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The Official Magazine of the MicroCap Stock Market Since 2006

wiNter/spriNg 2017

GoviEx Uranium Inc. Page


TSX-V: GXU, OTCPink: GVXXF Daniel Major, CEO

First Mining Finance Corp. Page



BioLargo, Inc. Page


OTCQB: BLGO Dennis Calvert, CEO www.

FEATURED ARTICLES 8 MicroCap Guru Jim Collins, CFA 24 The Russell Microcap® Index, A Current View Steven M. Shelton, MS, MBA, CFP®, CLU, ChFC, TEP, CIMA®, CMT

32 Raising Capital in the MicroCap Market Karl B. Douglas

with Rick Rule 36 An Interview By Shelly Kraft

TSX-V: FF, OTCQX: FFMGF Keith Neumeyer, Chairman and Founder

Orion Energy Systems, Inc. Page Facebook


Slash Dot







46 Five Keys to Attracting Chinese Financing 74 Planet MicroCap Podcast Robert K. Kraft Drew Bernstein, CPA 75 Cannabis Legal Corner Mark J. Ross, Esq. 54 Regulation A . . . So Far Sara Hanks, Esq. 76 Where Makers Gone?YouTube Reddit Have All the Market FriendFeed By Shelly Kraft with Mike Modeski56 Investing Alongside Private Equity David Stein, MSc., CFA


NasdaqCM: OESX John Scribante, CEO Digg



OTCMarkets & Greg Averyt -BMA Securities

People, and SlideShare Politics 66 Coming to America Margaret N. Rosenfeld, Esq. 82 Pricing, Newsvine Google Thomas Butler, MSC, MBA & Ramses Erdtmann 72 Perritt Capital Management - History of Small Company Stocks Michael J. Corbett 84 OPEC and Oil Stocks in 2017 Frederic Scheer

Google Talk

otC piNK: Drus

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In Loving Memory of Our Precious Daughter, and Sister, Sammi Kane Kraft Published Since 2006 Follow us: @StockNewsNow SNN Inc. 5839 Green Valley Circle Suite 205 Culver City, Ca. 90230 PUBLISHER Shelly Kraft SNN Chairman/Founder/CEO Lynda Lou “Lulu” Kraft SNN President EXECUTIVE EDITOR Robert Kane Kraft SNN Chief Operating Officer Wesley Ramjeet SNN Chief Financial Officer ASIAN PACIFIC CORRESPONDENT Leslie Richardson SNN COMPLIANCE AND DUE DILIGENCE ADMINISTRATION Jack Leslie CHAIRMAN OF SNN ADVISORY BOARD Dr. Leonard Makowka ADVERTISING and SALES 424-227-9018 GRAPHIC PRODUCTION Unitron Media Corp SNN CONFERENCES


f you have been around the MicroCap stock market for as many years as I have or even if you are new to microcaps, it will be hard to forget 2016. The market rocketed, stock prices soared, investors got fat, fund managers earned their keep and although healthcare and resources had some spikes and dips and shaky moments most are hanging in there and the strong have gotten stronger. From Brexit to the surging dollar, from worldwide instability issues to full scale abandonment of fixed income, the perfect storm was created to own U.S. securities and global capital poured into the U.S. Donald J. Trump is now the President of the United States! Historically Presidential election years usually wreak havoc on the markets with volatility causing surges, dips, and gyrations from minute to minute from rumors, reports of vital security hacks and information leaks but the 2016 Presidential Race will be long remembered indelibly as a raucous, rough, tweeted, social media frenzy and the year end Trump Rally taking equities to new record highs. As Microcap investors, we have been observing record breaking market highs and wondering, are these new market highs affecting microcap stocks? When do the microcaps begin to participate? When will the trickle down to microcaps begin? We used to say that when the market was on a bullish run you could throw a dart and land on a winner! Have we seen the top? Which sector is undervalued? Should we cost average up and keep buying? Is the stock we own getting ahead of itself? Is it time to sell? Just maybe the microcap bull market is hap-

E D I T O R I A L pening right now! You should keep reading because our expert writers will give you their opinions. In this issue we have profiled the following companies: First Mining Financial Corp. TSX-V: FF, OTCQX: FFMGF, GoviEx Uranium Inc. TSX-V: GXU, OTC PINK: GVXXF, Bio Largo, Inc. OTCQB: BLGO, Orion Energy Systems, Inc. NasdaqCM: OESX, Drone USA, Inc. OTC PINK: DRUS, IsoRay, Inc. NYSE MKT: ISR, Strategic Metals Ltd. TSXV: SMD, OTC PINK: SMDZF, Neo Lithium Corp. TSX-V: NLC, OTC PINK: NTTHF, Amplitech Group, Inc. OTCQB: AMPG, Charles & Colvard Ltd. NasdaqGS: CTHR. Writers include Drew Bernstein, CPA, Alan Brochstein, Mike Modeski, Greg Avert, Eric Hellige, Esq. Francesca Djerejian, Esq. David Alsup, Lou A. Bevilaqua, Esq., Kevin (Qixiang) Sun, Esq. David Stein, MSc., CFA, Mark Shore, Leslie Richardson, David Morgan, Frederick Sheer, Jim Collins, CFA, John Lowy, Esq., Karl Douglas, Robert Kraft, Margaret Rosenfeld, Esq., Corey Fischer, CPA, Michael J. Corbett, Joe Mazumdar, Brent Cook, Thomas Butler, Ramses Erdtmann, Rick Rule, Sara Hanks, Esq. Steven M Shelton CFP(r), CLU, ChFC, TEP, CIMA(r), CMT, and Shelly Kraft. Thank you to the many who have contributed to this issue and to all our loyal subscribers, readers and followers. We wish you all a Happy, Healthy, Safe and Prosperous 2017! Shelly Kraft, Publisher n 424-227-9018

Micro-Cap Review Magazine is published periodically. POSTMASTER send address Changes to Micro-Cap Review Corporate Offices. ©Copyright 2017 by Micro-Cap Review Inc. All Rights Reserved. Reproduction without permission of the Publisher is prohibited. The publishers and editors are Not responsible for unsolicited materials. Every effort has been made to assure that all Information presented in this issue is accurate and neither MicroCap Review Magazine or any of its staff or authors is responsible for omissions or information that is inaccurate or misrepresented to the magazine. Micro-Cap Review is owned and operated by SNN Inc.

This publication and its contents are not to be construed, under any circumstances, as an offer to sell or a solicitation to buy or effect transactions in any securities. No investment advice is provided or should be construed to be provided herein. MicroCap Review Magazine and its owners, employees and affiliates are not, nor do any of them claim to be, registered broker-dealers or registered investment advisors. This publication may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Such forward-looking statements of or concerning the companies mentioned herein are subject to numerous uncertainties and risk factors, including uncertainties and risk factors that may not be set forth herein, which could cause actual results to differ materially from those stated herein. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements. This publication undertakes no obligation to update any forward-looking statements that may be contained herein. MicroCap Review Magazine, its owners, employees, affiliates and their families may have investments in companies featured in this publication, may purchase securities of companies featured in this publication and may sell securities of companies featured in this publication, at any time and from time to time. However, it is the general policy of this publication that such persons will refrain from engaging in any pre-publication transactions in securities of companies featured in this publication until two trading days following the publication date. This publication may contain company advertisements/advertorials indicated as such. Information about a company contained in an advertisement/advertorial has been furnished by the company, the publisher has not made any independent investigation of the accuracy of any such information and no warranty of the accuracy of any such information is provided by this publication, its owners, employees and affiliates. Pursuant to Section 17(b) of the Securities Act of 1933, as amended, in situations where the publisher has received consideration for the advertisement/advertorial of a company or security, the amount and nature of such consideration will be disclosed in print. Readers should always conduct their own due diligence before making any investment decision regarding the companies and securities mentioned in this publication. Investment in securities generally, and many of the companies and securities mentioned in this publication from time to time, are speculative and carry a high degree of risk. The disclaimers set forth at - disclaimer are incorporated herein by this reference.

MicroCap Review Magazine


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The Premier Event in MicroCap Finance April 26–28, 2017 Planet Hollywood Resort & Casino, Las Vegas

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F E AT U R E D A RT I C L E S 8 MicroCap Guru By Jim Collins, CFA 24 The Russell Microcap® Index - A Current View By Steven M. Shelton, MS, MBA, CFP®, CLU, CHFC, TEP, CIMA®, CMT 32 Raising Capital in the MicroCap Market By Karl Douglas 36 Interview with Rick Rule By Shelly Kraft 40 High-Powered Gold and Silver are Ready to Shine in 2017! By David Morgan 46 Five Keys to Attracting Chinese Financing By Drew Bernstein, CPA 50 Chinese Déjà Vu By Louis A. Bevilacqua, Esq. and Kevin (Qixiang) Sun, Esq. 52 Is a Public Company Eligible to Do a Reg A+ Offering? By John Lowy, Esq.

56 Investing Alongside Private Equity – Tips and Pitfalls By David Stein, MSc. CFA 66 Coming to America By Margaret Rosenfeld, Esq. 72 Perritt Capital Management – History of Small Company Stocks By Michael J. Corbett 74 Planet MicroCap Podcast – 2016 Highlights and Looking Ahead at 2017 By Robert Kraft 76 Where Have All the Market Makers Gone? By Shelly Kraft with Mike Modeski- OTCMarkets & Greg Averyt –BMA Securities 86 Cannabis Sector Sentiment Strong Despite Uncertainty of Federal Policy By Alan Brochstein 91 Looking Beyond Lithium By Nick Hodge

54 Regulation A…So Far By Sara Hanks, Esq.

Commodities Corner

58 Commodities in Review By Mark Shore

Asia Corner

60 Hong Kong Shenzhen Stock Connect Launched By Leslie Richardson

Accounting Corner

69 Get Ready – the New Revenue Recognition Rules are Here By Corey Fischer, CPA 70

New Formations By David Alsup

Cannabis Legal Corner

75 2016 was a historic year for Cannabis By Marc J. Ross, Esq.

Resources Section

78 Fatal Flaws and the Junior Mining Sector By Joe Mazumdar and Brent Cook

Life Sciences Section

82 Pricing, People, and Politics By Thomas Butler, MSC, MBA and Ramses Erdtmann

Energy Section

84 OPEC and Oil Stocks in 2017 By Frederic Scheer

Comic Strip

92 WallStreet Chicken - Episode 15 “Mickey’s Birthday and an IPO”

Legal Corner

94 The Risks of Engaging Unregistered Finders in Securities Offerings By Eric Hellige, Esq. and Francesca Djerejian, Esq.

Profiled Companies

10 Isoray Medical, Inc. NYSE MKT: ISR 14 First Mining Finance Corp. TSX-V: FF, OTCQX: FFMGF 18 Orion Energy Systems, Inc. NasdaqCM: OESX 22 GoviEx Uranium Inc. TSX-V: GXU, OTC PINK: GVXXF 28 BioLargo, Inc. OTCQB: BLGO 39 Strategic Metals Ltd. TSX-V: SMD, OTC PINK: SMDZF 42 Neo Lithium Corp. TSX-V: NLC OTC PINK: NTTHF 44 Drone USA, Inc. OTC PINK: DRUS 64 Charles & Colvert Ltd. NasdaqGS: CTHR 88 Amplitech Group, Inc. OTCQB: AMPG MicroCap Review Magazine



MicroCap Guru A

s the markets whoosh upwards in the Trump Jump, it’s important to remember the old Wall Street adage: It’s a market of stocks, not a stock market. That axiom has come under attack in a top-down ETF-driven world. There are still a few of us out there, however, who believe that individual stocks can produce returns far in excess of the market. A good threshold would be to double the market’s returns in a given time period, and so far in the brief history of the Microcap Guru, we have had two such winners, Navios Maritime and Evolution Petroleum.



MicroCap Review Magazine

We were all conditioned to believe a Trump Victory would be the worst thing for the markets, but a funny thing happened on the way to the Crash. This Trump Jump has been a lightning move driven by gains in financials and energy. It has rendered the fears of most pundits as moot as the opinion polls, which were once again wrong in calling the election. But is it real? So, that’s when The Guru hits the road and starts doing the most fundamental part of equity research: management due diligence. I’d love to have time to fly all over Creation and visit every corporate headquarters and manufacturing facility in the world, but that’s not feasible. So, investment conferences are the next best thing, and the Granddaddy of Them All to me, LD Micro, happened recently in Los Angeles. With 240 companies presenting, LD is a Microcap-palooza (or something like that.) When I started out at Lehman Brothers in 1992 we had a terrific industrials analyst, Bob Cornell. Bob referred to the job of equity analyst as “professional cynic” and I think in these bull runs the analyst community forgets that job description. So, when management teams are exuberant, as many, but of course not all, were at LD Micro, I immediately ask myself if it is time to take the other side of the trade. Exuberance is healthy; irrational exuberance is expensive. The striking lack of volatility in the mar-

kets is a flashing red signal to me. I believe people are too happy, and that extends to microcaps as well as the blue chips. The Russell 2000’s volatility index, RVX, has been just as deflated since the election as its cousin, the VIX, which follows moves in option pricing for the megacap S&P 500. RVX stands at 17.68 as I write this, down sharply from the 25 level that stood in the days leading up to the election. So RVX has collapsed as the VIX has, and actually tested a 2016 low of 16 in early December before recovering somewhat in later December. But microcaps inherently are riskier than Apple, J&J, JPMorgan and Exxon. Every investor at LD Micro knows that, and virtually every management team does as well. It’s the managements that don’t understand that, have the worst presentations, and I tune them out immediately. It’s always good to have a few minutes to check e-mails or fantasy football scores. But don’t forget to make your macro decision before you start picking stocks. Valuations in the Russell 2000 have increased sharply in the last month, just as they have in the S&P 500, especially the XLF. So don’t let FOMO--Fear Of Missing Out--drive you into a buy-high scenario. n For more information and to subscribe to the MicroCap Guru Newsletter, please visit:

Delivered to your inbox every month: Stock Picks Each monthly newsletter will contain actionable recommendations on undervalued, underfollowed and undiscovered MicroCap companies.

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MicroCap Guru is a monthly email newsletter that delivers actionable insights from a MicroCap expert.

Each month at least two companies will be highlighted via detailed Wall Street quality research notes with earnings estimates, valuations and price targets.

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Nyse mKt: isr


isoray medical, inc. bringing Compassion and Hope to Cancer patients


small company in Richland, WA is dedicated to making a difference in the lives of patients diagnosed with different forms of cancer. Isoray Medical, Inc. [NYSE MKT:

ISR] has spent the last 10 years developing innovative treatments to help cancer patients effectively treat their cancer while maintaining their lifestyles. These efforts have focused on using Cesium-131 brachytherapy, a technique that delivers a targeted, personalized form of radiation therapy. The word brachytherapy derives from the Greek prefix brachy, meaning “short or close”, and describes how the treatment is implanted directly in or near the cancerous tumor site – allowing treatment of the region while limiting radiation dose to surrounding tissues. This precise dose delivery balances therapy and control of side-effects thereby providing patients with a compelling option for their disease, as evidenced by the experience

of Joe M., a prostate cancer patient in northern California. Joe was diagnosed with prostate cancer in April 2015: just one of an estimated 220,800 American men newly diagnosed with prostate cancer that year according to the American Cancer Society. Joe responded to his sobering diagnosis in the studious manner befitting an engineer and CEO with a Ph.D. in Physical Oceanography. He sought multiple opinions, read the relevant scientific literature on treatment options and survival rates, and, most importantly, asked the most relevant ques-

Tom LaVoy, CEO


MicroCap Review Magazine

tions. “What are my options and how can I minimize side effects while generating the best possible outcome at the same time?” He continued to pursue these questions even when his initial consults all suggested surgery. Along his journey, Joe met Dr. Steve Kurtzman, Director of Prostate Radiation at the Center for Advanced Radiation Therapy, El Camino Hospital in Silicon Valley, CA. Dr. Kurtzman shared his results showing lower recurrence rates and fewer side effects with Cesium-131 brachytherapy with Joe, and as a result, Joe had Isoray’s Cesium-131 seeds implanted in August 2015. “Prior to receiving Cesium-131 treatment, I thought the side effects would be minimal and the cancer would be gone,” Joe said. “That is exactly what happened.” In many ways, it is remarkable that patients like Joe even have an option like Cesium-131. The idea of implanting cancer with radiation (brachytherapy) is not new – Alexander Graham Bell first speculated on the idea in 1903. [1] And early brachytherapy showed promise, becoming an alternative cancer therapy in the 1930s. The problem was that the only radio-isotopes that were available for cancer treatments at the time emitted high energy gamma rays that made working with them hazardous for both the patient and for the healthcare worker. That started to change in the 1960s, when scientists identified a new generation of brachytherapy isotopes that emitted more controlled radiation. These isotopes would pose little hazard to health care personnel and would achieve the objective of treating malignancies more precisely than the higher energy isotopes. The initial low dose rate radio-isotope, Iodine-125, was introduced as an implant-

able “seed” in 1965, and it drew the attention of physicians who treated prostate cancer. But some biologists considered the half-life of Iodine-125 (60 days) too long to treat fastgrowing cancers. In 1985, Palladium-103, with its shorter half-life of 17 days, was introduced as a brachytherapy isotope and quickly became an alternative isotope, even as its energy was less than Iodine-125 – meaning the radiation penetrated less deeply into targeted tissue. Cesium-131, with its short 10 day halflife and energy comparable to Iodine-125, seemed the ideal isotope. However, no one was aware of a means by which to produce high purity, medical grade Cesium-131.

Cesium-131 by isoray – a New isotope, a New opportuNity Chemists at the Pacific Northwest National Laboratory in Richland, Washington, had developed a means to chemically separate highly radioactive Cesium-137 from contaminated water. The separation process had been developed at the Hanford Facility in Richland where a large amount of aging nuclear material is stored. Since Cesium-137 and Cesium-131 are identical chemically, it was theorized that similar purification procedures should also

“Prior to receiving Cesium-131 treatment, I thought the side effects would be minimal and the cancer would be gone,” Joe said. “That is exactly what happened.”

work for Cesium-131. With this concept Isoray was born in the mid-1990s and soon developed the process for separating and purifying Cesium-131. FDA cleared IsoRay’s Cesium-131 brachytherapy in 2003 for use in all types of cancers and tumors and was certified for EU sales in 2012. “Pioneers in brachytherapy theorized about the use of Cesium–131 for cancer treatment,” says Isoray CEO Tom LaVoy. “However, scientific and economic limitations prevented development until the late 1990’s when Isoray scientists developed the patented processes to make Cesium-131 a product.” “The Cesium-131 seed delivers a unique balance of therapeutic treatment and control,” LaVoy continued. “Because of its shorter half-life and higher energy (30 keV) than the other isotopes, Cesium-131 provides a fast treatment delivery with low radiation exposure to surrounding tissue.” Since its introduction over 10,000 patients have been treated using Isoray’s Cesium-131. While the majority of those patients have been prostate cancer patients, the impact of Cesium-131 is gaining momentum for aggressive cancers in the brain, head and neck, lung, and gynecological tumors, as highlighted in several recent studies. The most exciting new area is in the treatment of metastatic brain cancer, which impacts more than 100,000 patients a year. The team at Weill Cornell Medical College noted that “Patients with brain metasta[1]

(citation: Abstract/400869) MicroCap Review Magazine


sis who received intra-operative permanent [Cesium-131] brachytherapy implants saw an improvement of their neurocognitive status and self-assessment of [quality of life]. In addition to the excellent local control of metastasis, this approach may contribute to the improvements in cognitive function and [quality of life.]” [ article/10.1007/s11060-015-2009-5] The Barrow Neurological Institute has also published their experience on the use of Cesium-131 for the treatment of brain tumors. “We are seeing 95% local control of the treated tumors in our study using surgery and Cesium implants,” says Dr. David Brachman, Director of Radiation Oncology, Barrow Neurological Institute, Clinical Professor of Radiation Oncology, University of Arizona College of Medicine-Phoenix. ”In addition, we observed a very low rate of radiation injury, which has been a major concern in the past for patients who have undergone multiple treatments for their brain tumors.” Another area of excitement with Cesium-131 is for the treatment of recurrent gynecological cancers. In a presentation entitled, “Permanent Interstitial Re-Irradiation with Cesium-131: A Highly Successful Second Chance for Cure in Recurrent Pelvic Malignancies,” Dr. Jonathan Feddock, MD, Assistant Professor of Radiation Medicine at the University of Kentucky College of Medicine at the 2016 Annual Meeting of the American Brachytherapy Society and World Congress of Brachytherapy, described 26 implants performed in 21 women who had experienced recurrent cancers of the uterus, cervix or vagina. These women had previously been treated

“We are seeing 95% local control of the treated tumors in our study using surgery and Cesium implants. In addition, we observed a very low rate of radiation injury, which has been a major concern in the past for patients who have undergone multiple treatments for their brain tumors.” with surgery and/or radiation and standard of care for retreatment would have been radical surgery with removal of all pelvic organs. Instead Cesium-131 was implanted. Of the 26 implants, 21 cancer sites remained visually free of can52cer at a median of 14 months following Cesium-131 implantation, resulting in a local control rate of 80.7%. “These women were facing very radical surgery to address their recurrent cancers and it turned out that Cesium-131 therapy offered a much better solution for them, Dr. Feddock said. “This is the first study utilizing Cesium-131 therapy for these gynecologic cancers and we have followed these women closely in order to evaluate the effectiveness of this treatment. We are very pleased with the results.” These initial results for treatment of aggressive cancers provides more patients with hope for their cancer treatments. But for today, most Cesium-131 patients are like Joe, looking for a better option for their prostate cancer treatment. For these men, “Cesium is the ultimate solution between the Iodine and Palladium choice in brachytherapy for prostate cancer,” says Dr. Kurtzman. “I find our patients tolerate the short term effects of their treatment quite well,” Dr. Kurtzman says. “When I see my patients at two or three

“Cesium is the ultimate solution between the Iodine and Palladium choice in brachytherapy for prostate cancer. I find our patients tolerate the short term effects of their treatment quite well and when I see my patients at two or three months follow up, they are almost always back to their baseline and have essentially forgotten that they did it.” 12

MicroCap Review Magazine

months follow up, they are almost always back to their baseline and have essentially forgotten that they did it.” For Isoray Medical, the passion extends to both aggressive tumors like those being treated by Dr. Feddock and Dr. Brachman, and for the thousands of men facing prostate cancer treatments like those delivered by Dr. Kurtzman. “Isoray remains fully committed to realizing the value-based potential for Cesium-131 brachytherapy for cancer treatment,” LaVoy says. “As its efficacy continues to reveal itself in the scientific literature for multiple cancer types, in the improvement in the quality of lives for our patients and in the reduction of associated hospital days and clinical visits required with other treatment options including surgery, I am confident we will see it near, if not achieve, standard of care status in multiple indications.” Isoray’s patented Cesium-131 technology was named as one of 2006’s 100 most technologically significant products by R&D Magazine. In 2010, the company was recognized within the IRS Qualifying Therapeutic Discovery Program (QTDP), which is a project of U.S. Department of Health and Human Services. On the web: Contact: Thomas LaVoy, Chairman and CEO, (509) 375-1202 n The company paid consideration to SNN or its affiliates for this article.

