Doges were originally the elected leaders of Italian city-states during the Medieval/Renaissance eras. This note is not about them. Being an April newsletter, we're going slightly off the rails here. Not so much into our normal April tinfoil hat conspiracies, but most definitely into market absurdities. This time featuring delis and Shiba Inus.
This first gem was brought to our attention by the recent quarterly "letter to investors" by David Einhorn's hedge fund (note: we're not investors in his hedge fund, we just read the letter). The following is a chart of Hometown International "HWIN" since its going public in late 2019:
Not a bad 13x return in a year! Let's see what Hometown International is all about, shall we? Note again: all of the following in italics and quotes is pulled directly from their 2020 annual report via the SEC's website. Anything in bold is our own added emphasis.
"Hometown International, Inc. (the “Company”) was incorporated on May 19, 2014 under the laws of the State of Nevada."
Okay, so far so good.
"The Company is the originator of a new “Delicatessen” concept called “Your Hometown Deli.” Your Hometown Delis features “home-style” sandwiches, food items, and groceries in a casual and friendly atmosphere. Your Hometown Delis are designed to be comfortable community gathering places for customers of all ages. The Company seeks to create an establishment that will appeal to local residents and commuting workers, conveniently offering high-quality products at fair prices. Targeted towards smaller towns and communities, the Company’s first and only location was opened in Paulsboro, New Jersey on October 14, 2015."
Hm. To paraphrase what you just read, HWIN is one deli stand in Paulsboro New Jersey. This deli stand in Paulsboro, NJ, to be exact:
The president of Hometown International (and also CEO/CFO/Treasurer/Director/largest shareholder) is the local principal and head wrestling coach. The Vice President/Secretary/Director is a math teacher at the same school.
Let's keep going:
"We have limited advertising using social media and direct mailing to residents in towns around our store, however, we continue to place advertisements in a local high school sports calendar, local newspaper and have attended various local events with food samples and menus. Events like the Lighthouse Challenge held at Tinicum Rear Range Lighthouse and various political fundraisers throughout Gloucester County. We expect our losses to continue during 2021."
Okay, now they've just devolved into run-on sentences.
"Effective May 1, 2020, the Company entered into a Consulting Agreement with Tryon Capital Ventures LLC, a North Carolina limited liability company (“Tyron”). Tryon was things to support in the research, development, and analysis of product, financial and strategic matters. The term of the consulting agreement is one-year and Tryon shall receive $15,000 per month during the term. We anticipate extending the term of the Consulting Agreement with Tryon for an additional one-year term."
OMG where to begin. Maybe they meant "does" instead of "was"? Like, Tryon "does things" in the support of research, development and analysis of aforementioned "home-style" deli sandwiches? It paints a rather disturbing image of some Tryon child labor consultant going door-to-door posing as someone's kid's best friend in order to do market analysis of "home-style". And also see if their local sports calendar advertising is hung on the fridge.
"Effective May 1, 2020 the Company entered into a Consulting Agreement with VCH Limited, a company formed under the laws of Macau (“VCH”) which owns in excess of 10% of our common stock. VCH was engaged as a consultant to the Company, to, among other things, create and build a presence with high net worth and institutional investors. The term of the agreement is one year and VCH shall receive $25,000 per month during the term. We anticipate extending the term of the Consulting Agreement with VCH for an additional one-year term."
Okay, so this deli is now on the hook for $40k per month in consulting fees for a period of one year, with the expectation that both will be extended for another year. That's a commitment of almost $1 million in consulting fees over two years. Must be one hell of a deli!
Let's skip to sales:
"We generated revenue of $13,976 and $21,772 for the years ended December 31, 2020 and 2019, respectively. The decrease in revenue is attributed to the deli being closed due to COVID-19. The deli was re-opened on September 8, 2020, with a “soft opening” to a limited audience, prior to its “Grand Re-Opening” to the public on September 22, 2020."
....well hm. This deli has less than $2k per month in sales. If they're only open 5 days a week, that's something like $90 per day in total sales. Given that they also have a grocery section, they're probably making...5 sandwiches a day?
Compare that with whatever your favorite deli is. In Boston, it should be LaGrassa's. That place is open for 3 hours five days a week, and I'm pretty sure they're hitting 100 sammies a day, easy.
Conclusion: Hometown is not one hell of a deli.
Back to the annual report:
"The total cost and expenses was $638,414 for the year ended December 31, 2020, compared to $153,930 for the year ended December 31, 2019. This increase in costs and expenses is primarily due to $320,000 of consulting fees paid to related parties during the year ended December 31, 2020, an increase of $113,991 in professional resulting from the registration statement filed by the Company during the year ended December 31, 2020 and an increase of $59,909 in general and administrative expenses. Increase in general and administrative fees was attributable to fees required in connection with filing with the Security and Exchange Commission and an increase in general business expenses.
