Doing A Deep Dive On The Deep Dive's Dishonesty

https://thedeepdive.ca/ is a site that built a reputation and a following years ago as one of the few out there willing to do detailed financial and other critical analysis of Canadian penny stocks. This is a valuable endeavour as a lot of coverage on Canadian small caps are promotional or long-biased in nature and often distort or ignore bad news or caveats that may be buried in SEDAR filings.

Unfortunately, over the years The Deep Dive has degenerated to the point where most of the blog posts on there are complete wastes of time to read, all wonderfully dis-organized into a massively cluttered mess of a website. I suppose, just like news outlets such as CNN, the site struggled to find a way to monetize its content and concluded that low quality SEO clickbait articles was the best route to go. There's nothing wrong with trying to earn a living, but poisoning the "Deep Dive" brand is a bit of a bait and switch if most of the articles on there are fluff. May I suggest that the site changes itself to "The Shallow Pump" instead? theshallowpump.ca is still available on GoDaddy.

(As an aside, when you become an ACTUAL SUCCESSFUL investor, you don't need the few dollars generated from web traffic to support you, *wink wink* - successful analysis and successful investing should eventually go hand in hand.)

As a result of The Deep Dive's steep decline in quality, I just stopped following the Twitter account and stopped reading their content. Their Twitter account still follows me - we shall see how long that lasts - and they have far more followers than I do, along with some followers who I follow and respect. So The Deep Dive brand still has credibility in the Canadian microcap space. 

Now I was willing to let sleeping dogs lie and just forget about this site as a mostly irrelevant shell of its former self. But then The Deep Dive had to try to tap into half of its old school roots (the critical part, not the analysis part) and feign righteous indignation over the poorly researched and sloppily written short report on PKK from Grisly (sic) Research:

Had The Deep Dive done a little bit more analysis and been a little bit less critical, or at least waited for a proper response from PKK itself, it might not have posted this. Nor this on its website to amplify the Grisly false narrative. PKK provided its full response the next morning and the market reacted positively, erasing that 18% decline and then some. The Deep Dive is not that clueless. They are experienced market players for years. They know very well that in the legally sensitive and deeply personal situation PKK was put in, it needed some time to explain itself and have that explanation go through the lawyers. A few hours was not enough time for such a quality response and yet The Deep Dive piled on the fear campaign anyways. 

I find this is the perfect opportunity to speak out against what The Deep Dive has turned into. I'm only an individual investor with a couple thousand followers, but I figure that with all the pent up anger felt by PKK shareholders, now is the best time to voice my opinion as it will be spread to maximum effect. The Deep Dive or one of their supporters could brush this off as "oh, he's just upset because they said something mean about his precious PKK stock". That may be true. But all I ask is to analyze and debate the CONTENT of my argument. Not the motivation for making the content in the first place. Isn't that a fair request? 

The irony with short sellers and other critical players is that they feel they can act with impunity by calling out penny stocks and other potentially shady businesses. This is actually a good and useful service. However, just like they should be allowed to be critical of penny stocks, other people should be allowed to be critical of THEM. The Deep Dive has gotten away with being a hollow shell of its former self for years without anyone to my knowledge calling them out for it. It might finally be their time to have a short report hit piece focused on them.

The issues I have with The Deep Dive can be summed up in one screen capture on a recent paid promo fluff piece on Rockland Resources:

The two statements below RKL's stock price at the end of the article are hilariously mutually exclusive for The Deep Dive. You CAN be paid AND provide analysis on all aspect of the firm - including business opportunities, assets, skill level of management, financial analysis, and any "deep dive" potential red flags buried in SEDAR or SEC filings - but this is clearly NOT what The Deep Dive is doing.