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first mining finance Corp. the building of a mineral bank

tsx-v: ff, otCqx: ffmgf


irst Mining Finance Corp. (“FMF”) [TSX-V: FF] was created in 2015 to take advantage of one of the most severe bear

markets ever seen in the mining industry. In April 2015, FMF was listed on the TSX Venture Exchange with the goal of taking advantage of the bear market and the company aggressively embarked on its strategy of acquiring financially distressed junior mining equities which held high-quality mineral assets. According to Patrick Donnelly, President of FMF, “The market was so broken that it was cheaper to buy a million ounces of gold than it was to drill a million ounces.” Mr. Keith Neumeyer, the Chairman, founder and visionary behind FMF, has a track record of identifying the bottom of mining cycles. In the past, Mr. Neumeyer

benefited from similar market conditions when he founded First Majestic Silver Corp. and First Quantum Minerals Ltd., which, under his leadership, became multibillion dollar companies. During his time at First Quantum, Mr. Neumeyer assembled the current management team and together they acquired greatly undervalued yet excellent quality copper assets in southern Africa. First Quantum was one of the first North American mining companies to invest in southern Africa and today it’s one of the largest publicly-listed base-metal companies in the world. When Mr. Neumeyer created First Majestic Silver in 2003, precious metal

Keith Neumeyer, Chairman and Founder

Figure 1: NI 43-101 Compliant Resources by Project


MicroCap Review Magazine


prices were severely depressed. Realizing the opportunity to acquire highly undervalued yet high-quality silver assets, Neumeyer went about acquiring silver projects in Mexico. Today, First Majestic is the second largest silver producer in Mexico, which is the most prolific silver producing nation in the world. Knowing that the mining sector doesn’t stay depressed forever, Mr. Neumeyer took advantage of those bear market conditions and grew both companies into multi-billion dollar producers. Over a 14 month period during 2015 and 2016, FMF completed eight transactions where the company accumulated 6.5 million ounces of gold in measured and indicated categories and 3.5 million gold ounces in the inferred category, all of which are NI 43-101 compliant. Additionally, in June 2016, FMF acquired a 3.3 million ounce historic resource at the Goldlund project. The company expects to complete a NI 43-101 resource estimate at Goldund shortly and it also expects to complete updated resource estimates at its other projects. Based on NI 43-101 technical reports filed on SEDAR by First Mining Finance Corp., PC Gold Inc., Gold Canyon Resources Inc., Clifton Star Resources Inc., and Chalice Gold Mines Ltd. FMF is very discerning when assessing possible acquisitions. Its acquisition criteria is based on the quality of the asset, location, existence or proximity of infrastructure, security of land tenure, low holding costs and a low market valuation. In April 2015, when FMF first started trading on the TSX Venture Exchange, it had already assessed over 80 projects of interest and narrowed the list down to 10 targets that met its acquisition criteria. The first acquisition target was Coastal Gold Corp., which owned the Hope Brook Gold Project in Newfoundland, Canada. Hope Brook is currently estimated to have an indicated resource of 840,000 ounces of gold (5.5 million tonnes grading 4.77 grams per tonne) and an inferred resource of 110,000 ounces of gold (836,000 tonnes grading 4.11 grams

Figure 2: Market Cap and Share Price Growth Through Transactions (in CDN$) 2

per tonne). Additionally, the Hope Brook project has excellent exploration potential to add additional ounces. The Coastal Gold acquisition put FMF on the map given the quality of the asset and the low acquisition cost of only USD$9 million in shares of FMF. Within 18 months since being a publicly listed company, FMF now holds a portfolio of 25 assets, all of which are at various stages of development in prime regions of Canada, the United States and Mexico. The company has seen a steady growth in its share price and market capitalization, directly influenced by its rapid resource growth and addition of quality assets. The market capitalization of FMF grew from approximately US$27.5 million in April 2015 to US$328 million by December 2016. Market capitalization calculations are in CDN$ and are based on closing prices of

the Company’s shares on the TSX Venture Exchange.

Key persoNNel FMF is backed up by an A-list of mining veterans with a history of successful mining ventures. Mr. Keith Neumeyer is the founder and Chairman of FMF. He is also the President and CEO of First Majestic Silver Corp., which operates six producing silver mines in Mexico and has a US$2 billion market capitalization. He has extensive experience making accretive deals and navigating through financial, regulatory, legal and accounting issues that are relevant in the investment community. Dr. Chris Osterman is the CEO and a Director of FMF. He has a Bachelor of

FMF is very discerning when assessing possible acquisitions. Its acquisition criteria is based on the quality of the asset, location, existence or proximity of infrastructure, security of land tenure, low holding costs and a low market valuation. MicroCap Review Magazine


1. Based on FMF’s aggressive acquisition strategy over the last year and a half and the fact that it’s a very young company, this is a story that is worth following and investing in. An increase in stock price with every new asset acquisition has taken FMF’s shares from US$0.22 per share to a high of US$1.02 per share in its first 15 months of existence. 2. Over the past ten months, readers may have noticed that the gold price appears to have started a recovery and there is already a vast improvement in the investor sentiment towards gold equities. Now that the market has recovered to this point, FMF sees value in advancing some of its assets by de-risking them through additional drilling, metallurgical work and conducting economic studies. Over the coming months we can look forward to future catalysts such as the release of drill results, new resource estimates and further advancement of FMF’s projects. These activities should unlock internal value for the company, irrespective of the underlying price of gold. That being said, if investor sentiment for gold continues to improve, we see this company having the ability to substantially reward its shareholders.

Science in Mining Engineering, a Master of Science in Geological Engineering and a Ph.D. in Geology. Dr. Osterman has thirty years of experience in mineral exploration and mining and played an integral role in the discovery of the San Jose silver deposit in Oaxaca, Mexico and the Zuun Mod molybdenum deposit in Mongolia. Dr. Osterman is an expert in project reconnaissance and assessment which has proven to be essential in assisting FMF’s selection of the right projects to acquire. The FMF management team is bolstered by Mr. Patrick Donnelly, who is President of the company. Mr. Donnelly has a Bachelor of Science in Geology and a Masters of Business Administration. He comes with 10 years of experience as a mineral exploration geologist in Canada and he was a former base metals analyst with a sell-side securities firm in Toronto where he had the opportunity to review and assess hundreds of projects

around the world.

The company paid consideration to SNN or its affiliates for this article.

featureD fmf projeCt: spriNgpole, oNtario, CaNaDa. The most significant asset in FMF’s current portfolio is the Springpole project, which was acquired through First Mining Finance’s acquisition of Gold Canyon Resources Inc. in late 2015. Springpole is one of Canada’s largest undeveloped gold projects and it covers a total of 32,240 hectares. The project is located in northern Ontario, about 110 kilometers northeast of Red Lake and it hosts an indicated resource of 4.4 million gold ounces (128.2 million tonnes grading 1.07 grams per tonne) and an inferred resource of 0.69 million gold ounces (25.7 million tonnes grading 0.83 grams per tonne). n

The most significant asset in FMF’s current portfolio is the Springpole project, which was acquired through First Mining Finance’s acquisition of Gold Canyon Resources Inc. in late 2015. 16

MicroCap Review Magazine

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orion energy systems, inc. NasdaqCm: oesx


rion Energy Systems manufactures a cutting edge portfolio of award-winning commercial and industrial LED lighting and Smart Building systems designed primarily for the building retrofit market.

John Scribante, CEO

Many of the company’s trade secrets and nearly 100 granted and pending patents relate to lighting systems that provide exceptional optical and thermal performance, driving financial, environmental, and workspace benefits for a wide variety of customers. CEO John Scribante explains, “My vision is to build a company that uses digital lighting to solve the major business problems companies face. Today, the digital ceiling has become some of the most valuable corporate real estate and Orion has developed the capability to bring convergence between multiple building systems and solid state LED lighting. We can eliminate the labor cost and equipment needed for virtually all access control, asset tracking, space utilization, security, fire, and safety systems and build all of these capabilities into an intelligent lighting system.” Once considered a “Darling of Wall Street,” Orion enjoyed a period of positive media and investor interest soon after its public offering in 2007. However, the honeymoon period quickly passed and the next few

years were challenged by financial instability, fragmented product strategy, a major drop in market demand for its legacy linear fluorescent product offering, and replacement of its original founder and CEO. This put the company on the brink of collapse. In September 2012, Orion’s Board appointed John Scribante CEO. Mr. Scribante was previously the Division President credited for a significant portion of the company’s early revenue generation including customers such as Coca-Cola and SYSCO. Scribante knew a turnaround would require decisive, deliberate action and rose to the challenge. Historically, Orion’s core products consisted of fluorescent high bay lighting for factories and warehouses. The product line was severely outdated and cash was tight. Recognizing the urgency of Orion’s predicament, Scribante acted quickly to improve working capital and generate cash flow. In his first nine months, he shored up the cash balances and acquired Harris Manufacturing. This move provided Orion with a new solid state LED lighting platform, a seasoned and talented management and sales team, and

In September 2012, Orion’s Board appointed John Scribante CEO. 18

MicroCap Review Magazine

incremental cash flow that would accelerate its speed to market. The acquisition also provided the intellectual property needed to expand LED offerings with the subsequently patented LDRÂŽ Troffer Retrofit fixture for

commercial applications. The next challenge was to address manufacturing strategy. Prior to 2013, Orion fabricated, coated, and assembled virtually all of its products in company owned and

An influx of orders pressured margins due to design and supply chain inefficiencies, but Scribante’s focus on capital allocation, talent acquisition, and financial discipline allowed the company to turn around and position itself for growth in a massive market adoption punctuated by increasing shareholder value.

operated facilities. Recognizing that LED would require an entirely new supply chain, fab equipment, casting and extrusion tooling investments, and assembly processes, the company quickly consolidated its operations from Florida and Plymouth, WI into its facility in Manitowoc, WI. At the same time, the company began sourcing metal parts from local metal fabricators. An influx of orders pressured margins due to design and supply chain inefficiencies, but Scribante’s focus on capital allocation, talent acquisition, and financial discipline allowed the company to turn around and position itself for growth in a massive market adoption punctuated by increasing shareholder value. A LEAN production system was implemented and the company exited all non-core business endeavors, allowing the sale of $3.5M in real estate with the resulting MicroCap Review Magazine


cash invested back into growing the business. By 2016, the company was realizing over 80% of its sales from solid state LED lighting and returned to its historic profit margins.

HigHest performiNg leD ligHtiNg proDuCts iN tHe marKet In 2014, Orion launched its second generation LED high bay fixtures, building on its innovative leadership in this market segment. In 2015, LED offerings were expanded to include task lighting, industrial strip fixtures and exterior product options to meet the evolving needs of retrofit customers. Orion also recognized that as the LED market became more established, three fairly dis-

tinct customer classes with different needs and purchasing priorities were developing. Quick to launch a three-tiered branding approach, Orion’s line now offers products that meet key customer needs from those looking for low cost, to those seeking a midtier line balancing performance and value, to customers more concerned with long term total cost of ownership. In 2016, Orion introduced a new line of products to the underserved agribusiness and foodservice markets. Then the subsequent launch of its third generation ISON™ high bay fixture, which delivered industryleading performance of 214 lumens per watt (LPW), was a real game-changer. To that point it was believed that an LED high bay fixture would not be capable of delivering even 200 LPW, but Orion accomplished what

The Generation III fixture was 20% higher performing than Orion’s own industry-leading Generation II fixture and 40% higher than virtually all its competition. 20

MicroCap Review Magazine

its competitors could not. The Generation III fixture was 20% higher performing than Orion’s own industry-leading Generation II fixture and 40% higher than virtually all its competition. This performance gives Orion customers a funding source (in the form of energy savings) to invest further into Smart Building technology that is integrated into the Orion fixtures. As such, Orion’s customers benefit from insightful data and tracking capabilities that are important to managing a facility in today’s competitive environment. Executive VP Scott Green, who oversees Product Innovation, tells us, “Orion LED products cost less to operate than our competitors’ fixtures. If someone purchases another company’s LED High Bays, they are simply choosing to spend more on their utility bill. Base fixture performance is paramount. The more energy savings delivered from the fixture, the more cash flow is available to fund Smart technologies.” Orion has launched multiple expansions to its offerings including a patented modular fixture designed to be upgradable and compatible with developing third party sensor technologies such as wireless, Bluetooth and Internet of Things (IoT) architectures. These technologies can transform a company’s lighting system into a platform that captures real-time data like occupancy, daylight harvesting, thermal sensing and energy consumption, and translates it into useful insights to help analyze data received and make smarter decisions about energy consumption, space utilization, maintenance requirements, security, climate control, and fire and safety systems.

CompetiNg iN a fragmeNteD marKet witH DomiNaNt players Orion has unique competitive advantages. First, the company predominantly sells into the building retrofit market, a complex solution that provides a natural barrier to entry. Retrofitting a building requires working in occupied spaces and accepting the existing

building conditions, which may mean working with an electrical system that is decades old. Orion provides custom labeling, packaging and kitting, along with logistical services, factory assemblies, returnable recycling containers, and custom mounting and bracket kits to address these complicated facilities. Moreover, Orion prepares and stages orders for customers so they are labeled for the area where they will be installed, allowing contractors to move only the product needed into the space where they are working. This improves install times, increases contractor profits, reduces waste and limits facility disruption. These services are rarely found with other lighting companies who manufacture overseas. Second, Orion ships orders in less than ten days when its competitors are quoting months, delivering products with thousands of options with a 97% or better on-time reliability and allowing customers to realize the benefits sooner. Executive VP Marc Meade notes, “Our operation is committed to delivering on-time, with high quality and service flexibility, to meet the dynamic needs of our product development team and our customer base.” Third, innovation leads to pricing power. Orion delivers a higher ROI than any other product for the same price. Since the primary focus for retrofit is ROI, Orion benefits from its performance advantage. Lastly, Orion typically develops its new products in a four-month cycle from concept to delivery, as compared with 15-18 months for most LED manufacturers. Quickly identifying market needs and developing products to meet them gives Orion a key time to

market advantage over its competition.

explosive growtH iN tHe leD marKet Focus on shareholder value. There is a renaissance at Orion. The company has developed the best products for customers with different budgets and different needs. The price and performance of products lead the industry in virtually all categories where the company competes. Moreover, one of the most flexible business models of any lighting company allows it to flourish in the most dynamic market segment - commercial and industrial LED retrofit lighting. Orion’s financial performance is back on the rise. Gross margins are showing mean-

ingful increases, cash flow generation is strong, and GAAP profitability is within reach. Mr. Scribante says, “Capital allocation and cash flow generation are the primary management priorities.” Financial excellence is a process and the company is well underway. It should be clear - Orion has a bright future. The next time you go to the grocery store or the mall, look around. LED is everywhere, but you’ll notice there is still a long way to go and Orion is a great way to get exposure to the next generation of intelligent lighting systems. n The company paid consideration to SNN or its affiliates for this article.

Orion’s financial performance is back on the rise. Gross margins are showing meaningful increases, cash flow generation is strong, and GAAP profitability is within reach.

MicroCap Review Magazine



goviex uranium inc. the emergence of a multi-project african uranium Developer tsx-v: gxu, otC piNK: gvxxf


oviEx Uranium Inc. (GXU.V and GVXXF), since it acquired uranium licences in Niger in 2007, the Company has completed over 600,000 metres of exploration and resource development drilling, completed its pre-feasibility studies (PFS) and had its environmental impact assessment (EIA) approved and its first mining license granted by the Niger Government. In June 2016, GoviEx acquired the African projects of Denison Mines (DML.TO) in exchange for GoviEx common shares, and now has a portfolio including four projects in four African countries: Niger, Zambia, Mali and Namibia. With this acquisition, GoviEx obtained its second mining permitted project at the Mutanga in Zambia. The looming uranium supply deficit is the key higher prices in the uranium market. Global nuclear power capacities are projected to increase by 44%, from 376.6 gigawatts in 2015 to 540.6 gigawatts in 2030. Uranium

Daniel Major, CEO


MicroCap Review Magazine

demand could grow by over 48% to as high as 266.8 million pounds U3O8 by 2030 from an estimated 179.3 million pounds of U3O8 in 2015. Over the same period uranium supply is forecast to decline 4%. As a result, many market analysts are forecasting uranium supply to go into deficit by 2020. According to a Fasken Martineau paper (a leading international law firm founded in Canada), the permitting of Canadian uranium projects has historically taken 7 - 23 years to complete, causing a long backlog of Canadian projects that will not have their development permits in time for the upswing in uranium price that analysts are forecasting. GoviEx was founded by Govind Friedland, son of mining magnate Robert Friedland, whose family background and qualification in geology from the Colorado School of Mines enabled him to identify the opportunity to acquire some of the most prospective exploration ground in Niger, adjacent to Areva’s mines (producing approximately 7% of global uranium supply for almost 50 years). From 2002 to 2011, Mr.  Friedland was based in Beijing adding to his multicultural background having lived much of his life in Asia immersed in the mineral exploration industry, providing him a unique insight into China’s requirement of clean energy.

In 2012, as the company transitioned from exploration to development, Govind appointed Daniel Major as CEO. Mr. Major is a mining engineer who graduated from the Camborne School of Mines in the UK. Daniel’s career spans over 30 years in the mining industry with a solid track record that includes: production and planning at Rio Tinto’s Rossing Uranium Mine in Namibia and chief planning engineer for the development of Amplat’s Mogalakwena mine. Other leadership roles include Chief Executive and later Non-Executive Chairman of Basic Element Mining and Resource Division in Russia, responsible for 8% of global ferromolybdenum production, and leadership positions in several Canadian-listed mining companies with exploration and production assets in Canada, Russia and South America. GoviEx has built a strong shareholder base including some major players in the uranium mining and nuclear energy industry. In 2008, Cameco, the world’s largest publicly traded uranium company became a shareholder, investing US$28 million and is currently a 6% shareholder. In 2014, when GoviEx became a publicly traded company Toshiba converted their US$60 million loan to equity. Toshiba, parent company of Westinghouse, is one of the world’s leading suppliers of nuclear technology, and represents about

GoviEx has one of the largest total resource bases amongst its peers with 197Mlb U3O8, with Madaouela in Niger having 117Mlb, Mutanga in Zambia reported at 49Mlb and 31Mlb at Falea in southern Mali. Within this, global Measured and Indicated resources are 124Mlb.

one half of the global reactor construction. In 2015, Ivanhoe Industries, majority owned by Robert Friedland, an international financier, a major player in the junior mining industry, and the founder of Ivanhoe Mines, acquired a 10% stake in GoviEx. In 2016, Denison Mines acquired a 25% shareholding in exchange for its advanced African projects. These A-list institutions, together with management and the Board, currently own approximately 64% of GoviEx’s common shares outstanding. GoviEx’s acquisition of Denison’s African projects has transformed the company into an advanced African uranium champion with a clear pipeline of three advanced, largescale development projects, two of which are fully licenced. With over US$220m invested in its projects to date, GoviEx presents a compelling

value as its current market cap is less than US$30 million despite a strong development pipeline of projects with advanced metallurgical test work and engineering studies having been completed on its three principal development projects. GoviEx’s acquisition strategy has targeted well-established and pro-mining jurisdictions such as Mali and Zambia, which are major gold and copper producers respectively, as well as Niger, which is the 4th largest uranium producer globally (uranium exports account for up to 70% of Niger’s annual exports). Given the pedigree of these mining jurisdictions, GoviEx’s projects are located in regions with excellent infrastructure and access to skilled, mining labour. GoviEx has two fully-licenced uranium projects ready for development. As the market has taken note of, permitting uranium

Figure: Total Mineral Resource (Mlb U3O8)

mines is a very difficult task, taking up to 20 years in Canada. While current uranium market conditions are resulting is multi year low prices, with the uranium spot price around US$20/lb and the long term price, that accounts for 80% of uranium sales, at US$32/lb, the forecast move to a supply deficit around 2020 has market analysts forecasting uranium prices to exceed US$65/lb U3O8. GoviEx’s corporate strategy has been to systematically de-risk the Madaouela project since discovery while building a portfolio of advanced African uranium projects with the strategic acquisition of Denison’s African projects. Management is taking a long-term approach to structuring financing for the development of its project portfolio with an initial sounding of global debt markets returning a positive result for Export Credit Agency (ECA) covered debt project financing for Madaouela. “A systematic and integrated process to structure Madaouela’s project financing has begun, including dialogue with ECAs, commercial banks, uranium off-takers and, potentially, strategic equity investment at the project level,” stated Mr. Major. Despite holding one of the largest uranium resources of its peer group, and two fully permitted uranium projects in recognized mining districts with substantial infrastructure GoviEx, is currently trading at a 76% discount to the development peer group average. GoviEx trades at $0.18 per lb. of U308 in the ground versus the average development stage uranium company trading at $1.00 per lb. in the ground. Govind added, “GoviEx is working hard towards its intended goal of producing uranium before the end of 2020. One of the few companies of its size capable of making that transition, because of the combination of one of the world’s largest uranium resources, good costs and grades, diversification through the African continent, two mining permits and an A-list of shareholders with significant stakes add to the uniqueness of the GoviEx story.” n The company paid consideration to SNN or its affiliates for this article.

