."
Nevertheless, he told his audience, he had not appeared at the conference to sell the PIMA hardware. After all, in Benza’s words, "none of that is available."
Bye Bye Bulletin Board
Spectrum was delisted from the OTCBB in early April of this year after it failed to file required reports with the SEC. Why did Spectrum decline to file? On April 6th, the Company issued a press release, insisting it was "unable to file a Form 10" with the SEC because it was "in the process of finalizing strategic partnership negotiations that will significantly alter the size and structure of Spectrum’s wholly owned subsidiary Spectrum Water International."At the time of the April 6th press release some investors might have wondered how the possibility of a "strategic partnership" could conceivably interfere with the Company’s ability to complete the required SEC filing. After all, a Form 10 would only reflect the present state of Spectrum’s business and its present financial condition. Any subsequent sea changes (pardon the pun) could be reflected by subsequent filings.
It even appeared at the time that Spectrum had access to experienced experts who could produce the necessary SEC documents in short order. In February, the Company announced it had retained a major law firm (Miller Nash) and international financial consultants (Arthur Andersen). The Company even characterized the retention of Miller Nash as "the first in a series of eight major events that will dramatically enhance the company and its share values." That’s pretty heady stuff – after all, they were hiring a law firm. As for the other eight "major events" – we have been unable to find a list. Apparently, they do not include filing reports with the SEC.
Despite the presence of these experts, Spectrum offered no detailed explanation for its decision to sacrifice its valuable OTCBB listing. Instead, the Company’s Chairman and CEO, Sam Higgins, assured investors "we are diligently resolving this issue."
Four months later, Spectrum investors remain in the dark about those "strategic partnership negotiations," Spectrum still trades on the "Pink Sheets" and the Company has not filed any disclosure documents with the SEC.
A Bridge Over Salty Waters
Information about Spectrum is scarce, and in some cases conflicting. Several online services provide daily quotations form Pink Sheet stocks – but little more. For example, we wanted to know how many shares of Spectrum are presently outstanding, so we visited some of these online sites.One service, called PinkSheets.com, says the Company had issued about 11 million shares – as of June 30, 1996. Now that is not exactly an up-to-date tally.
Bloomberg.com also provides prices for Pink Sheet stocks. Bloomberg reports that there are 18.3 million shares of Spectrum outstanding. Are those current numbers? If they are, when did the Company issue those additional 7 million plus shares – and to whom. Without public filings, accurate answers to these questions are hard to come by.
A third online service provided by "e-trade" did not even venture a guess on the outstanding share question. While "e-trade" gives daily prices for Spectrum shares, no profile on the Company is available.
None of these online services provide answers to some other fundamental questions that should be in the minds of investors. Who are the officers and directors of Spectrum? Who are the principal shareholders and how did they obtain their shares? While Spectrum’s press releases identify two directors (CEO Sam Higgins and advisor Ali Abood) investors are left guessing whether anyone else sits on the Company’s board.
Of course the most fundamental question also remains unanswered. What is Spectrum’s financial condition?
Spectrum has provided no details of its assets, expenses or income. How does the Company finance its operations? The Company recently said it had secured financing to open a planned office in Dubai, United Emirates. But how much would that cost and where will that money come?
We found one press release reflecting Spectrum’s financing efforts. On December 1, 1999 Spectrum announced receipt of a $500,000 "bridge investment" from BKR Partners of Dallas. How would these funds be used? Spectrum indicated that it would spend the money on "commercial production and to continue sales efforts of Spectrum’s revolutionary water treatment technology."
What were the terms of the $500,000 bridge loan? Did BKR Partners receive Spectrum stock, and if so how many shares? None of that information was included in the press release. Nor have we been able to finds it in subsequent statements issued by the Company.
For that matter, who are Spectrum’s principal shareholders? If the Company filed regular reports with the SEC it would be required to disclose the names of everyone who owned or controlled over 5% of the Company’s shares. Absent such disclosure, investors do not know who owns any of the Spectrum shares. Nor do they have a definitive list of all of the Company’s officers and directors, their backgrounds, shareholdings and compensation. Does Spectrum have any employees, other than Mr. Higgins and one or two other individuals mentioned in subsequent press releases? If so, how are they compensated?
Public filings would answer many of these questions.
A bridge loan is, by definition, an interim funding measure that leads to further financing. So what was on the other side of Spectrum’s "bridge?" The Company claimed it had received "numerous new funding offers" but none of Spectrum’s later press releases indicate that any of those ever came to fruition.
Public filings would also tell investors just how those funds have been spent. For example, how much has been "used for commercial production?" We have been unable to find any disclosure that would indicate whether, or where, Spectrum has constructed any pilot plants or engaged in commercial production related to the desalinization process.
Which doesn’t mean Spectrum has been silent all these months. In fact, Spectrum has been busy issuing press releases. Have those announcements provided useful information for investors – or have they just raised more questions. We will take a look in our next installment on Spectrum Technology.
IF YOU HAVE QUESTIONS OR COMMENTS FOR STOCKPATROL.COM, CONTACT US AT editor@stockpatrol.com