We incurred loss from operations of $624,438 and $132,158 for the years ended December 31, 2020 and 2019, respectively. This increase in loss from operations was due to a reduction in revenues and an increase in operating costs."
Uh-huh, there you go. A loss of $624k on revenues of $13k. It's the tech startup business model!
But then there's that $320k in "consulting fees" paid to "related parties". Something's odd here...on $40k sales over two years, how are they sustaining a loss of $600k and not completely bankrupt and out of business?
"As of December 31, 2020, we had current assets of $1,556,426, consisting of $1,398,006 in cash, $6,594 in prepaid expenses, $954 in inventory, $150,000 in note receivable - related party and $872 in interest receivable – related party. Our current liabilities as of December 31, 2020, were $70,051, which is comprised of $64,749 due to certain officers, $2,388 in accounts payable and accrued expenses, and $2,914 in current operating lease liability."
Skip ahead a little bit….
"Our financing activities resulted in a cash inflow of $2,211,292 for the year ended December 31, 2020, which is represented by $2,500,000 proceeds from issuance of common stock, $11,732 proceeds from/due to related parties, $332,104 loan repayment to related party, $70,000 proceeds from note payable- related party and $38,336 repurchase of stock. Our financing activities resulted in a cash inflow of $161,444 for the year ended December 31, 2019, which is represented by $19,054 proceeds from a shareholder loan payable, repayment of note payable of $81,000, repayment of note payable – related party of $31,710 and $255,100 proceeds, net of repayment from note payable- related party."
Aaaaand there it is. So let's recap:
A company is formed in Nevada. It then opens a deli run by the local principal and wrestling coach in small-town New Jersey. After 6 years, that is still the one and only store. (Coincidentally, the lawyer copied on all communications between Hometown and the SEC back in 2015 and 2016 has been disbarred and pled guilty last summer to federal crimes related to shell company scams.)
But! Tiny New Jersey deli prevails and decides to go public. It issues 2.5 million shares of stock at $1 each and raises $2.5M. From which it pays $40k per month to a couple consulting firms, one of which, VCH, owns more than 10% of the stock. So VCH spends at least $250k on buying stock in this company, but then gets its money back in the form of monthly $25k consulting payments for a couple years.
And then the now-public entered into all those related-party loan transactions, most of which were with Hometown International's Chairman, Peter L. Coker Jr. Who happens to be based in Hong Kong, and also shows up as "Chairman" of a shady Macau hotel called "The 13".
It also issued about another 155 million or so warrants to purchase the stock at $1-$2. Of the listed beneficial owners of Hometown International stock and warrants besides the wrestling coach president, we find:
Blackwell Partners LLC Series A
TAR V Partners LLC
Maso Capital Investments Limited
None of those names mean anything to us other than the address is exactly the same for all of them, down to the floor of the building. In Hong Kong. And the same person has control over shares held by all three companies.
Global Equity Limited
Again, meaningless names (except for that $25k/month consulting fee charged by VCH!), but again, the exact same address. In Macau this time.
And then, weirdly, there's a Europa Capital Investments in Carrboro, North Carolina and a Peter L. Coker, Sr. in Chapel Hill (a solid 8-mile drive from Europa Capital in Carrboro). Peter L. Coker, Sr? I wonder if he's any relation to Peter L. Coker, Jr.? And yes, Coker Sr. is a managing member of Europa Capital Investments (with one Peter Reichard). Also coincidentally, Coker Sr. and Reichard happen to be partners in - wait for it - Tryon Capital Ventures with that $15k/mo consulting fee.
It's probably a lot harder to actually prove, but not at all hard to make an argument that Hometown Deli is a front for laundering money out of China, and the Cokers are getting paid handsomely for facilitating it.
What is a lot harder to make even an argument for, is the above chart. Specifically, the fact that after all this has come to light and been written about by CNBC, Bloomberg, and everybody else, it's still a single deli worth $100M. Total trading volume for all of 2021 is around 84,000 shares. Over 56,000 of that came on Friday and Monday (those big green bars at the bottom).
So on a normal day, this thing wouldn't trade. Or would have one trade. And then Einhorn's letter comes out, the whole wide investing world finds out about this deli, and 56,000 shares trade across hundreds of transactions, and the price barely moves. Which means that hundreds of people, after hearing about this deli, actually wanted to buy it at a $100M valuation. "Yes," they thought, "that sounds like a good investment. To the moon, Hometown Deli!"
Add this example to the list of prominent absurdities and memefication of the stock market. Speculative excess thy name is Hometown Deli. Or dogecoin! But stick a pin in that for now because we got sucked down the how-to-properly-file-money-laundering-with-the-SEC rabbit hole deeper than we originally intended.
We'll be back next month to look at cryptocurrencies!
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