MicroCap Review Magazine



The Russell Microcap Index ®

A Current View iN brief Russell Microcap® Index has enjoyed a period of over performance to the S&P 500. However, various technical indicators and cycles are warning that a probable top is expected in 1st quarter 2017, if not sooner. This major crest will likely lead to a final volatile ratcheting trend down to a lasting long term bottom. The exciting news is that once the anticipated low occurs, it will be one of the most exciting times in modern financial history to buy equities, especially microcap equities, a virtual fire sale to take advantage of! Given this technical outlook, the T-Report contains these major takeaways: • Index is in a topping “process” that takes time to complete, unlike a bottom which is an “event” • The Preferred Scenario has Index approaching a major top, ideally mid to late 1st quarter or per the Alternative Scenario, mid/late December to early 1st quarter • As for the final low, it is expected 2020+-2 Years • Until more index market action takes place to allow a more definitive market top call, a move under the February




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a CORNERSTONE GLOBAL GROUP “T-REPORT” 2016 low would confirm the long term trend to down To well establish these takeaways, the report will comment on the economic and general market outlook, monthly, weekly and daily charts, Russell Microcap® index, Index’s performance, technical analysis, as well as a conclusion.

eCoNomiC aND marKet CommeNtary From an economic perspective the equity markets, such as the DJIA, are reflecting the cresting, a long term topping process, of a 250 year cycle. It began in the 1700s around the time of the American Revolution and the French Revolution, a time of great change that has somewhat the “look and feel” of today. Currently we are witnessing an ongoing revolution in many parts of the world: *a revolution at the ballot box (BREXIT, Trump, Dec. 4 Italian referendum, etc.) and *a familiar cyclical revolution from globalism to nationalism with an increasing disdain for the so called elites. Truly this is an era that has moved from social optimism, which likely peaked at the time of the European Union’s creation. We now have moved in a ratcheting trend toward increasing negative social mood, as reflected in the dissonance within the Eurozone and among voters globally who feel disenfranchised. Other shorter term cycles impacting economies and markets include: *the Economic Long Wave that entered its economic winter season in 2000 and is characterized by deflation *the Debt/Credit Cycle that peaked in the hyperinflationary 1980’s. This cycle, which is closely associated with the Economic Long Wave cycle, has been declining ever

since the 80’s and has yet to bottom; an event characterized by personal and corporate bankruptcies, debt write-downs, severe economic contraction and so on that purges the global economies, governments and commerce of over indebtedness and excess capacity. NOTE… The bottoms for the Long Wave Cycle and Debt/Credit cycle are approximately due 2020+-2 years. This naturally occurring cleansing process creates the foundation for the next long term upward trend. Looking back over the years, I believe a recession tends to occur after every 8 year presidential incumbent leaves office. If true again, that would fit nicely with an expected major 1st quarter top and a return to an economic and equity market decline. Such a decline should be the end of a secular bear market that began in 2000 and has yet to crest, over 16 years and counting. Remember that the 1966 to 1983 secular bear market lasted approximately 16 years but that was not a 250 year cycle crest. Please note the following charts and accompanying analysis. NOTE…Therefore, one would expect this final trend down to start in the 1st quarter of 2017 and should take longer with a more significant decline to a lasting low. PLUS, the trend down is expected to be accompanied with high volatility!

russell miCroCap iNDex moNtHly CHart • •

The monthly chart is most clear as it lacks all the “noise” of the daily chart Clearly the Index has been in an uptrend since March 2009, with only one short downward penetration of the trend in 2016, the footprint of an

bottom details will become more accessible as index action develops

russell miCroCap iNDex weeKly CHart Russell Microcap Index Monthly Chart

• Russell Microcap Index Weekly Chart

• Russell Microcap Index Daily Chart

Intermediate 4th wave The labelings are Elliott Wave and are indicating two probable Index path scenarios The Preferred Scenario (blue line with arrow) would have the Index ratchet up on the chart to a new crest, labeled as Intermediate (3), which would be followed by a corrective decline and upon completion, it would lead to a final crest, ideally in 1st quarter 2017 followed by a final major decline The Alternate Scenario (red line with arrow) would have the index move up one more time and then decline majorly in late December or January, much earlier and at a lower peak than the Preferred Scenario The TAKEAWAY is this Index is in a topping process and when complete will move down toward “C Cycle” in the lower right graph corner and toward Index level 150 but does not have to go that low, ideally bottoming 2020+-2 years The probable final Index level and probable time of crest as well as the

The weekly chart, while not as clear as the monthly, exhibits a bit more detail of weekly moves to include index’s weekly open, high, low and close This along with other technical indicators, such as the 50 week and 200 week moving averages, provide a basis for trend continuation or trend change The Preferred and Alternate Scenario Paths provide more detail and are expected to exhibit a ratcheting trend TAKEAWAY, until more index market action takes place to allow a more definitive market top call, a move under the February low would confirm the long term trend to down

russell miCroCap iNDex Daily CHart •

The short term daily chart from May 2015 has substantial detail and likely beyond what a typical investor is interested in However, for those with a penchant for details, much is offered up in the dialog boxes printed on the graph Also, note the Index’s orderly moves up and down, as it trends up from February 2016, the final leg up to a lasting top In regard to the Scenarios, note the detail to the Alternate Top in red and how it relates to the Preferred Scenario in blue… Very coordinated! A change of Intermediate trend to down, will take a close under its lower trend channel and its 50 and 200 day simple moving averages A change of Long Term trend to down, will take a close under the February 2016 low TAKEAWAY, The Index is approach-

ing a major top, ideally mid to late 1st quarter or per the Alternative scenario, mid/late - December to early 1st quarter Index will soon provide clues to which Scenario will be observed by an technical analyst observing internal market action at short intervals of time

baCKgrouND The Russell Microcap® Stock Index is relatively new having been created in June 2005 but the data feed available through Mets Stock charting system begins in 2008. Without the long term history as found in the DJIA or S&P 500 Indices, it make its analysis more challenging from a historical technical perspective but still creditable on a probability basis. As a refresher, the Index is designed to  measure the performance of the microcap population, which is less than 3% of the US Equity Market. It currently includes the smallest securities in the Russell 2000 Index. According to the Russel Fact Sheet, as of 30 November 2016, the Index contained 1,668 holdings with an average US Dollar weighted market cap of $49.4 million, a median market cap of $18.6 million and the largest market cap stock at 2.338 billion.   As an explanation of the three charts presented earlier, this analyst always starts with the monthly chart with the maximum amount of index data available and work down to weekly, daily and sometimes hourly. This allows an analyst to view how The index or an asset has performed market wise as well as baselining many of the technical tools employed to include: *Trend lines and trend channels that graphically portrays the short term, intermediate and long term trends *Moving Averages which provide a smoothing of the trend as well as a change of trend indicator *Statistical technical indicators which provide momentum, strength of trend, volume and much more MicroCap Review Magazine


*Chart patterns offer clues to market tops and bottoms as well as continuation breathers, which are known as corrections, consolidations or compressions *Cycles provide top and bottom “tendencies” at various cycle lengths *The Elliott Wave Principle provides a probability estimate of where the index or asset is within its current trend, assisting in predicting probable short term, intermediate and long term tops and bottoms

russell miCroCap® iNDex performaNCe Has outperformeD tHe s&p 500 Russel Microcap ®Index is up 46% since the February 2016 low and up 314% since the March 2009 low S&P 500 Index is up 25% since the February 2016 low and up 240% since the March 2009 low Russell Microcap® Sectors and Styles currently in a trend of under-performing to the Russell Microcap Index are: *Growth Microcap Style have been in extreme under-performance, beginning in September 2016 *Health Care Sector has been in a wide amplitude ratcheting trend of under performance since October 2016 *Technology Sector has been one of under-performance since October 2016 *Consumer Discretionary is currently under-performing since early December 2016 *Energy Sector has been in under-performance since December 2016 but has the look of a trend that may move back to overperformance *Materials and Processing Sector has been in an trend of under-performance since early December 2016 *Utilities Sector were in very strong trend of over-performance since 2015 but have moved to under-performance in July 2016 and more in October 2016 *Product Durables Sector have been in


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a period of sharp under-performance since early December 2016 Russell Microcap® Sectors and Styles currently in a trend of over-performing to the Russell Microcap Index are: *Value Microcap style is extremely overperforming, beginning in September 2016 *Consumer Staples Sector is currently in a trend of over-performance since early December 2016 *Financial Services Sector has been primarily in a trend of extreme over-performance from February 2016 but since October has gone nearly vertical Technical Analysis is concerned with the individual index or asset price market action, which creates a trend that tends to persist. The concept is to isolate the trend as early as possible and ride the trend for as long as possible to end of trend, which is the beginning of a new trend. It is assumed the index or asset price reflects all that is known or perceived or believed, thus at each close the price or index value is a permanent chartable fact and are not modified as are estimate in fundamental analysis. In summary, the combination of both approaches is ideal, as technical analysis tends to alert the analyst of potential market actions before the fundamentals appear, at which time it confirms or disaffirms the technicals.

CoNClusioN The Russell Microcap® index combined with technical analysis may very well provide a microcap investor a trend compass in this aggregate asset class, a general guide to consider when to invest, go short, or divest microcap equities as well as provide insight into the trends and relative performance of sectors and styles. Now is the time to be on the alert for a change in trend and to be prepared to take action to preserve wealth and enhance wealth. An exciting and high profit potential era lies ahead as microcap’s trend to its destiny is fulfilled ! n

Steven Shelton is a Financial Services veteran of more than 30 years, having served in senior management in both the insurance and broker/dealer community, on and off shore. He has expertise in economics, financial market analysis, wealth management, traditional and alternative investments, financial planning, marketing, insurance, sales and consulting as well as an international speaking regarding global economics and financial markets. This is evidenced by advanced degrees in business administration and economics as well as six professional designations to include, Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Certified Investment Management Analyst, Tax and Estate Practitioner and Chartered Market Technician. He is the Managing Member of Cornerstone Global Group LLC, an Institutional consultancy and financial services publishing entity Steven M Shelton CFP®, CLU, ChFC, TEP, CIMA®, CMT Cornerstone Global Group LLC Office: 773-697-8021 Cell: 773-294-8174 Cornerstone Global Group LLC, 3240 North Lake Shore Drive, Suite 11-D, Chicago Illinois 60657, provides institutional consultancy on financial services marketing, distribution and product/service development to and for institutional use only. Cornerstone Global Group LLC is also the newsletter publisher of the CGG Global Market Technical Report, CGG Technical Research Notes and other publications, all of which are informational services and may include opinions as to buying, selling, holding various securities, asset allocation and strategies. However, Cornerstone Global Group LLC, it’s owners, employees and consultants are not investment advisers. At no time may a reader, caller, viewer or consultancy client be justified in inferring that any advice is intended as investment advice or as investment recommendations directed to any particular person or in view of the particular circumstances of any particular person. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Before investing consult with your investment advisor. Additionally, Cornerstone Global Group LLC does not render tax, accounting or legal advice and the information contained in this communication should not be regarded as such. Information provided by Cornerstone Global Group is expressed in good faith but is not guaranteed in any way.

An investment in clean water returns health and hope. LOVE WATER-providing access to clean water in order to restore

health and create opportunity in global communities, and to lighten the burden of living one family at a time Love Water, Inc is a 501C3 non-profit organization. Tax ID #90-0838636


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biolargo, inc.

biolargo’s advanced oxidation system (aos) poised to impact $862 billion global water market otCqb: blgo


lobal Water Intelligence, a leading industry market researcher, estimates the annual global water market to be $862 billion. Goldman Sachs calls water “the petroleum for the next century”1 adding, “investors who know how to play the infrastructure boom will reap huge rewards.” With global water consumption doubling every 20 years, they predict that by 2025 about one third of the global population will not have access to adequate drinking water.

After examining data from more than 36,000 water samples collected nationwide by the U.S. Environmental Protection Agency from 2013 to 2015, Harvard researchers found unsafe levels of toxic chemicals in the drinking water of 33 states2. In 2016, a USA Today Investigation reported that after analyzing samples from 2012 through 2015, unsafe

drinking water was found with excessive lead levels in All 50 States3. While some of the violations involve pathogens such as Legionella, most violations appear to involve recalcitrant contaminants such as lead and mercury that are difficult to remove with existing water treatment technologies. The EPA lists4 over 80 potentially harmful contaminants found in their “Table of Regulated Drinking Water Contaminants”, most of which are difficult for existing water treatment plants to remove. Some of the better-known contaminants are: lead, arsenic, mercury, nitrate, benzene, and pharmaceutical residues. For the most part, modern water treatment plants perform reasonably well for disinfection, albeit with high capital and operational costs. However, based on the numerous water safety violations, water treatment plants can fall short when it comes to removing recalcitrant contaminants.

1 newsbysector/utilities/2791116/Water-crisis-tobe-biggest-world-risk.html


2 story/2016/08/unsafe-levels-of-toxic-chemicalsfound-in-drinking-water-of-33-states/


existiNg water treatmeNt teCHNologies are expeNsive aND ofteN iNaDequate

Dennis Calvert, CEO


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biolargo’s aos: breaKtHrougH lowest Cost - HigHest impaCt CleaN water teCHNology

Figure 1

teCHNology gap witH CurreNt water treatmeNt teCHNologies Today, chlorine remains one of the most commonly used water treatment technologies for standard disinfection processes, but is under increasing scrutiny due to environmental concerns regarding its potential byproducts. UV (ultraviolet light) is gaining popularity because it does not leave any toxic residue or byproduct, however, it is costly to purchase and operate, requiring substantial input energy. Ozone is another technology that can be effective, but is very expensive to purchase and operate, and requires high levels of input energy. Filtration and membrane technologies are also commonly used to filter out unwanted contaminants, but they are fraught with high maintenance costs and biofilm fouling. Some, such as reverse osmosis systems, often require significant energy and can have limited efficiency. The world needs more effective clean water technologies that are inexpensive to build and inexpensive to operate in order to meet the ever-increasing demand for clean, safe water.

Figure 1 BioLargo AOS ‘Alpha’ Unit Built by Northern Alberta Institute of Technology After millions of dollars in R&D and more than 30 government grants (and counting), BioLargo’s research and development team recently showcased the first pre-commercial prototype of its patented AOS water treatment system, billed as the lowest cost and highest impact, scalable clean water technology in the world. Test results show that the AOS achieves unprecedented rates of disinfection, and eliminates infectious biological pathogens such as Salmonella enterica, Listeria monocytogenes and E. coli. The AOS has been shown to be 100x more effective at eliminating Salmonella than the best-in-class poultry production water disinfectant, chlorine dioxide. The AOS has also been proven effective in the elimination of toxic oil & gas water contaminants such as naphthenic acids and polyaromatic hydrocarbons. Research suggests the AOS also has the potential to remove soluble chemical contaminants such as acids, solvents, sulfurs, pharmaceutical by-products, nitrates, phosphates, mercury, copper, lead, aluminum, and most contaminants identified by the EPA. Lab-scale testing is planned to verify efficient removal of these contaminants. Past results confirm that the AOS can match the best-in-class technologies in performance at destroying soluble organics while using less than 1/20th the energy and operating more than 10X

faster than the commonly accepted industry protocol, hydrogen peroxide and ozone. The AOS is scalable and modular in design. The AOS is also unique in its ability to deliver residual iodine where the customers desire, or it can remove residual iodine as needed. Its flexibility allows it to be built to meet a wide variety of capacity and flow-rate requirements, and the company is already working on what it calls “Gen 2” for ultrahigh flow rates. The AOS Beta, which will feature full data-logging and automation features, is planned for early 2017.

biolargo aND iNDustry giaNt CHiCago briDge & iroN form relatioNsHip to implemeNt aos aND otHer biolargo teCHNologies BioLargo recently announced a new relationship with CB&I to support implementation of BioLargo’s advanced water and air technologies and provide independent performance verification. News of the CB&I relationship sends a signal to the investment world and to big industry that BioLargo’s advanced water treatment technology has an important contribution to help make clean water affordable in a wide variety of industries. The relationship also sets the stage to pursue business opportunities in which BioLargo’s technologies or products will be used to serve clients of CB&I and BioLargo. With 40,000 employees and a 2016 backlog of $20 Billion, CB&I is a world-leading engineering, procurement, fabrication, and construction company, and a provider of environmental and infrastructure services.

Test results show that the AOS achieves unprecedented rates of disinfection, and eliminates infectious biological pathogens such as Salmonella enterica, Listeria monocytogenes and E. coli. MicroCap Review Magazine


BioLargo recently announced a new relationship with CB&I to support implementation of BioLargo’s advanced water and air technologies and provide independent performance verification. CB&I builds oil refineries, liquefied natural gas terminals, wastewater treatment plants, offshore platforms, and power plants. CB&I is the world’s largest storage tank construction company, with tanks constructed for the oil & gas, mining, municipal water, and wastewater industries. They are also actively involved in the remediation and management of hazardous waste. According to BioLargo CEO Dennis Calvert, “all of BioLargo’s technologies can serve a wide array of industrial customers.” He adds, “Our mission to ‘make life better’ includes helping industry tackle operational cost challenges effectively. That intersection of service is likely where our new relationship with CB&I will shine the brightest and we look forward to working with the exceptional team at CB&I to serve industry.”

biolargo proDuCts for CleaN air aND aDvaNCeD wouND Care also fiNDiNg CommerCial patH Since the first sale in May of 2016, BioLargo has focused on marketing its CupriDyne

Clean™ industrial odor control products for the large waste-handling markets. Management reports, “We have a number of trials underway with leading companies in the waste-handling industry, and the feedback from customers confirms our belief that they want and need a reliable and affordable solution to their inherent odor management issues.” CupriDyne Clean eliminates powerful odor-causing compounds like H2S and ammonia instantly on contact, thereby maintaining clean, safe, and healthy air. The product is safe and non-toxic for humans, animals, and plants. As the word gets out, and after clearing the usual lengthy hurdles involved with becoming a vendor for large corporate and government accounts, management believes that sales will grow with national supplier contracts. In January of 2016, BioLargo announced that its Clyra Medical subsidiary closed a $5.75 million financing package for its Advanced Wound Care products. Cash of $750,000 was earmarked for Clyra to complete its product development work, testing, labeling and ultimately its FDA application and approval which, due to the successful

development work over the past year, is now scheduled 2017. An additional $5 million line of credit was committed by the investor to support commercialization once FDA approval is complete. Clyra is targeting late 2017 early 2018 to be ready for market.

looKiNg aHeaD The opportunities for BioLargo to make a meaningful contribution for a healthy world are massive. The company has invested years developing, refining and validating innovative products to “make life better”. As the Company continues to recruit highly qualified people, engage strategic relationships, and properly capitalize various business opportunities, management believes its technology and products will continue to find a successful path forward to significant commercial success as well as an important contribution to helping people and the planet. n The company paid consideration to SNN or its affiliates for this article.

