When two UK twenty-something buddies – who sold “streetware” and “head ware,” in 2014 and greeted customers with “Yo Peeps” – swing a stock deal with a Belize company owned by a guy in China, what can possibly go wrong?
First of all, that unlikely team has actually formed a publicly traded company called Broke Out, Inc. (OTC Pink: BRKO) and sold stock in the company. Now people are actually buying the highly risky over-the-counter “pink sheet” stock.
Unfortunate investors have no idea that this is a company that has gone $81,559 into the hole as it holds only $3,762 in cash.
Yet, levitated by a heavy promotional campaign over the last couple of days, Broke Out is now teetering on a market valuation of not $1 million … Not $10 million … But $100 million.
Incredibly, Broke Out soared on news that it has acquired an app called “Secret Menu for Starbucks™.”
The company is trying to tie itself to the popular international coffee store. But there’s every reason not to buy into this stock.
Broke Out has not responded to TheStreetSweeper’s request for comment and there’s really nothing beyond blatant promotions offering the bull case to this company which just may be the biggest financial disaster we’ve ever covered.
But let’s look at the top reasons Broke Out will likely leave investors broke:
*1. Background; Switch-eroo
Broke Out started as a way for a young UK man to express himself and perhaps make some extra bucks.
Here’s Broke Out founder Jason Draper modeling one of his line of eight pieces of clothing, as well as a snippet from his thoughts penned on the Broke Out website:
But Broke Out was, well, broke.
So, on January 27 this year, Broke Out issued 4.6 million shares to a Belize company controlled by Chinese resident Chan Set Kuan; Jason Draper also sold 15 million shares privately to Mr. Kuan. Mr. Draper and the other officer backed away, leaving Chan Set Kuan as the sole executive and director.
The stock offer wrapped up assets of Megapps Ventures, a company that had existed three months and spent the entire time not building apps but buying them.
Overnight, the struggling fashion company became a struggling app company operating out of a home office in Berlin, Germany.
And should something go wrong – and it will – filings spell out on page 11 how this China-Germany combination will make it very difficult for investors to find recourse.
*2. Absurd Acquisition
So how did a little two-man operation selling eight items of street wear become a two-man app company wrongly valued in the multi-millions?
It’s simple. In what is one of the most ridiculous moves TheStreetSweeper has ever observed, the market got excited about an acquisition that cost $10,000.
That’s right. For less than executives might have spent on a scooter, Broke Out bought an app.
On March 7, Broke Out filed an 8-K stating it bought this little Secret Menu For Starbucks app from Henry D’Andrea, who became a company director entitled to 20 percent of any profit that app might bring in.
*3. Secret Ingredient: Hype
So something that has no intrinsic value sucked in investors and ran the stock to the stratosphere. Now the stock is precariously positioned for a heart-lurching downfall.
Here’s the chart:
Investors can see from the chart that shares and volume soared on March 7, March 8 and March 9.
Here’s another interesting chart showing the trading action since March 1.
What happened March 7th through 8th?
After the filing about the Starbucks menu app and the Google Android test reaction app on March 7, stock promoters Finest Penny Stocks and Traders Choice broke out hype campaigns:
And here is yesterday’s promo:
While these promotions don’t disclose the cost or who paid for them, such campaigns typically cost at least $20,000 per shot. Since Broke Out has just over $3,700 in cash, who could have dished out that kind of cash … just out of the kindness of their hearts? We’ve asked stockpromoters and Elite Penny Stock Group but haven’t yet heard back. More to come…
Elite Penny Stock Group encompasses a vast network of stock promotional newsletters including finestpennystocks, smartstockchoices and many others. Insiderfinancial.com said the most powerful newsletter group in the OTC markets is now calling Broke Out its newest bagholder.
The trick for many promoters is to sign on penny stock companies, promote a frenzy over these stocks to thousands of folks, thus driving up the stock price. Then insiders or paid promoters dump the stock, collapsing the stock price and leaving behind a mortally wounded company.
Stock promotions are important to the pump-and-dump scam, according to the US Securities and Exchange Commission.
Here’s a snapshot from an SEC warning.
“Pump-and-dump schemes often occur on the Internet where it is common to see messages posted that urge readers to buy a stock quickly or to sell before the price goes down, or a telemarketer will call using the same sort of pitch.
“Often the promoters will claim to have “inside” information about an impending development or to use an “infallible” combination of economic and stock market data to pick stocks.
“In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is “pumped” up by the buying frenzy they create. Once these fraudsters “dump” their shares and stop hyping the stock, the price typically falls, and investors lose their money.”
More to come regarding promotions.
*4. Going For Broke
Broke Out is a “going concern” company that is operating at the very brink of bankruptcy.
Indeed, auditors MaloneBailey noted “substantial doubt about its ability to continue as a going concern.” The quality of Broke Out’s auditors is questionable because MaloneBailey, incidentally, has been singled out by the Public Company Accounting Oversight Board for deficiencies in clients’ audit reports related to GAAP (Generally Accepted Accounting Principles).
Perhaps more significantly, Broke Out filings warn investors: “As outlined in this Annual Report, we expect to need approximately $120,000 in additional capital to meet our operating needs over the course of our next full fiscal year. As of December 31, 2015, we had $3,762 in cash.”
And its liabilities have jumped to more than three times the cash reserve. Filings further warn:
“Our future is dependent upon our ability to obtain financing or upon future profitable operations. We reserve the right to seek additional funds through private placements of our common stock and/or through debt financing. Our ability to raise additional financing is unknown. We do not have any formal commitments or arrangements for the advancement or loan of funds. For these reasons, our auditors stated in their report that they have substantial doubt we will be able to continue as a going concern. As a result, there is an increased risk that you could lose the entire amount of your investment in our company.”
So Broke Out doesn’t have the money to make it through even one quarter. TheStreetSweeper can’t imagine how the company even hopes to survive because last year’s revenues were $131,515 (expenses were $130,186) and there’s no logical reason to invest in any sort of stock offering which would dilute current shares.
*5. Pathetic Numbers
It’s no surprise that not one single institutional investor has bought shares of Broke Out. Along with the other massive risks, the stock exhibits an absolutely awful set of numbers.
(Source: Yahoo Finance)
Broke Out is a money pit of epic proportions and we’re still digging into various promotional tactics that might have been used to lure investors into this amazingly risky over-the-counter stock. Indeed, the “business,” background, $10,000 acquisition announcement, promotional frenzy and overall financial weakness all make Broke Out quite special.
It’s so special that, for the first time ever, we cannot bring ourselves to assign a single penny of value to the stock. We think Broke Out will be dead in a year and its investors will be dead broke.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in BRKO and stand to profit on any future declines in the stock price.
* Editor’s Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected].