We see a lot of companies here at Metal Augmentor so very little surprises us. Every once in a while, however, we run across a situation so egregiously wrong that it demands a few words from us. Today we are going to discuss a U.S. bulletin board company named Green Tech Solutions (OTCBB: GTSO) that has recently made an entry into the field of rare earth metal logistics.
Here is the deal. The company did a reverse split of 200-to-1 late last year and ended up with 133,740 shares outstanding. Trading at a price around U$4 per share, that gave Green Tech a market cap under $500,000, arguably not too much for what is essentially a shell company.
Then something incredible happened. Green Tech had around $300,000 of debt incurred earlier in the year that could be converted into shares at
.01 per share. The 200-to-1 reverse split, however, somehow did not apply to this debt (we’re still trying to figure out how this could be the case as typically all convertible instruments are automatically adjusted pro-forma for share splits).
The result was that in November of last year, as revealed by this SEC filing, a German citizen by the name of Juergen Krause converted $150,000 of Green Tech debt into 15 million shares of the company immediately after having the debt conveniently “assigned” to him. The existing shareholders were thereby diluted over 99% and Mr. Krause became the de facto sole owner of Green Tech Solutions.
One might be tempted to think that the above sequence of events is no big deal — after all, we are talking about a $500,000 market cap shell company trading on the wild OTC.
The problem, however, is that for some mysterious reason Green Tech has continued to trade around the US$3-5 range since the massive November dilution in favor of Mr. Krause — with the exception of a couple short trips to opposite price extremes ($800 on the high side and $1.28 on the low side according to the price chart on this website). This “trading range” has given Green Tech, still essentially a shell company, an implied market cap of up to US$50 million!
And despite the slew of press releases starting last week — pretty much one per day — promoting the entry by Green Tech into various exciting endeavors including the transportation of rare earth metals to be mined in Mongolia, the company remains essentially a shell. To our knowledge it has basically no cash or assets . . . and the agreements that it has signed are essentially worthless at this point. Meanwhile $150,000 or so of debt remains convertible into another 15 million or so shares, giving Green Tech a fully diluted market cap around $100 million!
Just to be sure, we confirmed the ethereal nature of Green Tech’s operations by checking out the corporate headquarters, which turns out to be a virtual office (2880 Zanker Road, Suite #203):
So here is the low down on what could be the fastest and most incredible fortune ever made from the “rare earths mania”.
- Lucky Mr. Krause was “assigned” $150,000 in Green Tech debt for who-knows-how-much consideration.
- Mr. Krause immediately converted the debt into 15 million shares of Green Tech stock.
- As already mentioned, this conversion made him a 99%+ majority shareholder. This all went down in November 2010.
- Between then and last week the company typically traded a few hundred shares per day with no shares traded on many days.
- Then starting last week out of nowhere came a slew of promotional press releases announcing that Green Tech would be making a splash in the red hot rare earths sector. What Green Tech had in fact done is sign a bunch of agreements that are essentially worth nothing at this point.
- As a result of the tireless promotion, Green Tech shares — proving that the markets are in fact not in short supply of fools — started to trade in serious volumes of up to 300,000 shares per day in a price range around US$3.
- Keep in mind that all Green Tech shareholders other than Mr. Krause held a collective 133,740 shares while Mr. Krause held 15 million shares.
- Thus the vast majority of the shares being traded since last week have come fron Mr. Krause, who has at this point probably pocketed a few million dollars and still holds a few tens of millions of dollars in Green Tech stock.
All of this for an “assigned” $150,000 in convertible debt, likely making Mr. Krause the undisputed champ in the rare earth investment space: in less than 3 months, $150,000 has been magically turned into several million dollars in cash and another $40 million or so in stock. All told, we calculate gains exceeding 30,000%!
We’ll leave it up to the SEC to determine if any of these Green Tech precedings involved hanky-panky, although we’re not holding our breath based on the slow pace of recent regulatory enforcement action.
There are two observations we’d like to leave with readers:
(1) The markets are populated by many fools but there are both “right” approaches and “wrong” approaches to making money off them (we try very hard to use the right approach here at Metal Augmentor) and
(2) The rare earth mania is still hot enough that all you need is a bit of promotion to give your shell company a $100 million market cap (arguably this means the legitimate rare earth plays could still have plenty of upside).
We haven’t featured any rare earth companies up to this point at Metal Augmentor because we couldn’t predict the extent of the mania but also because we simply haven’t been able to quantify the value proposition of the various rare earth plays from a fundamental standpoint. There is, however, at least one rare earth company out there right now that seems to hold out the possibility for a proper valuation assessment. We’ll be discusing it with subscribers shortly