The opportunities for BioLargo to make a meaningful contribution for a healthy world are massive. The company has invested years developing, refining and validating innovative products to “make life better”. 30

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Raising Capital in the MicroCap Market 7 Success Factors for Achieving Significant Capital Raise Objectives 2016 represented a year of surprises in many areas. While we were entertained (or stressed out) by the election, many significant changes took place in the markets. We saw the coal industry go from bust to boom, and shale oil go from boom to bust and ultimately to stability all within 12 months. In addition we saw the Microcap market outperform every other market by capitalization. 2017 looks promising for the markets given some of the tax legislation being proposed. Now more than any period since 1998, Microcap CEOs should be on the trail hunting for that elusive capital. And investors will be itching to find great deals. So we’ve compiled seven of the best practices we observed in 2016 for raising capital to arm CEOs with some solid ideas as they hit the trail in 2017. The Microcap market has existed for decades going back to the 1970’s. Once called the “Pink Sheets” referring to the 5” by 18” stack of pink quotation sheets which were collated and printed daily for market makers, and often referred to as the Penny Stock market, the Microcap market has evolved significantly. Fifteen years of SEC



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regulatory reforms, and tighter FINRA regulation has changed the Microcap market for the better, to a point where it is fast becoming a legitimate capital raising forum for CEO’s seeking an alternative to the perceived “limited options” of the venture capital and private equity markets. US public companies with market caps of $250M or less, so called “Microcaps” now exceed $200B, yes BILLION, in aggregate market capitalization across all US exchanges. It’s hard to argue that a $200B market is anything but legitimate. And that fact is being further echoed by value hungry institutional investors seeking returns that outperform the major markets. It’s fair to say that the Microcap market it still evolving. With the winds of opportunity filling

the sails, what do CEO’s need to know to tap into this exciting alternative? Seasoned institutional investors such as Perrit Capital, Heartland Advisors and others have developed substantive methods of due diligence that allow them to value hunt effectively. And with the presence of serious institutional funds investing in Microcap stocks, CEO’s have an unprecedented opportunity to develop a “direct to investor” audience. We examined the successes and failures of several companies that we met in 2016, during various phases of capital raises to identify the common best practices being leveraged in the Microcap market. Here are seven commonalities that we observed during 2016:

US Listed Companies by Exchange Exchange

Total Listed


Microcap 319















Table 1: Microcap companies under $250M by exchange, Source: TD Ameritrade.

uNDerstaND tHe marKet Just understanding that you’re competing with almost 6,000 companies for capital is a great start! The most common point among the successful CEOs and other management officers that we met during the year was that they understand the market dynamics very well. They understand that there are many institutional investors seeking out-sized returns, “seeking alpha” based on pure fundamentals of equities listed in the inefficient OTC market. Gone are the myths that “institutional investors do not invest in Microcaps.” Their conviction was bolstered by the knowledge that over 1420 of the Microcap companies currently have institutional ownership of over 10%. Most companies recognized that NASDAQ was the ideal exchange on which to be listed. But most recognized that there is value to being listed on the OTC. In general most understood that there was significant interest in various forms of PIPE (Private Investment in Public Equity) offerings. And for good reason, according to the, $82 Billion in PIPE transactions were completed during 2016.

iNstitutioNal iNvestors seeK value Management for the most successful transactions we observed understood that fundamentally speaking, Microcap investors are bargain hunters. They are looking for companies that can grow at outsized return rates. If your company is growing at a compound annual growth rate that is no different to the more seasoned larger mid cap companies, it’s difficult to justify Microcap risk. Many of the more successful companies offered venture and private equity value propositions. We feel this is a critical success factor, and that both in deal structuring and marketing, it is necessary to offer venture and private equity returns with the promise of a built in “eventual” liquidity event as the market for the securities develops. Successful capital raises typically have an institution on board well before going public. Successful management teams generally leverage existing institutional relationships to help develop the public market for their shares. It’s important that CEO’s understand that their shares are designed to be sold. And large buyers are generally institutions that are familiar

with the “story”. Who’s in the deal is often as important as the deal itself. Prestigious institutional presence often denotes that someone did significant due diligence and vetted the company and its management. Although Microcap institutional investors are value investors, they are driven by the need for capital preservation. Capital Preservation is code for “do we trust management”. “Is there meaningful governance in place?”. By attracting a major institution in the stock, and leveraging company relationships with the “anchor institution” CEOs can generate a significant ownership base. For early stage companies, the right institutional investor can be the difference between long term capital raising success and falling into the “OTC no man’s land”. It’s all about sponsorship: Consider that most institutions queue up to invest in venture and PE funds. They do this for the professional management that ensure proper governance and board structures are in place, as well as proper management policies and procedures are implemented. So even if it takes a deep discount to attract an influential institution, we recommend the practice. Just make sure the institution in question is committing to put their name on the deal and work with management to do the work necessary. We strongly recommend recruiting a strong institutional investor to “sponsor” a transaction as critical success factor. Not only does this create the right perception of a company and its management, but the side benefits of oversight and proper governance help to avoid many of the strategic mistakes often committed in the Microcap space.

liquiDity builDiNg

Table 2 PIPE deals completed in 2016, Source:

It’s very difficult to market your stock if you don’t have a good story to tell! Needless to say, most of the successful deals we saw during 2016 had a very solid story that was easily articulated. It was the disruptors that prevailed in 2016. Combine faster and cheaper with effective management, perforMicroCap Review Magazine


Table 3 PIPE Investments in 2016 by type. Source:

mance and solid corporate governance and many investors paid attention. The successful CEO’s developed a deep management bench, and allocated a significant amount of time “pitching” buy side investors on the fundamentals of their story. The successful companies went well beyond the traditional IR, and went to direct email campaigns to institutional investors, as well as a consistent presence at the major conferences. Public relations is an area that many companies overlook. We noticed a trend toward more PR than IR. After all PR is generally more targeted at marketing the products and services of the issuer than marketing the stock. But an effective PR campaign has an added benefit that many investors will look to invest in what they see selling.

Dual listiNg: Several international markets offer ways to augment liquidity development by attracting alternative investors. High net worth retail, often viewed as a necessary component of a robust liquidity strategy, is a very tough nut to crack in the US for newly listed issuers. Brokers typically cannot solicit retail orders of shares under $5 per share. And many US retail broker dealers have moved to managed money platforms as compared to stock picking. This limits retail orders to investors that hear about the company through public relations exercises. However our neighbors to the north offer several well regulated exchange venues and retail brokers that perform more traditional investment banking roles, recommend high value opportunities to no-US investors. Although dual listing on Canadian exchanges doubles regulatory obligations, it’s well worth it if management can get the backing


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of a good investment banker. We have had success with firms like GMP Securities and Canaccord Genuity. Australia also offers compelling investment options through the ASX. And like Canada, offers more of a traditional investment banking option for microcap companies. In fact, Australia provides a gateway to other Asian investment markets.

alterNatives to equity. Growing the balance sheet doesn’t always require equity offerings. In fact we saw several companies achieve significant growth during 2016 without any significant equity issuance. In many case companies were able to access debt at competitive rates in the BDC “business development company” market. BDC’s offer debt to companies with historical cash flow, where sometimes the borrowers fall short of traditional bank criteria. Many BDCs consider the full disclosure of public companies as a benefit. In addition, for early stage companies, venture lenders and receivables finance are excellent low cost alternatives to equity issuance. Although basically an equity structure, ATM transactions allow companies to access capital with less equity sales. It’s sell as you go! ATM or “At-the-Market” offerings were the second most popular form of PIPE during 2016. 37.4% of 2016 PIPES were ATM deals. This relatively new structure is best suited to issuers with well developed liquidity and also ability to complete a registration statement. During 2016 many ATM transactions were completed at less than 8% discount to market, with no warrants. This new structure is often misunderstood by issuers and confused with “toxic convertible notes”. The primary difference is a note allows to owner to convert and

sell without the consent of the borrower (subject to certain limitations such as price floor). However with an ATM, generally speaking the issuer is in control of issuance. For companies with strong liquidity profiles, this is a useful vehicle leveraged by many successful capital raisers in 2016.

De-risK your Deal for your auDieNCe In the current market there is no substitute for authenticity. The days of the basic “all upside, no competition” pitch are over. We have seen this trend develop over the last few years. Successful managers are actually helping their investors to “de-risk” a transaction by frankly and openly defining the risks and weaknesses their companies face. Speak openly about your competitive threats. It’s your strategy to outmaneuver the competition which is important. And use the competition to show what a great value you are offering. Although this may seem counterintuitive, portfolio managers are more concerned with identifying the risk in a transaction than in identifying the huge growth that most CEO’s think they are interested in. Preparation of investment materials which go beyond “basic risk factors” to an in depth analysis, often lead to a meaningful conversation, and positive results. These critical success factors are far from comprehensive as issuers need to put significant effort into choosing service providers such as investment banks, advisors and counsel that have a proven track records. We compiled this list because selecting an simply effective IB, counsel, an audit firm and IR firm is not an automatic formula for success. As with everything success is usually a function of hard work and tireless attention to detail. The seven “extras” we identified are common among many successful Microcap CEOs. We hope list will dramatically improve your chances of a successful capital raise in 2017! n Karl Douglas is President of PPMT Capital Advisors, a private investment firm based in NY.

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An Interview with Rick Rule 2016 Review and Looking Ahead to 2017

The following Q&A is transcribed from a recent Shelly Kraft interview with Rick Rule

Rick Rule

SK: Rick, let’s start out with an overview of what you do? RR: I run the US and part of the International Business of Sprott, Inc. We manage or administer about $11 billion dollars principle in natural resources and precious metals. In truth I’m a credit analyst, but I do a lot of equity work as well. I help run worldwide portfolios in natural resources and precious metals. SK: Let’s get an update on the market? Commodities prices surged higher and then came down. Where are we now? RR: Precious metals equity markets were overbought last summer, that was pretty easy to see and those over valuations have corrected somewhat, sort of 20%. My suspicion in the very near term is that the markets being oversold will recover a little bit, but I think it will retest the lows. My suspicion is that the bull market will get underway in earnest again, sort of in February or March of 2017. The truth is, I think we’re in the 3rd inning of a 9 inning ballgame. I think we have a lot further to go, but we might go lower before we go higher. SK: What was the biggest surprise to you in 2016? RR: I guess there are two surprises that were extraordinary. One, I knew 2016 would be a good year in precious metals. I didn’t n BY SHELLY KRAFT


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have any sense it would be up 100% in the precious metals equities. The second thing and this is also a pleasant surprise. Unlike the last bull market in 2001, the precious metals mining companies haven’t greeted the bull market by doing a whole bunch of stupid things with their new found wealth. They have actually done a pretty good job with their money. I suspect given how many mining CEO’s got fired in the bear market, that this new found intelligence could last for two of three years to the benefit of all concerned. SK: When you talk about using the money smartly, do you mean drilling and putting money in the ground? RR: I mean, no dumb acquisitions yet and not putting marginal projects into production yet. No boards of directors increasing their emoluments four-fold, year-on-year. Gold mining companies for the first time in my lifetime are being run as businesses as opposed to warrants on the gold price. Which in my opinion is really wonderful. SK: On a scale of 1-10, how would you rate 2016 with 10 being the best and how do you feel 2017 is going to be on a scale of 1-10? RR: 11.2, on a scale of 1-10 for 2016, I had suspected 35% or 40% compound internal rates of return. 35% internal rate of return is astonishing. If you’re asking for 35% and somebody gives you 100%, that’s truly off the scale. My suspicion for next year, is what my suspicion for this year was. I would be very happy to see the juniors composite index up 35% or 40% next year. Believe me, I would be delighted to see it up 100%, but that’s not an expectation I have.

SK: Which group did the best over the course of 2016 in your opinion; the explorers, the developers, or the producers? RR: None of the above. The optionality plays, the people had very large deposits that weren’t economic at $1,100 gold, but might have been economic at $1,500 gold. The optionality plays were up an average of 500%. On a risk adjusted basis of course the big producers did the best because they did well and they didn’t have too much risk associated with them. I suspect market leadership will change in 2017 though. SK: What about Mergers & Acquisitions? RR: In 2017, M & A is going to continue. The truth is, that the whole industry needs less general and administrative expense relative to assets and the way that you do that is through M & A, making redundant teams disappear. Now, the best of the best targets have begun to disappear, but this is interesting news for speculators too. You know, the industry has had a dearth of exploration and expenditures, which means the industry, as a whole, is shrinking. Gold production will begin to fall by 2018, every other thing left unsaid. What that means is that the better exploration discoveries; the higher quality discoveries, the Reservoir Minerals of the world, the Kaminaks of the world, will disappear into the jaws of larger mining companies and they will do so at eye popping prices. Very high quality new discoveries will go away much in the way that they went away in the 1990’s at prices that surprised everyone. SK: So they don’t disappear, they just have new ownership? RR: That’s correct and by the way, I’m happy to surrender my ownership for correct compensation.

SK: In reality, miners haven’t stopped mining. They’re taking their own resources out of the ground. How are they going to replace them? I’m not talking about the giants, like the Barrick’s (ABX) going out, I’m talking about the smaller mining companies. Where are they getting their new gold? RR: It’s true on all levels Shelly. Barrick (ABX) is becoming a smaller company too, but what you say is very important for your readers to understand. This is not a business like a supermarket, where fresh groceries come in the back and go out the front. Every day you mine, your business gets smaller and the truth is, the industry is under invested over the past four, five, or ten years. Now, part of this is a natural and normal function that’s happening across all businesses, called outsourcing. The junior mining companies have cheaper access to capital than the senior mining companies because they have less of a book value to defend. So, in one sense the explosion of junior mining companies is a function of outsourcing the exploration function from the majors to the juniors. The truth is though, that this means successful efforts will become increasingly valuable. When the major mining companies begin to expand as opposed to contracting, and the CEO calls down to the exploration department, he’ll be reminded by the CFO that he laid them off three years ago. SK: How do you feel about the global growth in the mining and resource industry? RR: That is a very important question for your readers to understand Shelly. The truth is, the deposits are where you find them and the easy to find projects in places that are regarded as safe, have already mostly been found. All those deposits that we could stumble over in Nevada are in production. The big deposits we find worldwide are going to be in places that are regarded as trickier and have been less well explored. They’ll be in big Metallogenic belts, like the Tethyan Metallogenic belt*, and they’ll be in Chile, or the Congo, they’ll be in places that we are less comfortable going to. Not necessarily places that have more political risk by the way, just

places that have political risk that we’re unfamiliar with. There is all the political risk that you need in the United States, but the truth is, the big deposits will be found elsewhere. SK: So if you wanted to advise investors about the gold market, about what they should do, give us a timing answer and give us a little bit of direction from an expert from Sprott Group. Tell us what you think and what you tell your own investors? RR: Traditionally, gold has been a flight to quality style asset. It’s competed with the U.S. 10-Year Treasury. Jim Grant, defined the U.S. 10-Year Treasury as return free risk. Meaning the government absolutely, positively guarantees to give you back less than you gave them. What that means, is that it’s a less viable competitor and that means gold should do well. The first thing I can say, is if you don’t own gold, buy some gold. Preserve your purchasing power. If you’re prepared to take implementation risk, if you’re prepared to speculate, buy the gold stock. As the gold price goes up, the earnings of gold mining companies will go up and the share prices will follow. *The Tethyan Metallogenic Belt (TMB), extending from Europe through Anatolia to Iran, is one of the world’s major metal producing belts, and consists of many sectors. In addition Rick added: It is worth noting that the dollar strength credited to the election of Donald Trump, and to the recent interest rate rise has led to a substantial weakening of the gold price, and a more dramatic weakening of gold related equity prices. Investors and speculators may want to consider whether the quarter point increase in rates is sufficient to make US treasuries viable investments, and whether Trump’s policies, (maintaining entitlements, restricting trade and immigration, increasing infrastructure spending) are policies that would either be good for the economy, or make a dent in the federal governments $20,000,000,000,000 in on-balance sheet liabilities, or the $120,000,000,000,000 in off-balance sheet liabilities. On my own account, I prefer gold to the promises of any

Politian, including Mr. Trump. Investors should also note that most nonprecious metals extractable commodities continue to be very weak, but certain very oversold industrial materials, notably iron ore, metallurgical coal and zinc, have made substantial gains. Very recently oil quotes have moved up sharply as a consequence of supposed market tightening in the face of recent OPEC agreements. The outlook in these sectors is mixed: the industry pricing is often below the industry cost structure (the common precondition for a dramatic rally), but global demand and economic output continues to be very constrained.   If past is prologue (never a guarantee) the materials sectors equity pricing will advance before a broad-based rebound in commodities pricing occurs. Investors in the sector need to ask themselves whether they believe the recent strength in these equities is predicting the inevitable rebound in commodities pricing, or is merely a “bear market” rally. n Mr. Rule has dedicated his entire adult life to many aspects of natural resource securities investing. In addition to the knowledge and experience gained in a long and focused career, he has a worldwide network of contacts in the natural resource and finance worlds. As Director, President, and Chief Executive Officer of Sprott US Holdings, Inc., Mr. Rule leads a highly skilled team of earth science and finance professionals who enjoy a worldwide reputation for resource investment management. Mr. Rule is a frequent speaker at industry conferences, and is interviewed for numerous radio, television, print and online media outlets concerning natural resource investment and industry topics. He is frequently quoted and referred by prominent natural resource oriented newsletters and advisories. Mr. Rule and his team have long experience in many resource sectors including agriculture, alternative energy, forestry, oil and gas, mining and water. Mr. Rule is particularly active in private placement markets, having originated and participated in hundreds of debt and equity transactions with private, pre-public and public companies. Sprott US Holdings, Inc. is a holding company made up of three separate and distinct companies: Sprott Global Resource Investments, Ltd., a FINRA Registered Broker/Dealer; Sprott Asset Management USA Inc., an SEC Registered Investment Adviser offering managed accounts; and Resource Capital Investment Corporation, an SEC Registered Investment Adviser managing partnerships. These three companies make up the US Subsidiaries of Sprott Inc. and are active in securities brokerage, segregated account money management and investment partnership management involving both equity and debt instruments, across the entire spectrum of the natural resource industry. MicroCap Review Magazine


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Larry Hogan, Governor | Boyd Rutherford, Lt. Governor


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strategic metals ltd. tsx-v: smD, otC piNK: smDZf


trategic Metals Ltd. (TSX-V: SMD) is a highly successful, uncommonly wellfunded generator of mineral projects. The Company is the largest claim holder in Canada’s Yukon Territory, a politically stable, mining friendly jurisdiction with world class mineral potential. Strategic’s basic business model is simple. It acquires mineral projects at low cost during times of market weakness, advances them with early stage work and then, during robust markets, sells, options or spins-out projects to other parties. The Company maintains exposure to projects via working interests, share payments and/or royalties. Strategic utilizes excess capital to make investments, providing exposure to promising exploration projects owned by other companies, often in other jurisdictions. Share sales are made at times when pricing and liquidity are attractive. Royalties are held or sold when metal prices are peaking. Although the majority of the Company’s 130 property interests target gold and silver —metals Yukon is famous for— the Territory’s unique geology allows for diverse deposit types. Strategic’s projects also host base metals such as zinc, copper, and lead, as well as specialty metals including molybdenum, tungsten, tin, and vanadium. Strategic’s President and CEO, Doug Eaton, has diligently explored the Yukon since 1971, and has contributed to the discovery or advancement of a long list of Yukon deposits. Recent major discoveries that Strategic has participated in include Carlin-type mineralization at ATAC Resources Ltd.’s Rackla Gold Project, and high-grade epithermal mineralization at Rockhaven Resources Ltd.’s Klaza Deposit. Strategic financed early exploration at both of these discoveries and continues

to hold equity interests of 8.3% and 41.4%, respectively. Other shareholdings include: a 33.4% interest in Precipitate Gold Corp. that resulted from a property transaction at IPO and subsequent investments made following discoveries in the Dominican Republic; a 16.5% interest in Silver Range Resources Ltd., which was a 2011 spinout from Strategic that is now focused on generating gold projects in NWT, Nunavut and Nevada; and, a 100% interest in Terra CO2 Technologies Ltd., which is developing processes and equipment relating to carbon sequestration and mine remediation, based on a concept conceived by Mr. Eaton. The Company is able to minimize its exploration risk by seeking partners for projects prior to conducting large-scale drill programs. This has allowed Strategic to maintain a tight share structure over many metal cycles. The Company has extremely low holding costs because none of its projects are subject to option or royalty payments, and it has built

up many years of assessment credits on its most advanced projects. To minimize regulatory delays and reduce risk for incoming partners, Strategic often conducts environmental and heritage studies and secures exploration permits, before vending the projects. The Company currently holds permits that approve 3,000 drill holes, totaling over 500,000 m of drilling on various projects. With modest exploration budgets, Strategic continues to make new discoveries year after year, which speaks to the quality of people on the ground and the underexplored nature of the Yukon. n The company paid consideration to SNN or its affiliates for this article.