Before going further, I need to preface that I have nothing against RKL. I have no opinion whether to buy or sell the stock, and wish the company well. As an exploration or start up mining company, I understand its position. It has a typical exploration business model where it achieves marginal or no revenue and spends money hoping to explore a property and build out a resource, among other corporate expenses. I also know that it has to spend money marketing its stock. Why? Because until a cash generating outcome is achieved (buyout, sale of property, royalty deal, or eventually cash flow from operations) its only source of funding is through the selling of securities, usually through the issuance of common shares. In this situation, a company needs to promote its stock so it can have a robust stock price and dilute less shares at a higher price rather than more shares at a lower price. I am merely using the RKL article to expose The Deep Dive's inconsistent and dishonest practices. Sorry RKL, you're going to be dragged through the mud a bit as collateral damage.

This was The Deep Dive's response to when I called them out for feigning outrage on PKK while simultaneously providing one-sided paid coverage on their site:

Keep in mind that they vet all of their clients. So they are very well aware of financial state of any company they end up promoting, assuming their "vetting" process is anything more than if the company paid them on time. Let's review RKL's latest income statement ended June 2021 from SEDAR:

As expected, there is no revenue. There are also expenses that are to be expected for a start up exploration company. One thing that stands out is the $500,000 in share based payments over one quarter. For context, at $0.17, RKL has a market cap a little over $4 million. That is a substantial expense for a company this size yet The Deep Dive didn't think that was appropriate content for their audience to know as part of their focus on "all aspects of the firm". In my opinion, that $500,000 worth of share issuance is reasonable as it's mostly related to normal business expenses for a startup like capital raising costs and the purchase of properties. This isn't about RKL so I'm not going to get into details - read Note 5 of the company's financials if you're that interested - but The Deep Dive should have gotten into the details on their article as part of having full editorial control. The tripling in shares outstanding over one quarter was also completely ignored. As the company now has nearly $2 million in cash from the capital raise, one can reasonably expect the dilution to occur at a much slower rate going forward. But that's also something that should be mentioned when writing about "all aspects of the firm". 

There is something in Note 5 of RKL's financials that I particularly want to highlight:

Last year, the company issued a bunch of shares at well below today's stock price, and well below its 52-week range of $0.11 to $0.285. This includes 2 million shares issued at half a penny for $10,000 to directors. 2 million shares is 7.7% of the total shares outstanding. More shares were issued at $0.02 or $0.05. Remember that The Deep Dive vets all of their clients. At $0.17, the site is actively promoting a stock at a price that is 34 times what insiders paid and several times more than the price of these other share issuances. This is a textbook liquidity opportunity for early stage investors at high returns for a company that hasn't done much yet except become publicly listed. Nothing necessarily wrong with that, but it should be something which potential investors are made aware.  The Old Deep Dive would have been absolutely all over this in any report they did. Then let investors figure out themselves if they want to pay 34 times what insiders did. The New Deep Dive? Meh, whatever pays the bills I guess. Keep that part out and excuse it with:

 

This is dishonesty by omission, and the editor is excusing it with "well we have several forms of content". I used to respect The Deep Dive as one of the few honest penny stock writers out there. I didn't always agree with their conclusions, and they once called out a company I was long on (turned out they were right), but I at least respected their analysis. It was reading up and absorbing some of what they do, among others, as well as some critical comments on my Seeking Alpha articles that helped me to refine and improve my own analysis and articles. Both from a long and short perspective. 

However, in the end The Deep Dive just turned out to be another paid shill with absolutely no integrity. Even worse, they occasionally pretend to still be in their old critical analysis days by feigning outrage or concern over PKK's immediate behaviour after a short report. Without any effort into analyzing if the report had actual merit. Do you honestly think that if RKL was under attack like PKK was that The Deep Dive would react in the same way? I don't. Maybe this is part of their strategy to keep retail investors around and invested in their own paid promotions. Getting retail investors to think "Well, they didn't like that PKK company, but they like this RKL company, so that one must be REALLY good if they are so picky. I'll buy that."

Fuck thedeepdive.ca.

I want to end this piece with some clarification before someone points out the potential hypocrisy of my righteous indignation over The Deep Dive's righteous indignation on PKK. I am a writer and I have gotten paid in the past. Very seldom, less than 5% of my articles in my lifetime were compensated. I also have an all-encompassing disclosure below. As I have been very successful investing recently, I am actively refusing any paid work that might come my way. However, I wanted to provide an example of one the more recent compensated articles I wrote:

https://seekingalpha.com/instablog/1107010-edward-vranic-cfa/5203127-datable-seeks-enable-users-monetize-data-p-consumer-platform

This was on Datable, DAC, and I was bullish on it at the time (no position today). Like many penny stock long picks, it turned out to be wrong and the stock is down around 50% from the time of my article three years ago. While my bullish thesis didn't work out, I still provided details of the financial, technical and business risks that I felt existed. My opinion is my own and I could have missed something, but no one will read that and say it was one-sided overly bullish analysis. 

Just like I took apart one article from The Deep Dive, I'm sure someone can look through the catalogue of my several hundred articles out there and find something that is "less good" than the others and try to take it apart. There are a couple of differences though. First, my articles, particularly the compensated ones always have at least some kind of fair financial or risk analysis, even if there is a bullish slant on it overall. The Deep Dive's piece on RKL was pure fluff that completely ignored all possible risks to owning the stock. This was not an innocent oversight, but a direct and intentional omission. Second, I'm not the one marketing myself as "The Deep Dive". I'm just an individual investor who writes on his blog and on Seeking Alpha. I don't make any particular claims or try to brand my work as something bigger than it is. 

One last point. I have never gotten paid one red cent from PKK over several years of writing about the company. However, my writing and constant contact with management allowed me an opportunity to buy into Cubeler as a private company at a $3 million valuation for $20,000. That led to an exit with 48,000 PKK shares plus some cash that is now worth nearly $500,000. This is advice for anyone trying to make it in this industry. You can make A LOT more being a successful activist investor than being a paid shill writing for a few bucks. 

One also has to wonder about these paid shills out there. If they have been at this for years, and are still begging companies for contracts, how bad of investors must they be? Why listen to their advice if they suck at investing to the point they still have to do compensated articles in order to put food on their plate so many years later? At some point you would think they would graduate to successful investor making a living off of that alone with no need for side hustles. They might still write for fun as I do, but would have no need to monetize their content. Just some food for thought.

My Reaction to the Grizzly Short Report On PKK

Link to the Grizzly short report here:

https://grizzlyreports.com/Research/PKK.pdf

I've skimmed through this and won't provide feedback on every little detail. I'm just a shareholder. It's not my job to provide a rebuttal on all or any of this. That's management's job. But I will type out my initial thoughts. 

The first thing I can say is that I warned people - including management and other shareholders - that this would happen. PKK would get attacked as soon as its market cap became large enough to be of interest to short sellers. It was part of the reason why I sold what I sold, expecting volatility along with normal growth pains. Now it may be time to consider a buy once the dust settles. I prepared management on this for years and warned Johnson Joseph that the company needs to have rock solid financial control processes. He responded very well and appears to have a robust auditing process with Grant Thornton.

Who can you trust more? The person who has been in PKK for years and predicted stuff like this would happen to a tee? Has been through all the ups and downs and has been critical of past mistakes and complimentary of accomplishments? Or the entities behind this sloppily produced short report that have known PKK for maybe a few weeks or months? And believe me, it is pretty sloppy:

 

If you're going to insult someone's garage app, maybe make sure that very sentence is run through a second person for editing. It makes your statement of someone else's shoddy work very ironic.

Regarding the claims of overstated revenue, as I said, the company has a robust audit process in place. Grant Thornton looks over these numbers carefully. I look forward to management's response. I also mentioned in my most recent analysis and a few times before it that PKK's accounts receivable balance is something to keep an eye on as it is high and growing. Collection of this cash would go a long way towards diffusing such claims of inflated revenue. As someone who has also written bearish reports, a rising A/R balance is accounting101 level of a red flag. Though not out of line for a company quickly growing revenue like PKK.