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High-Powered Gold and Silver are Ready to Shine in 2017!


y December 2015, the four year cyclical bear market within the larger and longer secular BULL RUN for the metals and miners gave compelling evidence of ending. The Morgan Report Members were notified early and knew big things were in store for theresource sector. On January 19, 2016 the Bears’ last gasp failed, causing mining stocks, gold and silver to make a six month rocket launch, confounding the public and most of the experts. Technician James Flanagan analyzing initial bull run legs going back decades, concluded: The 175% Advance in Gold Stocks in 5 Months, 22 Days Now Places Us As the 11th Greatest 1st Leg Up in Any Bull Market in Any of the Tangible Assets During the Past 150 Years.  A month before this historic run became obvious to the investing public, The Morgan Report stated to subscribers - “Get ready the bottom is in! We anticipate significant upside for a couple of months or more; we’ll keep you posted with our premium video service.” As we are market-driven, an exit point was established for all to offset with partial profits during the summer peak. We also sent out word in early February, 2016, via our exclusive POP-UP Alert System, recommending a Canadian silver producer with properties in China, which at the time was trading for less than $US0.50



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a share. Subscribers had almost two weeks to establish a position in the .45-55 cents zone before it took off and ran to $3.60, for a potential 700% profit. Not bad for a “quick trade” we saw coming. Demonstrating the longer-term potential for this profitable silver trader is the fact that it had a 2011 high of over $16.00 per share. Currently it has over $90m in the bank, and pays a dividend! Now that it’s trading at around $2.00, it might make sense to stake out a position for the next upside run! TMR members have ongoing access to our thinking on upcoming high reward- to-risk power plays just like this one. Your Second Chance: For almost two years now, we’ve made resource company site visits and written about a story we call “a potential game-changer” in our new book Second Chance: How to Make and Keep Big

Money from the Coming Gold and Silver Shock-Wave. An Exclusive Trade for You? This is a trade where risk is balanced by an exceedingly high potential reward - in fact one of the highest reward-to-risk profiles we’ve seen in over four decades of analysis. Will it work out? At this point we can’t say, but if you approach it from a good knowledge base, a successful outcome could make a significant difference in your lifestyle. It might end up becoming the investment story you’ll be telling others about for years to come. This patent-pending, environmentally-safe process shows great promise in its ability to safely and reliably extract free-state gold without using mercury or cyanide, from very low to high grade ore. Simplified “on site” processing promises dramatically lowered production cost.

A look at the future?

TMR thinks it could become a “silver bullet” in dealing with waste (eTrash) from discarded electronic equipment like motherboards, cell phones, and keyboards - safely recycling gold, silver, platinum and palladium from a potential host of eWaste sources. This looks to be where the extremely high growth potential lies. To the best of our knowledge, no one else in our industry is covering this special situation. A parent company spinoff is scheduled to trade in the next few months. Current paid members to The Morgan Report know the name of this operation, probably have a position in the original company, and will have access to ongoing information that can help them decide if they want to buy spinoff shares once trading commences. We feel the potential - especially for the new operation - is so great that we invite you to come onboard. Even after the spinoff is trading, you could still have an excellent chance at a moon shot! As a new subscriber you’ll receive the full story, and what a story it is! The Bigger Picture: The late John Exter,

member of the US Federal Reserve Board of Governors, created a visually-powerful inverted triangle chart showing the various financial asset classes, known as Exter’s Pyramid. His belief - as is mine - was that the public will move down through these levels, losing faith in each one until they reach real money - gold, and silver. Notice that the asset class just before reaching gold is paper money. Once confidence - the only thing backing fiat paper currency - erodes, the final, convulsive “run to gold” will massively accelerate. Investing is always about probabilities. If you’re waiting for an “all-clear” signal before you jump into this or any other sector, you’ll be waiting until that market surge has come and gone. But if you believe, as we do, that we’re setting up right now for the continuation of the sector bull run that got underway in January, 2016, then let us help with your research so you can start taking action. You don’t have to “back up the truck” and bite your nails. How about doing the math on the projects that appeal to you, and plan to buy tranches into weakness, while keeping a cash reserve?

Bob Moriarty, whose track record for calling major turns in this sector stacks up with the best of them, recently said in an interview: In 29 years of measuring sentiment in gold, the sentiment is the lowest it’s ever been. This is exactly the kind of sentiment that marks bottoms, major bottoms...I continue to believe that this is the greatest buying opportunity in the history of the precious metals’ mining sector - the last chance to hop aboard the train before it leaves the station. We can’t guarantee this will turn out to be “the greatest opportunity”, but what if it is? Do you want to watch what happens? Or make things happen? We at TMR are already positioned, and have cash from our sell at the 2016 top. How about you? n David Morgan is a widely recognized analyst in the precious metals industry. He consults for hedge funds, high net-worth investors, mining companies, depositories and individual investors. He is the publisher of The Morgan Report,  author of the book The Silver Manifesto, and a featured speaker at investment conferences in North America, Europe and Asia. As a public service, we provide a weekly Free E-letter, TheMorganReport.

MicroCap Review Magazine



Neo lithium Corp. tsx-v: NlC otC piNK: NttHf “Our team is confident that the 3Q Project has the potential to be a large high grade discovery – the brine found in an open reservoir has the right chemistry for low cost evaporation process, contains potash as a valuable by-product and lithium grades that are equal or superior to all other known development stage projects and producing mines.” — Waldo Perez, Ph.D., P. Geo. President & CEO

Neo Lithium Corp. is quickly becoming one of the foremost new names in lithium brine exploration, rapidly advancing its newly discovered Tres Quebradas (3Q) Lithium Project - a unique high-grade lithium brine reservoir and salar complex in the Lithium Triangle, located in the Province of Catamarca, the largest lithium producer in Argentina. The 3Q Project covers approximately 35,000 ha and the salar complex within this area is approximately 160 km2. A high grade northern target was identified extending over 14x3 km including a salar and a reservoir. The northern target has high grade lithium with very low key impurities (magnesium and sulphate) - a significant factor in traditional low cost evaporation techniques


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for final lithium production. Hot springs on the property with elevated lithium content are part of the recharge system of the salar complex. The technical team that recently discovered this unique salar complex is one of the most experienced in the modern era in lithium salars, having discovered and led the technical work, including resource definition and full feasibility study that established the Cauchari lithium salar as the third largest lithium brine resource in the world. The atmosphere in Argentina is favourable for a lithium boom with the recently elected, pro-business President Mauricio Macri implementing changes to promote economic growth in the country. Lithium is emerging as one of the most prized commodities on earth as prices have tripled since 2003 and continue to remain strong with lithium demand expected to double by 2020. This is encouraging data that coincides with Goldman Sachs dubbing lithium as ‘the new gasoline’ in a special research series entitled “What if I told you” which explores emerging trends that will change our everyday lives. Changes like the long-awaited electric car revolution.

Neo Lithium’s 3Q Project is the right asset in the right location at the right time. Neo Lithium holds the entire salar complex; has discovered a “new” high grade and low impurities lithium reservoir in the Lithium Triangle, and is headed up by a quality team of seasoned experts in the lithium sector. With its strong cash position and fully financed through exploration to Lithium Carbonate PEA report, Neo Lithium is poised for long term gains. Neo Lithium trades in Canada on the TSX Venture Exchange under the symbol NLC. n The company paid consideration to SNN or its affiliates for this article.

I am thankful for my friends, my family, my dog, sports,

my legs and my Xbox :) Braylon O'Neill 6-year-old bilateral above knee amputee 3-time CAF grant recipient Determined to be the fastest kid on the block

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DONATECAF.COM ABOUT CHALLENGED ATHLETES FOUNDATION ® It is the mission of the Challenged Athletes Foundation® (CAF) to provide opportunities and support to people with physical challenges, so they can pursue active lifestyles through physical fitness and competitive athletics. CAF believes that involvement in sports at any level increases selfesteem, encourages independence and enhances quality of life. Challenged Athletes Foundation, Inc. is a 501(c)(3) non-profit organization. Tax ID #33-0739596

C H A L L E N G E D AT H L E T E S . O R G


Stitch Marketing & Research, 2015


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otC piNK: Drus

Drone usa, inc. “

At Drone USA, we love stuff that flies: piloted, unmanned, optionally piloted, large and small, rotary, or fixed wing. Irrespective of our backgrounds, we all share a passion for aeronautical technologies, and especially drones,” said Drone USA Inc. Chairman and CEO, Michael Bannon.

Early in 2016, Mr. Bannon became aware of high growth market gaps relating to low-altitude drone applications, within the defense, public safety, and commercial sectors. These gaps are either not serviced, or inadequately serviced by system providers worldwide. Undoubtedly, these market place shortcomings constitute an opportunity for commerce success, when the right strategy and tactical attributes are assembled and put into action. Over the course of many years, Mr. Bannon has developed and managed successful businesses and understands the importance of empirical knowledge, relationships, team building, and structuring for operational excellence. A Harvard graduate with a strong entrepreneurial vein, and he has a track record of getting things done effectively and profitably. He set out with a goal to create a drone company that met several objectives: • Operate in the low-altitude drone space, in professional high-growth segments • Structure to possess two distinct growth vectors: organic growth through sales and growth by acquisitions • Possess competitive advantages over other players in the market • Be a candidate for inclusion onto a major stock exchange

ketplace is littered with drone system providers that are struggling to survive. These companies include innovative and capable developers of drones and sensors, companies that excel in their technical areas of expertise but lack the infrastructure and the business development capabilities to be successful yet also provide potential acquisition candidates. To realize sustained revenue growth, Drone USA cites that practical and reliable products are needed at competitive prices, that meet compliant regulatory demands, and are built under controlled processes. Management maintains an intimate knowledge of various marketplaces and its endusers and has experienced understanding of budgetary expenditures and required deliv-

ery timelines, critical mission protocols, and providing impeccable customer support, all equally important. Drone USA’s products need to fit the needs of its customer’s mission and must operate flawlessly. For this to happen the Company supports research & development, supply chain management, configuration control, and producing with repeatable quality and reliability. As the Company grows, it must operate a credible flight testing program, and possess the talent to recommend specific solutions (aircraft, sensors, data collection and exploitation packages) for specific operational needs. Last, but not least, the products and services must be competitively priced. Many contemporary leaders in the various

Michael recognized that developing the appropriate infrastructure, operating protocols, and growth strategy are paramount for success in today’s drone markets. The mar-


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drone markets are intimately familiar with industry procedures and are quite adept in excelling within their pertinent domains. DJI and Parrot dominate the hobbyist consumer markets, AeroVironment Inc. and General Atomics are the undisputable leaders in professional small unmanned aircraft systems (SUAS) and medium altitude long endurance (MALE) systems respectively, and highaltitude-long-endurance (HALE) platforms such as Northrop’s Global Hawk / Triton, and Aurora’s Orion rule the stratospheric realm. Above that, Boeing leads outer space with the X-37B system, also called Orbital Test Vehicle. Michael Bannon has assembled some of this industry’s best resources through exceptional talent hiring, acquisitions, and partnerships, and has established a complete operational infrastructure that positions Drone USA to become one of the two largest players in the professional SUAS space. The team of seasoned employees and collaborators comes from the industry’s most successful companies. Drone USA’s approach is innovative, with products that are technically and operationally advanced, maintaining costs that are lowest in our class. Drone USA acquired exclusive access to a portfolio of proven and very capable lowaltitude drones originally developed and sold to several distinct customers with dissimi-

lar needs. Additionally, Drone USA established strategic partnerships with producers of some of the best higher-altitude UAVs in the world. Drone USA plans to offer several services from turn-key flight operations to approaches where the end-user becomes progressively more operationally autonomous, until full independence is attained. The Company is headquartered on the 85th floor of the landmark One World Trade Center and has development and production capabilities near São Paulo, Brazil through BrVant Technology Solutions, and is currently establishing a production and development facility in San Luis Obispo, California though a partnership with ES Aero Inc., a renowned engineering and production entity recognized internationally for its aeronautical achievements commissioned over the years by various global leaders in manned and unmanned flight technologies. Most systems offered by Drone USA fit within the new FAA set of flight regulations for the US, therefore enabling the Company to reach out to the market and compete for sales domestically. One of Drone USA’s principal differentiators is the ability to customize solutions for specific needs. The company is not vertically integrated, which allows it to choose from the very best sensor packages and data exploitation systems available, achieving

high performance without compromising reliability, maintainability, or price. This is a great competitive advantage achieved by the integration of the very best in engineering, manufacturing, and operational assets inside the Company’s infrastructure. The parallel vector of growth is the intended acquisition of solid and profitable entities that will bring revenue and strategic benefits into the Drone USA. As examples, the addition of BrVant’s portfolio of technology brought a line of world-class products into the Company’s line-card, and the newest acquisition (Howco Distributing Co. in Vancouver, Washington) has brought additional revenue into the Company. Drone USA will continue to actively identify, qualify and evaluate drone-related companies with superior technologies to acquire which will add products into existing sales channels through the Company’s proven network of sales representatives in the US and worldwide. Mr. Bannon added, “Drone USA (OTC Pink: DRUS) is perfectly positioned to provide continued Company growth for our shareholders and industry wide recognition for our products and services in the future.” n The company paid consideration to SNN or its affiliates for this article.

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Five Keys to Attracting Chinese Financing


s China steps up as a major deal player, companies and advisors need to be able to view the world through Chinese eyes

In just the past few years China has gone from the world’s largest destination for capital investment, to a net exporter of capital. This flood of outbound investment is a game changer for the global economy, and needs to factor into the strategy of every company that is seeking access capital or maximize value for its assets. In the first nine months of 2016, China displaced the United States as the number one player in cross-border M&A, with $174 billion of deals, up 68% according to Dealogic. Just a few years ago, Chinese deals were few and driven primarily by State Owned Enterprises (SOEs) acquiring energy and raw materials assets to feed heavy industry. But recently, sectors like manufacturing, technology, consumer goods, and healthcare have all emerged as areas of focus. The U.S. was the number one destination for Chinese outbound M&A, accounting for nearly 30% of deals announced thus far in 2016, according to Thomson-Reuters. In addition, China is emerging as an important source of venture funding, with Chinese internet giants Tencent and Alibaba opening offices in Silicon Valley to invest directly in companies that may be able to



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provide them with a technology edge and new Chinese venture and private equity funds seeking access to U.S. venture investments and even public company buy-outs. The forces that are driving this global shopping splurge are likely to accelerate, rather than slacken. As China’s economy slows and its labor markets tighten, the Chinese government has mandated that its companies move up the value chain. Acquiring advanced technology and recognized brands is often faster and surer path than developing them internally. Downward pressure on China’s currency has increased the attractiveness of dollardenominated assets and cash flow, while the government has made it significantly easier for companies to get deals approved and deploy capital overseas. Loosening monetary policy and accommodative lending are fueling the deal binge, given that most sectors of the domestic economy are already overcapacity and overleveraged. Companies and wealthy business owners are hungry to diversify. And while heated campaign rhetoric has caused some concerns about a potential U.S.China trade war, this could actually increase the interest of China’s industrial companies to own manufacturing assets inside the American market as a hedge against future tariffs. For all of these reasons, the management and boards of companies from early stage technology companies to mature industries need to consider how China’s emergence onto the global stage will factor into their own plans to grow and create value for shareholders. Taking advantage of this opportunity requires some adjustment in thinking

and moving beyond the familiar cast of characters and deal structures. Here are a few keys to making China investment deals work: Evaluate Policy Alignment – Unlike in America, where companies largely chart their own M&A strategies, the Chinese government provides explicit guidance as to where overseas investment should be focused. This takes the form of direct control for state-owned companies and faster regulatory approvals and access to capital for private sector. The “Made in China 2025” plan that was released by the State Council in 2015 provides a clear roadmap of where the government would like to see capital flowing. Industry was mandated to become innovation driven, strengthen intellectual property, reduce environmental impact, build brands and upgrade its human capital. The plan also lays out specific sectors that have a high priority, including advanced information technology, robotics, electric vehicles, advanced materials, biotech and advanced medical products. Hardly surprising then, that there has been a surge in Chinese investment in the IT and robotics industries since the guidelines were promulgated. There is evidence that the $1.3 billion acquisition of Lattice Semiconductors by a newly-formed private equity fund, Canyon Bridge Capital Partners, operating out of Silicon Valley was funded by the State Council. Companies that have unique technologies in targeted sectors are likely to find an eager audience with Chinese buyers and investors. Look Beyond the “Usual Suspects” – One

of the greatest challenges for a U.S. company is to understand who the Chinese players are that may be a fit to invest in or acquire their company and how to engage the decision makers. Further complicating this is that over the past few years, the M&A landscape has exploded well beyond large SOEs to include a wide range of non-state companies, Chinese private equity and venture funds, trust companies, and others. For example, more than 50% of outbound technology investment used to be dominated by just three players – Baidu, Alibaba, and TenCent – known as BAT. But this year nearly 75% of deals have been by non-BAT companies, as the number and size of outbound technology investment has surged. In the third quarter of 2016 alone, there have been 30 deals valued at over $1 billion, including the acquisition of Finnish game developer Supercell for $8.6 billion by Tencent, a $4.4 billion deal for Israeli online casino game developer Playtika by Shanghai Giant Network Technology and Jack Ma, and Ingram Micro’s $6.3 billion acquisition by HNA Group. Companies need to make sure that their advisors have a strong understanding of the universe of potential buyers in China to bring the right suitors to the table, and also be able to provide diligence on potential investors industry position and sources of funding. Understand Chinese Valuation Metrics – Chinese acquirers may be looking at valuations in a very different way than U.S. strategic or financial investors, which can be advantageous to informed sellers. Rather than looking only at publicly traded peers in U.S., it pays to look at the valuations of Chinese public companies in the sector, which may have vastly different multiples or be valued on different metrics (revenue as opposed to earnings or EBITDA, for example.) Chinese companies that have completed high profile overseas acquisitions have often seen outsized leaps in their share price in China. In general, Chinese management can afford to take a longer term view on an investment if they believe it is important to create a strategic advantage with domestic

peers or if it aligns with government mandates. By failing to see a transaction through Chinese eyes or entertain Chinese bids, sellers may be leaving money on the table. Prepare to Be Patient – In the past, Chinese companies had a reputation of being unprepared to move quickly enough to participate in global M&A deals. In addition, the financing for these deals was often highly complex and non-transparent, creating anxiety as to whether the deal was capable of closing. This is changing as Chinese management teams become more comfortable and proficient at completing overseas deals. But management and advisors still need to be prepared for more intensive education of Chinese counterparts, while needing to evaluate funding sources that can include government investment vehicles, unknown private equity funds, and trust structures. The use of escrow funding and increased availability of target level financing from foreign banks can help mitigate the funding risk. And the use of meaningful break up fees is becoming more accepted for deals that are likely to be subject to regulatory review by CIFUS (Committee on Foreign Investment in the United States) in the U.S. or Chinese regulatory approval. Package Investment with “Sinofication” Strategy – The most powerful deals may be those that package a strategic investment in a U.S. company with a viable plan to scale the American technology or business model in the Chinese market. Foreign companies are learning the hard way that it is increasingly difficult to overcome the home court advantage that China provides to domestic players through the ability to shape regulations, offer economic incentives, and drive public opinion. As a result, foreign companies are increasingly adopting various approaches of Sinofication of their business model, such as the recent merger of all of Uber’s China operations into domestic competitor Didi in exchange for a minority 20% investment stake in the China business and a $1 billion investment by Didi into Uber’s global business. This stanched a reported $2 billion loss from

Uber’s China business, and the Chinese government then legalized ride sharing services a week after the deal was announced. Expect to see a wide variety of creative deal structures that include Chinese outbound investment with the injection of overseas technology and business models so as to be able to capture part of the value of a Chinese market that would otherwise be out of reach in many fastgrowing sectors of the economy.

tHe HumaN faCtor All these issues are important for companies that want to position themselves to attract the flood of capital investment that will be coming out of China as China Inc. seeks to recalibrate its economic model. But the key as to whether these deals are ultimately successful will largely depend on how both sides are able to align incentives and meld their business culture. While M&A may provide a short cut to obtaining technology and expertise, capitalizing on these strengths will require careful integration. Chinese management is generally less familiar with the norms of operating a business and retaining key talent overseas. A successful deal requires that both sides invest the time leading up to and during a transaction to see if there can be a cultural fit and develop a post-closing operating framework and technology roadmap that can keep all parties onboard and committed to shared goals. Attracting investment from Chinese sources may bring with it additional complexities and a steep learning curve. But the pay off, whether in the form of enhanced value for an asset or access to capital combined with entry into one of the world’s largest markets, will more than reward those who invest the energy to make it work. n Drew Bernstein is a Managing Partner of Marcum, Bernstein & Pinchuk (MBP), which is one of the leading auditors of Chinese companies listed in the U.S. and provides due diligence services, human capital consulting, internal controls, and global tax advisory to both multi-national companies with operations in China and Chinese companies expanding overseas. MicroCap Review Magazine



Chinese DĂŠjĂ Vu

China Based Companies Look Again to U.S. Capital Markets


hina based companies created a bit of a frenzy in the U.S. capital markets during the period from 2005 through 2011.




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According to Law360, by late 2011 over 150 Chinese companies had gone public in the U.S. through reverse merger transactions with public shell companies. U.S. hedge funds, family offices and other investors were clamoring to buy securities of these companies in private placement, or PIPE, transactions that closed simultaneously with the closing of the reverse merger. Many of these hedge funds and family offices enjoyed significant returns on their investments while others who came to the party later did not do so well. In 2010 short sellers began putting out short reports on some of the China based public companies. These short sellers would first sell the company’s stock short and then issue an investigative report that identified various irregularities from fraud to undisclosed related party transactions. As the stock of many China based companies began to tank the short sellers would reap significant rewards. As a result of these short reports, announced audit committee investigations and SEC enforcement actions involving China based public companies, investors lost interest and many of the companies that remained listed on an exchange in the U.S. or quoted on the over-the-counter market began to go private or go dark. From 2011 until today it remains very difficult for China based public companies to raise capital in the U.S. from U.S. investors. Only the biggest China based companies like Alibaba ($25 billion) or ZTO Express ($1.4 billion) are able to raise any significant amount of capital from U.S. investors. Even

though the U.S. capital markets seem closed to China based companies, it seems that these companies have continued to go public in the U.S., however, they are now doing so through the front door in the form of a traditional IPO instead of the back door through a reverse merger with a public shell company. In 2014 and 2015, more than 20 China based companies listed in the U.S. through IPOs and they raised a total of approximately $29.5 billion. This year there have been six Chinese companies that either completed or are in the process of completing IPOs in the U.S., raising a total of approximately $2 billion. Unlike during the reverse merger heyday, where most companies were in the manufacturing sector, these companies are mainly operating in the e-commerce, TMT (technology, media, and telecom) and logistics industries. Chinese technology companies in particular are interested in listing in the U.S. as the U.S. markets represent not only a securities market but a potentially significant commercial market. More and more Chinese intellectual property is being exported to the U.S. Of note is the fact that the Shenzhen market only recently opened up to Hong Kong investors (and by extension U.S. investors with accounts at Hong Kong investment banks) on December 5, 2016. Hong Kong investors are now able to trade the securities listed on the tech heavy Shenzhen Stock Exchange through an equity trading link between the mainland and Hong Kong. It will be interesting to watch the level of demand for Shenzhen traded securities and

see if that demand correlates with demand for China based companies listing in the U.S.

wHo is iNvestiNg iN tHese ipos? For the most part, it appears that the Chinese companies are bringing the investors with them from China. Most of the investors in these IPOs, in particular the smaller IPOs, are Chinese funds, banks and individuals. Even though the money is coming from China, these Chinese companies prefer listing in the U.S. because of the prestige associated with a U.S. listing and the ability to raise capital in the U.S. markets is secondary. Another reason that these companies are listing in the U.S. is that the timeline associated with a U.S. listing is significantly shorter than that for listing on the Shanghai or Shenzhen stock exchanges or even listing in Hong Kong and the costs associated with a U.S. listing are similarly less than a local listing. The approval-based IPO system in China has built up a queue of more than 800 companies that are currently waiting for approvals, which could take years for the China Securities Regulatory Commission to review. In contrast, it takes about four months to list in Hong Kong where as a U.S. listing can be done in as little as three months. In addition, it is generally believed that there is no significant difference in terms of associated fees for Chinese companies to list in China, Hong Kong or U.S. So, it seems that even though the U.S. capital markets may be closed for Chinese companies at the present time, cost, efficiency and prestige make it worthwhile to list in the U.S. For instance, according to the chief financial officer of Yintech Investment Holdings Limited, a large Chinese commodities brokerage that raised $101 million through an IPO in U.S. in April 2016, the company chose listing in the U.S. because of China’s huge backlog of IPO applications. “The purpose of the IPO is to further enhance our corporate brand and credibility.”1


sHoulD u.s. iNvestors reCoNsiDer maKiNg iNvestmeNts iN CHiNese CompaNies? In the reverse merger days, Chinese companies were able to go public without the scrutiny of an underwriter or a national securities exchange and the SEC review only occurred after the company closed its reverse merger and PIPE financing in connection with the review of the company’s super 8-K or resale registration statement. Given that the new generation of Chinese companies are subjecting themselves to added underwriter, SEC and exchange vetting prior to the sale of securities, perhaps U.S. investors should take another look. Another helpful factor is that most of the money is coming from China and the Chinese investors are better able to do their own due diligence on Chinese companies than U.S. investors and in a significantly better position to enforce remedies. Given the common language and location, these Chinese investors may be able to identify red flags that U.S. investors cannot and if a problem does arise, these Chinese investors can take swift action in Chinese courts and do not need to rely only on U.S. courts. According to Eddie Wong a partner of top 40 accounting firm Friedman LLP and a leader of Friedman’s China practice, “As the Chinese public companies become more mature and sophisticated, unlike those that went public in the reverse merger days, they are becoming higher quality issuers. They are aware of their obligations to the U.S. regulators, investors and auditors, and are more concerned with transparency than ever before.” In addition to the upfront vetting that Chinese companies are subject to in an IPO as compared to a reverse merger, underwriters like ViewTrade Securities, which has underwritten several Chinese IPOs and has significant connections throughout Asia, are using structural mechanisms to help protect investors. For example, in ViewTrade’s recent China Customer Service IPO offer-

ing, it required the Chinese company to keep $500,000 in an escrow account for 24 months as an indemnification fund to be used if shareholder or other litigation arises as a result of the offering and the issuer does not honor the indemnification clause in the underwriting agreement. According to Doug Aguililla, Director of Investment Banking at ViewTrade, “We believe that this mechanism serves to increase market integrity and investor confidence.” These structural mechanisms are another reason for investors to reconsider making investments in Chinese public companies. The jury is out on whether investors should reconsider investments in Chinese companies. A wait and see approach may be most prudent. However, given the potential for significant returns, U.S. investor may want to begin testing the waters with this new breed of Chinese issuer. n Mr. Bevilacqua is the founding member of Bevilacqua PLLC (, a boutique transactional corporate and securities law firm. Mr. Bevilacqua counsels companies of every size ranging from entrepreneurs with just an idea to established companies whose securities trade on the NYSE or NASDAQ. He has broad experience representing issuers in public offerings and private placements of securities (including private placements under Rule 506(c) of the Securities Act, crowdfunding offerings under Title III of the JOBS Act, and Regulation A+ offerings), Exchange Act compliance, angel and venture capital financings, other areas of equity and debt financing and mergers and acquisitions. Kevin (Qixiang) Sun (孙启翔) is a Senior Counsel of Bevilacqua PLLC. Mr. Sun has more than 10 years’ experience representing public and private companies in a variety of aspects of corporate and securities law, with a particular focus on public and private equity finance, securities compliance and mergers and acquisitions. In particular, as a native mandarin speaker, Mr. Sun has advised more than 20 China-based companies in connection with their underwritten offerings, private placements and reverse merger transactions. He also counsels public companies with respect to periodic reporting obligations, corporate governance issues and going private transactions. In addition, Mr. Sun has extensive experience in assisting multiple Over-The-Counter companies in connection with their NASDAQ/NYSE listing applications and their continued listing compliance.

MicroCap Review Magazine



Is a Public Company Eligible to Do a Reg A+ Offering?


o-called Regulation A+ has generated a lot of interest, and well over 100 companies have filed with the SEC to raise capital via Reg A+. In my previous article in MicroCap Review, I stated that Reg A+ is an excellent way for a company to raise up to $50,000,000, especially if it sells its products to individual consumers. The SEC’s commentary to the Regulation A amendments states that their mandate is to review these amendments after two years. The rule changes were promulgated on March 25, 2015—the two year period is approaching an end, so it’s a good time to review and reflect on certain of the Regulation A amendments that were made, and some that I believe should have been made. A question often asked about Reg A+ eligibility is, “Is a company that is already public eligible to raise capital through a Regulation A+ offering?” And the answer, which is a common reply to many questions about SEC laws and regulations, is “Yes, and no.”



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Yes, privately-owned companies and nonreporting public companies (which usually trade on OTC Markets’ “Pink Sheets” as non-reporting issuers), are eligible to raise up to $50,000,000 in a Tier 2 Regulation A+ offering, if they have audited financial statements). Or, these non-reporting but publicly traded companies can raise up to $20,000,000 in a tier 1 Reg A+ offering, without having audited financials. However, although US and Canadian companies have always been eligible to use Regulation A+, since the inception of Reg A, most SEC-reporting issuers, explained below, have been ineligible to use Regulation A. Why? Probably because when the Regulation was announced, it was thought that a $300,000 maximum would differentiate it from registered public offerings using Form S-1, which had—and still has—no ceiling. Probably the most artificial eligibil-

The SEC’s commentary to the Regulation A amendments states that their mandate is to review these amendments after two years.

ity distinction—which has survived since Regulation A was first promulgated, is that 1934 Act Section 12g reporting issuers are ineligible, but companies which become voluntary SEC filers one year after their 1933 Act S-1 registration statement becomes effective are eligible. Section 15d of the 1934 Act states that an issuer’s duty to file reports under Section 13 of that Act (Forms 10-K and 10-Q, etc.) is automatically suspended one year after its S-1 registration statement is declared effective, if the issuer has less than 400 shareholders. Many, if not most, such issuers have less than 400 shareholders after one year; thus, they are no longer “subject to” the reporting requirements of Section 13 or 15d; therefore, if this voluntary filer continues to file their 10-K and 10-Qs each year (and 8-Ks when appropriate), it is eligible to raise up to $50,000,000 in a Reg A+ offering. However, an issuer which either has more than 400 shareholders one year after its S-1 offering, or which files a Form 8-A and becomes a Section 12g reporting issuer, i.e., no longer a voluntary filer, is no longer eligible to use Regulation A+. Or, if a 12g issuer transfers its assets and business to a newlyformed subsidiary, making the 12g parent a holding company, the subsidiary would be eligible for Reg A+ but not the parent. The similarities between 12g and 15d reporting issuers are, in my opinion, the most important for investors: the requirement to file an Annual Report on Form 10-K with audited financials, quarterly reports on Form 10-Q (which are reviewed by the auditor), and Reports on Form 8-K when either required by that Form or appropriate in the issuer’s discretion. The additional disclosures required by 12g reporting issuers--such as 5% holders vs. 10% holders, short-swing profits rules, proxy filings, Williams Act Schedule 13D rules—are also important for investors, but in my opinion are not as significant as the basic reporting requirements for both 12g and 15d issuers. Another anomaly is that subsidiaries of

The similarities between 12g and 15d reporting issuers are, in my opinion, the most important for investors: the requirement to file an Annual Report on Form 10-K with audited financials, quarterly reports on Form 10-Q (which are reviewed by the auditor), and Reports on Form 8-K when either required by that Form or appropriate in the issuer’s discretion.

SEC-reporting issuers are eligible to use Reg A+ (although the subsidiary cannot consolidate the parent’s assets or business), while the parent remains ineligible. So, given that the hallmark of all SEC laws and regulations has always been DISCLOSURE, I believe that Regulation A+ should be amended as soon as possible to permit all reporting issuers to use this Regulation--whether section 12g or 15d issuers, whether voluntary or required to report. Indeed, OTC Markets filed a petition with the SEC on June 6, 2016 (Petition no. 4-699), to amend Regulation A to allow all reporting issuers to use Reg A+, and I submitted a letter in support of that petition. So, my recommendation is that the SEC add all US and Canadian reporting issuers-15d and 12g--to the list of companies which are eligible to use Regulation A+ (provided that they are current in their filings and in compliance with the other requirements). n

John Lowy is the founder (in 1993) and CEO of Olympic Capital Group, Inc. (, and is the principal of his law firm John B. Lowy PC, both based in New York City. John is a highlyrespected and acknowledged expert in reverse mergers, capital formation, financial consulting and initial public listings of all types. He recently founded and is the CEO of Platform A+, Inc. (www.platformaplus. com), which provides a turnkey service to companies that want to raise capital via Regulation A+. As an attorney, an advisor and principal, John has led or participated in more than 200 such transactions, creating market value in excess of $5 billion. He has been instrumental in leading the process by which these companies have raised capital or reverse merged, and achieved listings on the NASDAQ or the AMEX, or were sold to larger companies. In addition to the U.S., John has completed transactions for clients based in at least 15 foreign countries. The sectors in which his clients are engaged range from low tech to high tech, real estate, pharmaceuticals, medical devices, biotech, oil and gas, mining, renewable energy, entertainment, food, agriculture, education and retail, among others. He received his B.A. from Tufts University and graduated from the University of Pennsylvania Law School. He is a frequent contributor to MicroCap Review.

MicroCap Review Magazine



Regulation A…So Far


hile the JOBS Act was passed in 2012, the amendments to Regulation A that the JOBS Act mandated didn’t go into effect until June 2015. So this market is roughly 18 months old and we’ve seen just over 150 public filings (since companies can file confidentially, there may be a few more in the works). Regulation A offerings are “exempt public offerings”. This means there are no restrictions on who can invest, and that investors can be publicly solicited. They don’t have to be registered with the SEC they way IPOs are. Disclosure for these offerings, though, does have to be reviewed by the SEC (for “Tier 2” offerings) or by both the SEC and the states where the offering is made (“Tier 1” offerings). Tier 2 offerings can be up to $50 million and Tier 1 up to $20 million. Having worked on 16 Reg A filings to date, and having observed the market since inception, I’ve noticed some consistent themes in this very small, very young market.

two types of regulatioN a offeriNg There’s been a lot of discussion of using Reg A for crowdfunding – raising relatively small amounts of money from large numbers of small retail investors online – but Reg A can also be used for traditional deals where placement agents who are registered brokers



MicroCap Review Magazine

place securities with institutional or investors or high net worth individuals, all offline. “Just passing through”: Regulation A as a stepping stone to full registration Some of these companies doing more traditional offerings are just passing through the Reg A universe. These are bigger companies using the regulation as a waystation to full registration with the SEC and listing on a national stock exchange. They do it this way because the regulatory burden of doing a Reg A filing is lighter and companies get fewer comments upon review by the SEC staff than they would if they filed a traditional Form S-1. Additionally, they are able to use a broader range of marketing materials than they would if they were doing an old-school style IPO. These companies are not going to be staying in the Reg A market. They aren’t “crowdfunding.”

“seCurities are solD aND Not bougHt” You can’t just post a Reg A offering on an investment platform and assume that people will flock to buy your shares. Retail investors aren’t constantly on the lookout for the next sexy deal (at least not yet). You need to drive potential investors to look at your deal and then you need to convince them to buy your securities.

you Have to Have (or buy or builD) your owN CrowD For companies seeking a retail investor base, whether they call this process crowdfunding or not, success is going to depend on having a crowd of potential investors. These may come from the company’s own users and customers (VR hardware and gaming companies, for example), potential customers, affinity groups (national diasporas, for example, or associations relating to particular medical conditions who might be interested in specific health

companies). Some companies have extensive email lists and some companies (such as sport-related enterprises) have both a fan base and celebrity “influencers” who can promote their offering. Companies without their own crowd need to build their own buzz. This can be done through old-fashioned securities brokers “smiling and dialling” or by specialist publicity outfits who are able to exploit social media (which makes more sense when a company is willing to accept small minimum dollar investments). The emergence of specialist PR shops who coordinate securities offerings as if they were a launch of a new beverage is one of the most striking aspects of the new Regulation A market.

tHe Data suCK People ask “how much money has been raised so far under Regulation A?” and it’s surprisingly difficult to answer that question. Reg A permits offerings to be made over a relatively long period, so many of the companies that have filed under Reg A so far are still raising funds. When a Tier 1 company has finished raising funds, it files a Form 1-Z to say how much it’s raised and to end any ongoing disclosure requirements. There have only been a handful of these filings. Companies using Tier 2 should be disclosing the amounts raised in their annual Form 1-K and their semi-annual Form 1-SA, but there is no common presentation for such information, and not all the companies that have filed have made these ongoing filings yet.

platforms, broKers aND “goiNg iNDie” Regulation A offerings don’t have to use intermediaries, although the state dealer registration rules in states such as Texas and Florida make it difficult to sell in those states without a

broker’s involvement. Reg A filings do not yet show a common pattern with respect to intermediary involvement. Some companies make their offerings through traditional brokers, some through online investment platforms run by brokers, some through non-broker online platforms. A growing number of Reg A offerings go “indie” – they create their own online website to attract investments.

decision and avoid fraud and help intermediaries avoid liability. Sara’s prior position was General Counsel of the bipartisan Congressional Oversight Panel, the overseer of the Troubled Asset Relief Program (TARP). Prior to that, Sara spent many years as a partner of Clifford Chance, one of the world’s largest law firms. While at Clifford Chance, she advised on capital markets transactions and corporate matters for companies throughout the world. Sara began her career with the London law firm Norton Rose. She later joined the Securities and Exchange Commission and

as Chief of the Office of International Corporate Finance led the team drafting regulations that put into place a new generation of rules governing the capital-raising process. Sara received her law degree from Oxford University and is a member of the New York and DC bars and a Solicitor of the Supreme Court of England and Wales. She serves as co-Chair of the SEC’s Advisory Council on Small and Emerging Companies. She holds a Series 65 securities license as a registered investment advisor. Sara is an aunt, Army wife, skier, cyclist, gardener and animal lover.

Do “reservatioNs” meaN aNytHiNg? Regulation A permits companies to “test the waters” and collect indications of interest before they file anything with the SEC. Many companies advertise the dollar amount of interest they have attracted and some sites refer to these indications of interest as “reservations.” The relationship between indications of interest and investments received is not yet clear. For some companies, less than 10% of the interest indicated converts into investments.

wHat NeeDs to HappeN for tHis to be a suCCess It’s difficult to assess the success of Reg A so far. For some companies, it’s clearly been a great success and they’ve raised several million dollars. Others have failed to get any traction and have withdrawn their offerings. Clearly, more investor interest is going to be crucial. This in turn depends on education – how many retail investors even know this market exists? Some argue that the market will not thrive unless a secondary market develops to provide liquidity, but Reg A retail investors may well prove to be buy-and-hold investors less concerned with short-term liquidity. It will probably be a couple of years before we know what works in the Reg A market. n Sara Hanks, co-founder and CEO of CrowdCheck, is an attorney with over 30 years of experience in the corporate and securities field. CrowdCheck provides due diligence, disclosure and compliance services for online capital formation. Its services help entrepreneurs and project sponsors through the disclosure and due diligence process, give investors the information they need to make an informed investment








Investing Alongside Private Equity – Tips and Pitfalls P

rivate equity (“PE”) investment in mining has grabbed headlines over the last several years and has become a significant market participant and alternative source of funding to the capital-hungry metals industry. While mining-specialist PE funds in some form or another have been involved in the sector since the late 1990’s, the business seemed to blossom around 2012 as approximately $10 billion was raised over the following few years to take advantage of the downturn. It’s been more than five years since the last peak of the junior mining mar-



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ket was reached in 2011 – and the impact of PE funds in the space is still as confusing as ever. But unlike other more mature sectors, mining PE is extremely active, paradoxically, in the public equity markets, in part due to the culture and risk structure of the sector, so for the smaller investor, being able to swim alongside these behemoths is becom-

TMAC Resources’ major PE backer increased its position on the IPO – a great signal – and the listing has been a big success, tripling in price since trading began in 2015.

ing a basic survival skill for navigating the stock markets. PE and traditional micro-cap mining finance have learned to live alongside one another and for the executives managing these companies there is a huge benefit from the increased flexibility and audience for financing alternatives. The average investor needs to be aware that, similar to doing a joint venture with a multi-billion-dollar major company, the PE is first and foremost out for itself (and its partners) and you – as the private micro-cap investor – are at best, an afterthought. Note: The following is meant to be overlain on your own fundamental analysis of an investment opportunity, not as stand-alone advice. Not all PE investors are the same. Some are investing their own money and may have an unlimited timeframe, while others may be investing for a partnership with stringent limitations. Some only invest in equity and use board influence to monitor their holdings, while others have flexibility to do any type of financing imaginable. Use the internet and network with other investors to find about more about the strengths and weaknesses of your potential PE coinvestors.

buy situatioNs 1) IPO of company funded by PE, provided PE investor is not selling out – Companies that are funded privately by PE likely have good management and governance practices in place, and may avoid teething issues that can be typical of new public companies. As a smaller shareholder your interests are aligned with the PE investor at this stage. The fact that bankers and other institutional investors are buying into the IPO is also a good sign. 2) Two or more PE shareholders – An even better situation is to have two or more PE shareholders, with more or less equal positions. This provides you, as a smaller investor, the benefit of a larger PE firm’s access to due diligence and funding

Buffalo Coal has lost 94% of its value since agreeing to a convertible loan with one of its PE shareholders in 2013. With the company unable to repay the loan, the terms were repriced downward several times, while interest payments converted to stock at lower and lower prices.

ability, but multiple PE investors should keep each other honest. If the company does require alternative financing in the future, having multiple PE investors at the table should help tilt the risk-reward to the common shareholders, even if the Company borrows money, etc. 3) Converting other securities into equity – This move may happen right at a market bottom, or for other reasons, but when a PE firm is increasing its share position, while strengthening the balance sheet of the Company – that is a good thing for you, the smaller shareholder. Conversions could be from debt, or even royalties/streams (which are another type of liability to the mine owner – i.e. you). If a PE investor owns multiple asset classes within the same company, you want to see that their biggest weighting and potential for appreciation will come from common shares – not from the return on debt or other instruments.

sell situatioNs 1) Adding debt to an existing equity position - Remembering that a PE firm likely has a longer time horizon and deeper pockets than you, be very wary when they are layer-

ing on debt onto an existing equity position. This can (and probably will) be used in the future to average down, taking a larger position with more dilution to you, the common shareholder. Secured debt can protect the PE firm’s downside – but you get no such protection. This situation can be a black hole for average investors – as the company can be forced effectively into a below-market acquisition, especially during a period of low commodity prices. 2) Take-private acquisition – Although pretty much every mining PE fund should have the ability to do this, this tool is seldom used. It takes a lot of intestinal fortitude to buy a company at a market premium, and perhaps more so in the mining sector. But if you are fortunate enough for this to happen – enjoy the premium and move on. n David Stein, MSc. CFA has co-invested with many other private equity funds over the past seven years as a metals and mining focused investment manager. David now leads Toronto-based Aerecura Capital, which manages and executes niche strategies in the natural resources sector and is a consultant to, and director of Aberdeen International (AAB-TSX), a publicly traded mining investment company. David was recently a recipient of the 2016 Bedford-CIM Young Mining Leaders award. David can be reached at

MicroCap Review Magazine



Commodities in Review S

ummary: Utilizing a European volatility index for Pan-European volatility

(The full paper can be found at the Eurex Exchange)1 In past articles, I’ve discussed the negative correlation between the VSTOXX® Volatility index and the EURO STOXX 50® Index and how the volatility index tends to rally when equities decline (downside volatility). The recent passing of the Brexit vote on 23 June 2016 introduced immediate uncertainty and downside volatility to the global capital markets. The results of several upcoming European elections could introduce more uncertainty and volatility into the capital markets. According to Bloomberg News,2 40 percent of the EU economy will be voting in 2017. Does this discussion begin to identify a larger macro story of positive correlation behaviour of several European equity indexes? If so, could investors find potential utility in the VSTOXX® Futures volatility index? When examining the correlation of several European equity indexes, Table 2 demon-

Table 2: Correlation matrix of daily spot returns of VSTOXX®, EURO STOXX 50® Index, CAC 40 index, FTSE 100 index, DAX® index and STOXX® Europe 600 index from 2 Jan 2007 to 30 Sept 2016 (in EUR). EURO STOXX 50® Index -0.77 1.00



CAC 40

FTSE 100


-0.76 0.98 1.00

-0.67 0.85 0.87 1.00

-0.74 0.95 0.93 0.82 1.00

STOXX ® Europe 600 -0.76 0.96 0.97 0.94 0.93 1.00

Source: Bloomberg data

strates the relatively high positive correlation among various European spot equity indexes and a relatively high negative correlation the equity indexes tend to experience relative to VSTOXX® spot. An initial observation indicates the volatility index may offer added

value to multiple European equity indexes if the indexes tend to be positively correlated. No one has a crystal ball to identify when equity markets will decline. The so-called rare “Black Swan” events have occurred several times over the last decade. Beginning

Chart 3: Spot prices of EURO STOXX 50® Index, DAX® index, CAC 40 index, STOXX® Europe 600 index FTSE 100 index and VSTOXX® from Jan 2007 to Sept 2016. European Indices Price Movement



Chinese Financial Turmoil



2008 Financial Crisis

European debt crisis

Greek Debt Crisis


300 8,000




150 4,000

100 2,000


MicroCap Review Magazine


CAC 40

Dax® Index






















FTSE 100























Price of VSTOXX

Price of European Equity Indices (in EUR)

350 10,000


STOXX® Europe 600

Source: Bloomberg data

Table 3: Returns of spot European equity indexes and VSTOXX® spot index during each of the volatile periods when the EURO STOXX 50® Index declined from peak to trough.