As for the claims of fake subsidiaries and fake acquisitions, this was poorly done. They go through some SAIC data and the conclusions are more or less "we can't find it, therefore it must not be true". PKK's corporate breakdown is understandably confusing and was built that way so that the company can repatriate funds in the form of dividends. The company has discussed dividends for years. Now that it's cash flow positive, the easiest way to lay waste to these types of claims of enriching insiders is to start paying that dividend!

As for the claims of past failures such as Quickbale, the IT business or Gold River, this part is fair. The company has wandered the desert for several years, and I have said that many times. Welcome to the Canadian junior markets. How many companies have "pivoted" like PKK? How many companies have gone from gold mining to weed to blockchain in a series of RTO transactions and reverse splits? How many HIT Technologies to Carbeezas are out there? When a mining company strikes dust on one property, it tries its luck again on another. Guess what? Something like 90% of start up businesses fail, and Venture-listed companies aren't an exception to that rule. Every single small cap success story has a long history of failure, unless the management team and corporate shell got VERY lucky on the first try. Look at Terry Booth and Bruce Linton. The two biggest names in the business side of Canadian weed behind Marc Emery.  Look at the trail of tears left behind them from shareholders chasing their endeavours that didn't pan out. Developing a startup business isn't easy, and insulting someone's past over it is pure FUD. PKK stuck with its guns on developing a business in China, and after many years and several failures, it finally delivered. 

I got a good chuckle on the first page of the report when it referred to Liang “Golden” Qiu as a  mastermind and conman of criminal entities. I can tell you with high confidence after meeting the man several times, he is NOT a criminal mastermind in any way. Take that however way you wish. IF there IS a mastermind, it would be Johnson Joseph. He is clearly the brains, the boss, the one with the capital markets knowledge and the top decision maker of the PKK organization. Golden's skill set is more appropriate for COO type of work, or what PKK refers to as the subsidiary CEO. Building relationships, and overseeing the nuts and bolts operations in China. 

As for the reference to LongKey, after years of dealing with PKK - and this is my opinion only, I didn't get any confirmation from the company one way or another - LongKey was just a shell. You could view LongKey as the "proto-Cubeler". LongKey failed to develop into what the company needed in order to lay out its plan. As did Quickable. So they went back to the drawing board, got some competent developers and made Cubeler. They dropped the reference to LongKey right after that because between Cubeler which was in development, and Gold River which I guess could be called the "transition plan", LongKey was redundant. 

As for LongKey being an entity that has" Untrustworthy personel, severely breaking the law, abnormal operations", like I said, it was just a shell. Plus we are dealing with China and the Chinese government here. Part of the long, long wait on PKK's business model to develop was the company's need to navigate through a changing Chinese financial system as it cracked down on bad actors or actors it didn't like. Just because something is labelled as "breaking the law" in China doesn't mean that it is breaking the law or any moral code by Canadian standards. This would still be a red flag for PKK's operations having past ties to such a company that the Chinese government didn't like, except that PKK has since provided enough evidence that it is on the right side of the government's graces right now, especially at the local level.

Finally, Cubeler. I would have thought the shorts would have hammered this point down a lot harder than they did, given that the $100 million acquisition just resulted in $40 million worth of cash and PKK stock being sent to Golden and Johnson combined. But the report did mention the self-dealing in one page at the end. As a Cubeler shareholder myself, I have insight into both sides of this that most people don't. Back when I initially invested in Cubeler, I actually asked Johnson about merging the two companies. He sold me HARD on leaving Cubeler as a standalone entity. It was going to be the Robinhood of small business lending in North America (a free service meant to grow a user base quickly). I'll let people reading this take a guess on what the business model was supposed to be. The way that man described this business to me, he did not want to merge it with PKK. It was going to be its own seperate NASDAQ listing along with PKK. The licensing deal was always going to be in place but PKK was meant for China and the Cubeler business model meant for North America and elsewhere. 