EURO STOXX 50® Index STOXX® Europe 600 CAC DAX® FTSE 100 (In EUR) VSTOXX ®

Financial Crisis -60% -60% -59% -54% -61% 167%

Greek Debt Crisis -18% -10% -18% -6% -6% 106%

European Debt Crisis -35% -25% -31% -32% -17% 172%

Chinese Financial Turmoil -21% -18% -17% -24% -18% 87%

Brexit -14% -12% -13% -11% -12% 72%

Source: Bloomberg data

in 2008 with the Financial Crisis and followed by the Greek Debt Crisis, and followed by the European Debt Crisis, and followed by the Chinese Financial Turmoil and followed by the Brexit vote. In each of these global macro events the five European stock indexes declined and VSTOXX® volatility index rallied. As noted in Chart 3, the equity indexes tended to peak, decline and find support around the same time. This suggests when the global macro events occur, investing in equities geographically across Europe may not offer enough diversification to reduce the portfolio correlation risk and tail risk. The returns in Table 3 are based on when the EURO STOXX 50® Index peaked and bottomed surrounding each event and how the VSTOXX® volatility index and the four European equity indexes behaved during each period. During the five volatile periods

the five equity indexes experienced similar negative returns. In the same periods the VSTOXX® spot index rallied. This is in-line with the previous correlation data showing negative correlation of the VSTOXX® index to the European equity benchmarks. Based on 5-day rolling returns, the front month futures contracts of the European indexes traded with similar returns prior to and post the Brexit vote. This offers some more evidence to the positive correlations among the respective European equity indexes discussed earlier. When the 5-day rolling returns of front month VSTOXX® Futures is added to the chart, the negative correlation performance of VSTOXX® Futures becomes very pronounced relative to the front month futures contract of the four European equity indexes. Once again, the results may offer the option to employ VSTOXX® Futures with

Chart 5: 5-day rolling returns of European equity index front month futures and VSTOXX® Futures front month prior and post the Brexit vote (23 May 2016).


5 Day Rolling Return of European Equity Index Futures (2 April 2016 to 1 July 2016)

40% 20% 0% -20% -40% -60%



several European equity indexes besides the underlying EURO STOXX 50® Index. In summary, when examining the correlations either as a static metric or as a rolling metric, the correlations of the European equity indexes tend to maintain a high positive correlation frequently above 0.8 to the EURO STOXX 50® Index. During the various volatile periods the equity indexes tended to peak, decline and bottom around the same time. On the flipside, VSTOXX® volatility index tends to maintain a relatively high negative correlation to these respective equity indexes. When viewing the most recent macro event (Brexit), on a rolling 5-day return, the returns tended to behave in similar fashion to each other leading up to and post the Brexit vote. Combining all of these results strongly suggests an investor with exposure to one or many of these European equity indexes may find an added value in utilizing VSTOXX® Futures to reduce portfolio tail risk and correlation risk. n Mark Shore has more than 25 years of experience in the futures markets and managed futures, publishes research, consults on alternative investments and conducts educational workshops. His research is found at Mr. Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business where he teaches a graduate level managed futures/ global macro course. Mr. Shore is a frequent speaker at alternative investment events. He is a contributing writer for Eurex Exchange, CBOE, Swiss Derivatives Review, MicroCap Review and Seeking Alpha. Mr. Shore graduated from DePaul University with a degree in Finance. He received his MBA from the University of Chicago. Past performance is not necessarily indicative of future results. There is risk of loss when investing in futures and options. Futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions. (Endnotes) 1 2 ht t p s : / / w w w. b l o o m b e r g . c o m / n e w s / a r t i cles/2016-07-31/europe-elections-2016-17-thevotes-to-watch

Source: Bloomberg data

MicroCap Review Magazine



Hong Kong Shenzhen Stock Connect Launched Creates World’s Second Largest Equity Market


new cross border stock link between the Hong Kong Stock Exchange and neighboring Shenzhen Exchange made its historic debut on

December 5, 2016, marking another milestone as China moves towards opening its capital markets. With less than 1.6 percent foreign investors as of early 2016, the Shenzhen stock market represents the largest untapped investment opportunity in the world. For the first time foreign investors have the ability to invest in hundreds of China’s fast-growing companies often attributed to the New China. The Shenzhen Exchange is China’s second largest stock exchange, behind Shanghai,

with a market capitalization of $3.4 trillion. Individual investors make up the majority of traders in Shenzhen owning as much as 59 percent of the equities compared to 34 percent of Shanghai equities. Trading almost nine times a year with monthly turnover of more than $1 trillion, it is also Asia’s busiest exchange, according to the World Federation of Exchanges data. Shenzhen’s high turnover



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is due to a lot of “stir-frying”, a Chinese term for frequent buying and selling of equities by retail investors hoping to make a quick profit. The new link unifies Shenzhen, Shanghai and Hong Kong exchanges essentially creating the world’s second-largest equity market by capitalization, worth more than $10 trillion, and the largest by cash turnover globally. Composed of a different universe of equites than the Shanghai Exchange, the Shenzhen Exchange offers a diverse range of new investment opportunities to foreign investors. The Shenzhen Exchange has more privately-owned companies compared to Shanghai, which has a higher concentration of state-owned enterprises, financials and industrial companies. Subsequently, stocks listed on the tech-heavy Shenzhen Exchange generally have significantly greater growth prospects than Shanghai listed equities. Only a fishing village a few decades ago, Shenzhen became known as an “instant city” which now successfully attracts privately run startups, many looking to raise capital in the world’s second-largest economy. Shenzhen and the surrounding Pearl Delta area are home to an extensive number of technology companies giving the region the name “China’s Silicon Delta.” Stocks on the Shenzhen Exchange include high growth technology, consumer, healthcare and “New China” sectors that are the drivers of China’s new growth engine. Through the Shenzhen link, foreign investors can now access an additional 880 stocks more than doubling the 567 mainland Chinese stocks global investors can buy through the Shanghai Hong Kong Stock Connect that was launched two years ago. The stocks include 270 on the main board, 410 on the Small and Medium Enterprise (SME) board and 200 on the Nasdaq-style ChiNext board. The ChiNext board is for professional investors only due to its speculative nature. Combined, the Shenzhen Connect and the Shanghai Connect cover 70 to 80 percent of China’s mainland market capitalization. Analysts are predicting Chinese stocks

Shenzhem stocks by industry Share of total by market cap (%) Manufacturing


Techonology, media and telecommunications


Consumer goods & services


Medical & pharmaceutical


Real estate & construction




Utilities & transportation



3% 0.99

Source: Wind Information, FT analysis

to have a good year in 2017 despite weak economic growth. Specifically, consumer, infrastructure, health care and technology sectors are forecasted to experience strong earnings growth with exporting companies benefiting from a weakening RMB. Some of analysts’ favored companies on the Shenzhen Exchange include: Wangsu Science and Technology, the country’s biggest content delivery network service provider, supporting Internet infrastructure by improving image quality, speeding up page loading, and maximizing bandwidth. The company is expanding overseas and into cloud computing. Market share is around 50 per cent. GoerTek, one of China’s leading acoustic components companies which sell products

to big brands such as Sony, Samsung and Lenovo. The company is expanding into virtual reality software development. Hangzhou Hikvision Digital Technology Co., the world’s largest supplier of video surveillance equipment with internet-enabled cameras installed in more than 100 countries. Wanda Cinema Line Co., a leading cinema operator in China with a 15% market share in terms of box office revenue. The company is outperforming its peers generating 29 percent year-over-year growth compared to industry average of 8 percent. Shenzhen Inovance Technology Co., a supplier of industrial automation products, particularly in motion control and power inverters. It has gained market share in auto-

Only a fishing village a few decades ago, Shenzhen became known as an “instant city” which now successfully attracts privately run startups, many looking to raise capital in the world’s second-largest economy. MicroCap Review Magazine


mation products and is likely to continue expanding its market dominance in 2017. Luxshare Precision Industry Co. is expected to benefit from a new speaker-box business and the rising use of Type C connectors for smartphones in China. The company also makes the connector dongle that comes in every box of the new iPhones which have no headphone jack. Wuliangye Yibin Co., the second largest Chinese spirit company in China widely known for its famous baijiu brand in China. China’s largest white goods manufacturers Gree Electric and Midea Group. The Hong Kong Exchange is also expected to experience significant benefits from the new link with Shenzhen. Chief Executive Leung Chun-ying stated at the launch ceremony that the link makes Hong Kong the ‘super-connector’ between the rest of China and the rest of the world. While mainlanders already have access to 318 large cap Hong Kong listed companies through the Shanghai link, the Shenzhen link allows access to about 100 smaller companies in Hong Kong. Already, southbound investors, the term for mainlanders buying Hong Kong stocks, outweighs investors buying into the Shanghai market, or northbound investors. In the two years since the Shanghai link opened, Chinese investors have purchased $42.8 billion of Hong Kong shares. UBS forecasts net inflows from China into Hong Kong in 2017 will be 160 billion yuan ($23.2 billion) under the two links. UBS also predicts Chinese money to account for over a third of Hong Kong’s trading turnover in three years, up from a tenth now. As Chinese investors increase their holdings in Hong Kong’s stock market, they are expected to increase market turnover and volatility providing much needed liquidity to small and mid- cap stocks. Additionally, with greater access to Chinese investors, the link could attract more international companies to list in Hong Kong. While the first day of trading through the new link was light with 2.67 billion yuan ($393 million) worth of northbound


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trading from international investors buying Shenzhen stocks and HK$923 million ($123.4 million) of southbound by mainlanders buy into Hong Kong stocks trades, volumes are expected to pick up in future. Southbound investors are expected to be stronger than northbound investors as mainlanders look for ways to hedge against the depreciation of the RMB. With the Hong Kong dollar being pegged to the U.S. dollar, buying Hong Kong dollar assets is like buying into the U.S. dollar. Additionally, Chinese investors typically like fast-growing small and mid-cap plays. Valuations of Hong Kong stocks are very low and Hong Kong’s small caps in particular tend to have lower valuation and higher dividend yields than stocks traded in Shenzhen. With China’s small-caps 4-6 times more expensive than their Hong Kong peers, Hong Kong offers better value to mainland retail investors. Currently, China’s small-cap companies trade at over 40 times expected earnings, the highest in Asia-Pacific, and four times the ratio in Hong Kong.

New CHiNa’s growtH prospeCts Despite China’s economic growth slowing to a 25-year low in 2015, the country is regarded by the World Bank as an uppermiddle class nation on its way to becoming one of the world’s advanced economies. China has 16 per cent of the world’s GDP but more than 18.7 per cent of the world’s population and the country is taking an increasingly prominent global leadership role. The country is in a transition from an economy driven by industrial expansion to one based on consumption and technological efficiency. It has also become the world’s largest trading nation and continues to strengthen its role in world trade. The “One Belt, One Road” (OBOR) initiative is a leading example of how the country is increasingly impacting the world. Initiated in the fall of 2013, the OBOR, focuses on the connection and cooperation of China, the

rest of Euro Asia, Oceana and East Africa. OBOR consists of two main components, the land-based Economic Silk Road and the oceangoing Maritime Silk Road. In 2015, China’s trade with countries participating in the belt and road initiative surpassed US$1 trillion. Additionally, China’s domestic market is continuing to grow. The number of middle-class and affluent households has grown to 116 million, up from 2 million in 2000. The continued growth and evolution of China’s consumer market and the emergence of a large middle class will remain a major source of future value creation as China’s citizens move beyond being able to only afford the basics of life, and their discretionary spending expands. Boston Global predicts affluent shoppers under the age of 35 and Internet surfers will push China’s consumer market up to $6.5 trillion in sales by 2020, an increase of 54% from 2015. Furthermore, while China is losing global market share in manufacturing low-value-added goods to countries with lower cost labor, it has become a dominant global and local player in high-end electronics and industrial equipment, with rising momentum in infrastructure exports. n Ms. Leslie Richardson has over 20 years of investment management and equity research experience. She operates a boutique investor relations firm in Hong Kong for Asian companies listed in the U.S. and Hong Kong. She also assists private companies develop investment material and build an investor following in preparation for a public listing. Additionally, she is the Asian Correspondent for Micro-Cap Review,, a financial magazine focused on mirco-cap companies. Previously, she worked for CCG Elite in assisting Asian-based, U.S. listed clients formulate key communication strategies. Ms. Richardson began her investment career at U.S. Trust Company then went on to join Odyssey Advisors as a portfolio manager and Director of Research. Ms. Richardson specialized in high growth sectors such as bio-tech, alternative energy, IT and telecommunications. She earned her M.B.A. from the University of Southern California. Ms. Richardson is based in Hong Kong.

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Moissanite: The World’s Most Brilliant Gem®


oissanite, also known as silicon carbide, is a rare, naturally occurring mineral discovered in 1893 by Dr. Henri Moissan in a meteorite crater. Decades later, through innovation and tirelessly refining our process, we’ve taken Moissan’s discovery and created a colorless gem that rivals any earthly gemstone for fire and brilliance. Moissanite’s hardness surpasses that of any mineral on earth, and its refractive properties exceed that of diamond – making it the world’s most brilliant gem.

We are passionate about moissanite and our vision – to ensure a world where socially responsible gemstones are at the forefront of the marketplace.

As the original creator of lab-created moissanite, Charles & Colvard has over twenty years of experience in manufacturing and distributing this ethically sourced gemstone. In late 2015, we changed the playing field for moissanite when we introduced Forever One™ to the market. Forever One is the epitome of created moissanite – our first completely colorless gemstone – creating new standards in the fine jewelry industry. Our master technicians and gemcutters analyze, polish and facet each individual stone to bring out its full natural beauty, ensuring each of our gemstones are both sustainable and of a superior quality.

Our Team of Experts.

Charles & Colvard is driven by an ethical promise: create the world’s most brilliant gem, while leading the way for environmentally and socially responsible choices in the jewelry industry at a revolutionary value.


Our dedication to creating high-quality products and developing better techniques to enhance the stunning brilliance of our moissanite is unparalleled. And because of this we are able to offer exceptional products to our customers.

Our management team is led by business veterans with expertise spanning every facet of the fine jewelry industry – from manufacturing to distribution and the retail store. Additionally, our team’s expansive knowledge and experience in the e-commerce and supply chain industries serves to bolster the success of our omni-channel, go-to-market strategy. Our moissanite jewelry has never been better, or more competitive, and the jewelry landscape has never been more favorable for our management team to grow our business. We’re more committed than ever to making our presence felt and getting our gemstones and finished jewelry in front of the right audiences.

The market is ready. The gemstone is here. Millennials are the largest and fastest growing generation, and their buying power continues to increase.1 By the end of this decade, they will account for a third of all retail sales.2 Millennials are not impulse buyers. They are nontraditional, environmentally aware, cost-conscious digital natives. The decision to purchase a product is about more than material possessions – it’s about the spiritual, intellectual and cultural values the item invokes.

President & Chief Executive Officer


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of millennials are likely to switch brands to one that is associated with a good cause, given similar price and quality.

would buy a product with a social and/or environmental benefit.

would like to see more of the products, services, or retailers they use, support worthy social and/or environmental issues.

Like millennials, we reject the notion that jewelry is simply a symbol for one’s wealth. Rather, we emphasize the personal connection between the consumer and their purchase. Much like our efforts to create sustainable, eco-conscious gemstones, choosing to purchase moissanite is a conscious choice. We strive to eliminate artificial distinctions between value and beauty by making artful, eternal jewelry readily available to more people than ever. Moissanite was made for millennials. To drive them to our channels, we are facilitating a conversation through social media and online channels that encourages them to learn more about the creation and benefits of moissanite. In turn, this will lead to further growth of our audience and nurture a new generation of loyal customers.

The future of moissanite. 2017 – A look ahead.



Millennials are embracing lab-created and diamond alternative options at a considerable rate. These alternative stones continue to garner attention and raise awareness for other options to mined gems. To tap into this trend, we will expand our efforts to educate the market and consumers on the value and sustainability of moissanite. Our potential market is significant. The global diamond jewelry market is in excess of $80 billion in annual sales,4 and De Beers estimates synthetic gems could account for nearly one-tenth of rough-diamond sales in the next five years.5 Given our more than twenty years of expertise, our Forever One colorless gemstone and the purchasing needs of our millennial audience, we are well positioned to garner a share of the global diamond jewelry market. While other gemstone investments are dependent on the success of the global economy, our economic price points and no-debt financing reinforce Charles & Colvard as a value play in your portfolio. The Center for Generational Kinetics, 2016 Cushman & Wakefield, 2015 3 Cone Communications 2015 Millennials CSR Study 4 The Diamond Insight Report, 2015 5 The Wall Street Journal, 2016 1 2


“With Forever One™, which is colorless or D-E-F, the climate and culture is now ripe for moissanite to shine brighter and reach more young couples.”-JCK online

Over twenty years of expertise. One incredible created gem.


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The company paid consideration to SNN or its affiliates for this article.


Coming to America What You Need to Know About Accessing Public U.S. Markets


he U.S. equity markets have experienced a noticeable uptick since early November 2016. Are you a company outside the United States that is thinking about unlocking additional value by establishing a securities market presence or raising capital in the States? Here are some things to consider in connection with conducting a public offering in the U.S.: will you qualify as a “foreigN private issuer”? One of the first questions any company seeking to access public U.S. capital markets needs to consider is whether it qualifies as a “foreign private issuer,” or FPI, under applicable U.S. securities laws. Whether a company qualifies as an FPI will affect its registration and reporting requirements. The FPI analysis is complex, but generally speaking, if the company is incorporated outside of the United States and 50% or less of its outstanding voting securities are held by

U.S. residents, it will qualify as an FPI. Even if more than 50% of its outstanding voting securities are held by U.S. residents, an international company will still qualify as an FPI unless any of the following conditions is true: the majority of its executive officers or directors are U.S. citizens or residents; more than 50% of its assets are located in the United States; or the company’s business is administered principally in the United States. The U.S. securities laws contain several special provisions for FPIs designed to recognize international jurisdiction standards. In addition to being entitled to use differ-



MicroCap Review Magazine

ent registration and reporting forms that provide for scaled disclosure in several key areas, such as executive compensation, FPIs generally have additional flexibility in financial statement presentation (being able to choose among GAAP, IFRS or home country standards reconciled to GAAP) and remain exempt from rules under the Securities Exchange Act of 1934, as amended, regarding shareholder proxies, significant ownership reporting and short-swing trading.