Somewhere along the way, Johnson got convinced to turn his ~25% stake in Cubeler into $27 million worth of PKK shares and dilute his interest in Cubeler with PKK shareholders. This change of heart came totally out of the blue to me. It should be obvious to anyone that PKK needed to acquire Cubeler, but he had done such a job to convince me otherwise that I was actually shocked when it happened. This was not at all a matter of self-dealing or any intentions of it. If anything, Johnson was convinced by someone, likely a large PKK shareholder, to do it this way. Now the PKK and Cubeler business model can be one. Keep in mind Cubeler is a start up business. Just because I talk it up right now doesn't mean that it has 100% chance of success. We will see what happens in the future, but this report is mostly noise. What I look forward to is the company's response. I warned them about this and any shareholder should invite the opportunity to see how a management team responds in times it is being challenged. Not everybody in the media needs to be a suckup like on the Wall Street Reporter videos.

A Simplified Analysis of 2020 Hype Stocks

Here's a little chart of some of the more talked about hyped up penny stocks/small caps over the last year. CBDT, CMC, FOBI, DOC, PKK and I added in one that I like recently, SAY. With each company's last reported quarter on profits and net income, current stock price and performance between its 52-week high and low. The lessons should be apparent.

The better the financial performance, the better the staying power of the stock. PKK is the only one that has pulled a profit and has more revenues than the rest combined last quarter. And no surprise, it has been a high flyer that has kept most of its gains, up over a 10-bagger, but only off 33% from its high.

DOC is an interesting case. It ran in early 2020 so its run is no longer reflected in the SP as it's sitting at its 52-week low. It was hyped as a revenue play, which it was, but has come off as it's apparent that it has a while to grow before becoming profitable, though it is within reach. It's "only" off 55% from its high, which in penny stock world and compared to the others, is actually pretty good staying power. That's what happens when you buy stocks with actual revenues.

CBDT is like a less successful DOC. Some revenues, but much less than DOC. While the net loss is smaller, it's a larger percentage of the revenues, indicating that CBDT has further to go than DOC to reach profitability. Although it has some revenue, it was WAY overhyped compared to its near term business prospects. Therefore you see it 83% off its high, but still a good performer for those who got in at the bottom.

CMC is what it is, and anyone who understands investing on financials versus hype saw this coming a mile away.

The biggest and most important lesson for new traders to look at is FOBI. FOBI has PKK-like stock price performance with CMC-like financial performance. What's the likelier conclusion here? That FOBI is the magical stock that's going to buck the trend? Or is in the middle of buying hype that's going to come crashing down? Yes I know FOBI signed some contracts with numbers attached. I know it'll have some revenues in the near term. CBDT had *some* revenues and *some* contracts as well. What happened to it?

Finally, the last one SAY. It gave back much of the run it had earlier in the year, but in terms of financials it's pretty decent. A distant #3 in revenue of the six stocks and the one closest to profits behind PKK.

The adage in the investing world but particularly in penny stocks is to buy low, sell high. Based on this we can conclude:

CBDT - hold or moderate buy. If you held on for this long, CBDT has cratered to the point stock price wise and improved to the point financially where it's no longer an overvalued piece of crap. I personally wouldn't buy it, but at least in the adage of buy low, sell high, you're much closer to the former than the latter.

CMC - moderate sell. It's beat up as badly as CBDT, but there's no evidence to support a higher SP in the numbers or business model. You're basically praying the technology issues eventually work out and the churn in execs is a red herring.

FOBI - strong sell, up on hype and has yet to prove out a profitable business model. It's where CBDT was back in February.

DOC - buy if you believe in the company. It fits the adage of buy low, sell high right now.

PKK - hold to moderate buy. The opportunity to "buy low" on PKK when I was hammering the table on it a year ago is gone. But the numbers clearly indicate a business on the right path so you're still probably in cheap at this point. You're better off with this stock than FOBI, that's for sure.

SAY - fits the adage of buy low well. Significantly off its hype stock price, not that far above its low. Has some numbers to back it up.

P.S. I know I didn't bring up market cap. I wanted to simplify this analysis as much as possible. Adding in market cap and financial metrics based on it would have supported the same conclusions for the most part anyways.