How will you aCCess tHe marKets? International companies should consider whether they simply want a securities market presence in the U.S. or whether they want to actively raise capital in the U.S. Many international companies, particularly those in the early growth stage, find that the price of their common equity securities is not within the customary range for U.S. trading or public offerings. Those companies may consider offering American Depositary Receipts (“ADRs”), which are negotiable certificates evidencing ownership of American Depositary Shares, which in turn represent an interest in a specified number or fraction of the international company’s shares (such as 1 ADR = 4 shares of Common Stock). “Level 1” or “Level 2” ADR programs, establish a securities market presence in the U.S. (on either an over-the-counter market or a U.S. national securities exchange, respectively) but do not involve a capital raise. “Level 2” ADR programs require registration of the underlying security on Form 20-F, which is roughly analogous to the domestic Form 10-K. “Level 3” ADR programs enable companies to both establish a U.S. market presence and raise capital and will implicate a more robust registration statement customarily used for public offerings. If a company is seeking to raise capital, the financing instrument used will have important consequences. The company’s bankers can advise on the attractiveness of particular financing methods given current

Dual listing in both the U.S. and typically the home country promises to broaden a company’s pool of potential investors, increase liquidity and potentially raise additional capital.

market conditions, but companies should remain mindful of the potential impact a particular financing may have on its current condition and future financing opportunities. Generally speaking, convertible debt instruments carry the largest risk for adverse impact on a company’s capitalization and financial condition. At the other end of the spectrum, common equity offerings are generally the least burdensome.

will you seeK Dual listiNg of your seCurities? Dual listing in both the U.S. and typically the home country promises to broaden a company’s pool of potential investors, increase liquidity and potentially raise additional capital. Many companies pursue dual listing for the more intangible positive benefits on brand awareness, reputation or analyst coverage. Companies considering a dual listing should be mindful of the potential up-front cost in legal, accounting and applicable registration and listing fees, and, more importantly, ongoing listing standards. So long as the U.S. stock exchange is notified that the company will be following and is in compliance with home country governance practices and appropriate disclosure is made, international companies may typically continue using their home country governance practices, subject to input of the company’s investment banker. Certain areas, however, such as the composition of the company’s audit committee, are inflexible, and dual listing can have important consequences on the board of directors and committees of the

listing company. Companies will also need to consider establishing a U.S. investor relations function in connection with the dual presence. There is no one-size-fits-all approach for international companies seeking to establish a presence in or raise capital in the United States. Companies must balance immediate goals with long-term strategy and should fully investigate all of the potential opportunities and their consequences before committing to a course of action. n Partner Margaret Rosenfeld has more than 20 years of experience with public companies and she leads the global Microcap practice at Smith Anderson law firm ( Founded in 1912, Smith Anderson is the largest business and litigation law firm headquartered in the world-renowned Research Triangle region of North Carolina. Smith Anderson provides a full range of legal services to a diverse group of regional, national and international companies and is well-versed in assisting small public companies with initial public offerings, ongoing public reporting and corporate governance requirements, structured financings such as PIPEs, registered directs, CMPOs, rights offerings, ATM/equity lines, convertible preferred and convertible debt, and alternative financings under Title II, Title III and Title IV of the JOBS Act. Smith Anderson is proud to have represented Groundfloor Finance as the first company to qualify an offering under Regulation A+.  For more information, please contact Margaret Rosenfeld at or 919-8216714.

MicroCap Review Magazine



Get Ready – the New Revenue Recognition Rules are Here


anuary 1, 2018. Not so far away. That is the day that the new revenue recognition standard will become effective for most public companies with a calendar year end. It seemed that this day would never come. It was long ago that the Financial Accounting Standard Board (FASB) and the International Accounting Standard Board (IASB) started their noble attempt to converge US Generally Accepted Accounting Principles (US GAAP) with IFRS, the accounting principles used by the rest of the world. While that project has pretty much derailed, the two governing bodies of accounting did agree on a new converged revenue recognition standard. Many have referred to this as one of the most major developments in accounting since Sarbanes Oxley. So, is your company ready for this change? According to studies by the AICPA, SEC and others, many companies are not, and time is running out. If your company hasn’t already done so, it is imperative that company management begin a comprehensive study and analysis to determine if the new pronouncement affects the company’s revenue recognition and disclosure policies. The entire revenue and disclosure process will need to be reviewed and aligned with the new standard. Management will need to ensure that systems are in place to record revenue under the new principles and capture the necessary disclosures. Currently there are numerous accounting models and industry-specific guidance for the recognition of revenue. This results in different revenue accounting for economically simi-


lar transactions. One of the goals of this new standard is to remove the highly segmented, industry-specific revenue recognition guidance that currently exists and adopt a more principles-based standard that will be applied consistently regardless of industry. The new pronouncement, Revenue from Contracts with Customers, establishes a single global standard on how companies are to recognize revenue. The new standard provides a 5-step process to recognize revenue. This includes (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) ultimately recognize revenue when (or as) each performance obligation is satisfied. The new standard provides guidance that isn’t in US GAAP now, including guidance on contract modifications, costs of revenue transactions, service revenue recognition, changes in estimates of contract life, transaction price, level of effort, and deliverables, loyalty programs, intellectual property, balance sheet presentation, and footnote disclosures. For many companies, the new revenue accounting rules may not significantly affect the way revenue transactions are recorded, but could affect the financial statement disclosures. This would be true for those companies that are in a retail business, or where there is point of sale cash collection. The accounting for distribution businesses and consumer product companies should also not see too many changes, but may see certain changes in how certain costs are accounted for. However there are certain industries and transactions where the accounting could be significantly affected. Software companies, biotech companies, entertainment companies, brand management companies and basically any company where a license or royalty is involved will be significantly affected by the

new rules. Contractors, homebuilders, engineers, architects, and real estate developers that have contracts with customers are also among those that will be affected by this new guidance. For many of these companies, the new rules may accelerate the timing of revenue recognition versus today’s GAAP guidelines. This means the new rules may allow for a sizable portion of license and other fees to be recognized upon delivery of the license to the customer. Entities that sell real estate will generally recognize revenue when control of the property is transferred, subject to the assessment of collectability, which may generally be earlier than recognition under current guidance. In adopting the revenue standard, companies can select from two transition methods, a full retrospective method or a modified retrospective method. Under the full retrospective method, the new revenue standard will be applied to each prior reporting period presented and the company will need to restate its 2017 financial statements in its 2018 interim and annual financial statements as if the guidance had always been in effect. For companies selecting the modified retrospective method, prior year financial statements would not be restated. Instead, companies will recognize the cumulative effect of initially applying the standard as an adjustment to opening retained earnings. There is a lot to comprehend, and the clock is ticking. The important thing here is to ensure that Management has started its analysis because waiting for year-end will be too late. n Corey Fischer, CPA, is Firm Managing Partner of Weinberg & Company, a multi-office, PCAOBRegistered firm specializing in the audit, assurance and tax needs of micro and small cap companies. He has more than 25 years of experience, having worked with the Big 4 accounting firms, and as an SEC reporting officer for a number of NASDAQlisted companies. He is based in Los Angeles, and is an expert in financial reporting, SEC compliance, raising debt and equity, mergers and acquisitions, and structuring accounting operations. Email: coreyf@ or 310-601-2200. MicroCap Review Magazine


4th Quarter, 2016 adds & subtracts of FINRA Member Firms compiled by DAVID ALSUP

Financial Industry Broker Dealer Data Aggregator

4th Q: 24 New formations & 43 Withdrawals (est)

New Formations:Three-year average is 10.2↓ per mo. BDW three year average is 20.5↓Closures per mo)

Crowdfunding Portals: 21 firms are currently registered with FINRA/SEC a/o 12-9

43 Firms Withdrew

24 New Firms were admitted • •

5 firms admitted were Equities oriented 10 firms admitted were Private Placement firms 6 firms admitted were classified as Ò OtherÓ 2 firms admitted were Mutual Funds

• 24 were equities firms. • 3 were Private Placement firms • 7 were Mutual Fund firms , 6 firms classified as Ò OtherÓ • 9 firms kept their RIA • 26 of these firms had less than Ten reps

Monthly New Formations chart showing the number & types of firms admitted Equities

19 17

23 0 2 8

1 4 9



14 2 2 9 27

17 2 4 8

5 3 1 8



4 6 12 41


9 4 2

1 3 12 43


Mut F,


14 2 5 8

17 32


11 2 4 9

4 5 7





5 3 6 30

24 11 2 2 15

0 10 34

11 3 6 7 34

9 2 6 10 31

10 2 6 5 24

4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

Monthly BDW Chart showing the number & types of firms that are closing Equities

16 13 7 43


10 5 5 26 46

10 6 8 40


12 6 9 36


18 5 9 45



Mut F,


28 10 4 10 20 42

9 5 9 18 41

20 2 10 21 53

9 7 46


25 11 3 3 39


14 42 19 39

12 63 32 53

11 4 42


14 42 19 39

13 8 5 34 63

3 7 6 24 43

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

As of November 30, 2016, there are 3963 FINRA Member firm CRD Numbers. (Note: There are some bankrupt firms still carried in CRD, such as Lehman Bros, & Stanford.)

=========================================================================== The above data has been sourced from regulatory agencies publications' and statistics, along with some independent third parties. While it is believed to be reliable there can be no guarantee of the accuracy of the data. The numbers have been cross-checked for accuracy, and they should be within plus/minus two percent. For example, there may be as many as 15 firms NOT included in these statistics and NOT reported that filed for a BDW prior to Nov, 2016. David Alsup • 949-468-0111 •


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Review Magazine 71 Neither OTC Markets Group Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation aboutMicroCap the financial condition of any company. nvestors should undertake their own due diligence and carefully evaluate companies before investing. ©2017 OTC Markets Group Inc. All Rights Reserved.


Perritt Capital Management – History of Small Company Stocks


ver since financial markets materialized, investors have been devising schemes to enable them to beat the market’s average return.

Some invest in large companies, some invest in small companies, and others ignore company size and invest in companies of any size so long as they have potential to produce excess returns. Some investors buyand-hold, while others trade frenetically. Some invest in high multiple growth stocks, while others prefer to shop among companies whose stocks have recently been beaten down. Then there are the technical analysts and those who analyze only economic fundamentals. Some investors assemble portfolios from “the top down,” while others prefer a “bottom up” approach. Academics have long admonished inves-

tors for spending so much time trying to predict the future. They point to the plethora of studies that indicate the stock market is a reasonably efficient mechanism. In an efficient market, the best guess at tomorrow’s stock price is today’s price. Most academics agree that the only way to produce markettopping long-term investment returns is to build and maintain a highly-diversified portfolio that contains more systematic risk than the stock market as a whole. In short, what investors ultimately get from their equity

portfolios is paid for by the risks they take. The first formidable crack in the so-called efficient market theory appeared in the late 1970s when a University of Chicago doctoral student discovered a strategy that has produced superior investment returns for more than 80 years. Superior meaning that this strategy has historically produced greater returns than dictated by portfolio risk. This strategy has come to be known as “the small firm effect.” Simply put, the small firm effect is the tendency of the common stocks



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of small firms to outperform the common stocks of large firms given the same level of risk. According to Ibbotson & Associates, small company stocks have produced annualized returns of 10.02% from 1926 through 2015, which compares favorably to large company stock’s return 11.44%. Even when returns are measured over shorter time periods, smaller company stocks perform well versus other assets classes. The table above shows the performance of Large Company Stocks, Small Company Stocks, Long Term Government Bonds and Treasury Bills for each of the past eight decades. While small company stocks have not always been the best, there returns are meaningfully positive in every period. Due to these performance results and the academic research, I have dedicated my life and career to following and investing in smaller company stocks. My near 30-year career has brought me both satisfaction and handsome results, but various changes in the past 15 years has me pondering the future of small company stocks. The changes in the past 15 year are mostly related to increased regulation and the cost of being a public company. Much of the changes started with Sarbanes Oxley Act (SOX) passed by U.S. Congress in 2002, which is designed to reduce the risk of fraudulent activities by corporations. While the act had lofty goals, the cost was too prohibitive, particularly for smaller companies. There have been several other laws and programs introduced after SOX was passed in 2002. Another example is Dodd-Frank, which significantly increased

banking regulations and costs. The bottom line is that we believe these increased regulations resulted in less publicly traded companies. As you can see from the chart above, the number of U.S. companies listed on the major exchanges has declined from more than 7,000 to less than 3,600 today. In addition to companies that are not interested in having their equity publicly traded, merger and acquisition activity also contributed to the decline of publicly traded companies. Furthermore, we believe it is partially obvious that only quality companies are routinely acquired, and that lower quality companies do not get acquired. The point is that as this dynamic increases the percent of lower quality companies within the public markets today. With regard to low quality companies, the table below details some interesting history for the Russell 2000 Index and the Russell Microcap Index. As you can see, the number of profitable companies has declined significantly in the past 10 years while the number of unprofitable companies has increased significantly. While the universe of publicly traded companies is starting to be dominated by low quality companies, we believe the situation may change in the next few years. Donald Trump’s election as president of the United States and the Republicans’ sweep of control in the legislation caught the financial world off guard. So, what does a Trump presidency mean for the markets and the economy? The implications of how a Trump win plays out in the markets are not entirely obvious. Trump has not been overly detailed

on his economic policies and there is always a transition from campaign rhetoric to actual policy. However, it does seem clear that there will be a push for fewer regulations and lower taxes. Whether regulations are modified or not and taxes are reduced or not, it seems clear that the future may have a more pro-business orientation. Therefore, this new environment could pave the road for more companies wishing to becoming public companies. Remember that not all companies go public through the traditional method of an IPO. You could also see new companies coming public from spin-offs, reverse mergers, or moving from the pink and bulletin board market to the national exchange. The next few years should be an exciting time to find and invest in new quality smaller public companies. n Source Ibbotson & Associates: Large Company Stocks defined as S&P 500 Small Company Stock defined as CRSP 6-8 decile Michael J. Corbett CEO, CIO and Portfolio Manager Michael is CIO and Portfolio Manager for all equity portfolios with Perritt Capital Management and The Perritt Funds. Perritt Capital Management first employed Mr. Corbett in 1990 as a research analyst. He assumed portfolio management responsibilities in 1996. In late 1999, Mr. Corbett became president and lead-manager of the Perritt MicroCap Opportunities Fund (PRCGX). He became portfolio manager of the Perritt Ultra MicroCap Fund (PREOX) at its inception in 2004 and the Perritt Low Priced Stock Fund (PLOWX) at its inception in 2012. Mr. Corbett was named to the Barron’s/Value Line Top 100 Mutual Fund Manager from 2003-2007. He is a Registered Investment Advisor. Mr. Corbett’s insight regarding small company investing has been sought after by a variety of financial media outlets, including CNBC and The New York Times. He is a member of the Joliet Diocese Endowment Fund Board and previously served on the St. Mary Gostyn Finance Committee and the St. Mary Gostyn School Board.

MicroCap Review Magazine



Planet MicroCap Podcast – 2016 Highlights and Looking Ahead at 2017 “Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.” —Warren Buffett on Investing This quote makes me feel optimistic about the task at hand. The task is becoming the best MicroCap investor I can, and sharing that journey with those interested in learning more about investing in MicroCap stocks. There’s no pressure to be the best right away.

HigHligHts of 2016 Understanding the importance of corporate governance In Episode 22, I spoke with Adam Epstein from Third Creek Advisors, and we discussed corporate governance, and why it is important to keep in mind when looking at MicroCap companies. Before speaking with Adam, I honestly, didn’t really keep in mind board of directors, who’s on the board and may have been blinded by the flashy names on some corporate boards. After our talk, I think MicroCap companies have to critically think about their corporate board formula-

tion, not just because they should surround themselves with appropriate people, but investors, like you and I, can approach them as an important part of our due diligence. Dissecting Reg A+ and 100 Baggers I did a couple episodes this year covering Reg A+. I thought this was important as this has had a lot of attention over the last couple years. If you are at all curious about what Reg A+ means, I invite you to listen to my interviews with David Weild and Cromwell Coulson. Dissecting 100 Baggers is an episode I did with Chris Mayer from Bonner & Partners. This was interesting because that is every investors’ dream – find an undervalued company, invest at the right time, the company continues to execute, re-invest profits and enjoy the ride. Easier said, than done! However, 100 baggers are out there and it takes hard work and dedication to find them. Characterizing “Intelligent Fanatics”



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I really enjoyed speaking with Sean Iddings discussing his new book he co-wrote with Ian Cassel about “Intelligent Fanatics.” I wasn’t naïve to think that great CEOs grew on trees and this book illuminated how successful leaders that were innovative in ways I didn’t realize built sustainable businesses. I highly recommend picking up a copy.

looKiNg aHeaD at 2017 One thing you will not read here is my predictions about what will happen in MicroCap stocks for 2017. As Mike Schellinger from the recently said in Episode 35 when I asked about some of the themes to look out for in 2017, he said, “I have a big prediction for you… I predict October is going to be a dangerous month for stocks…Want to know why?....It’s one of the particularly dangerous months for speculating in stocks, but the other months that are dangerous are July, January, September, April, November, May, March, June, December, August and February, which are all the months” (also originally stated by Mark Twain as Mike says in the interview). At the end of the day, I continue to look for value using the new tools at my disposal. One very exciting thing I’d like to announce is that at the Planet MicroCap Showcase, April 26-28, 2017 at the Planet Hollywood Resort & Casino is Las Vegas, I will be hosting the first ever live Planet MicroCap Podcast with a very special panel of guests that have previously been guests on my program. You can rest assured, it will be educational, potentially controversial, but above all, FUN. Go to www. and register so you can be an in audience for this, as I’m very excited for this event. n


By All Measures, 2016 was a Historic Year for Cannabis


y all measures, 2016 was a historic year for Cannabis. With the possible exception of 1996, when California became the first state to legalize (medical) marijuana, and 2012, when Colorado and Washington legalized recreational marijuana, 2016 was probably the best year for marijuana. Following the 2016 elections, eight states (including Washington, D.C.) have legalized recreational marijuana, doubling the number from the prior year, including California, the 8th largest economy in the world. And, five additional states have legalized medical marijuana, increasing that number from 23 to 28, with more than half the states in the U.S. having legal access to marijuana. Now the question on everyone’s mind is, what impact will be felt by Donald Trump’s election as the next President? According to Forbes, legal sales recorded for 2016 were $6.7 billion, up 30% from 2015, and some analaysts are projecting sales of $20-25 billion in 2020, which would represent compound annual growth of 35% over the next five years. Suffice to say, the industry is booming, as everyone predicted, and perception among the public has also dramatically changed in the last 20 years—60% of the public want to see marijuana legalized nationally, that number stood at about 25% 20 years ago, and 84% of Americans want to see medical marijuana legalized nationwide. However, with all the “growth” that marijuana saw in 2016, the industry now faces


an unknown, Attorney General Jeff Sessions. To say Sessions is a strong opponent of the legalization of Marijuana would be an understatement. During his confirmation hearings, he stressed he will enforce federal law when asked about marijuana, after noting that marijuana is illegal under federal law. However, he was sitting in a confirmation hearing, and any answer other than “I will enforce federal law” would probably be disqualifying. After all, the job of the United States Attorney General is to ENFORCE federal law. The immediate question on everyone’s mind is “now what?” The appointment of Jeff Sessions has struck fear in pro-marijuana groups and shaken the stock market for cannabis companies. But what can we expect will really happen? On the one hand, the Trump administration can rip up the Cole Memorandum, which was issued during the Obama administration and provides that, given the federal government’s limited resources, if a state complies with eight enumerated points, the federal government will not interfere, and enforce federal law. After all, the RohrabacherFarr Amendment, which codified the Cole Memorandum, and formally prevents the federal government from enforcing federal law, is set to expire on April 28, 2017. On the other hand, the Trump administration can continue to enforce the Cole Memorandum and seek, once again, to extend the Rohrabacher-Farr Amendment. This would allow more jobs to be created, a central theme extolled by Donald Trump, as the industry continues to grow. It will also allow the states to decide matters for themselves, which Donald Trump and others likely to serve in his cabinet, including Jeff Sessions, appear to support. While it is impossible to predict the future, given the new administration’s emphasis on jobs and growth, it may be too tempting for them to enforce federal law, which would

cripple marijuana-related businesses, not to mention eliminate a tremendous source of tax revenues for the states. Also, given the new administration’s focus on repealing and replacing the Affordable Care Act, immigration reform, building a wall, criminal justice reform, and jobs, will it also want to tackle this complicated and controversial issue? Clearly time will tell, but it seems to me that we have, or at least we should have, reached the tipping point and not go backwards. n Marc J. Ross is a founding partner of Sichenzia Ross Ference Kesner LLP, formerly known as Sichenzia Ross Friedman Ference LLP, a firm he started in 1998 which specializes in corporate, securities, litigation and regulatory matters. In the securities and corporate area, Mr. Ross advises companies with their 1934 Act reporting requirements as well as their NASDAQ, AMEX and NYSE and other exchange listing and compliance matters. In addition, Mr. Ross assists companies going public, whether through a reverse merger (RTO), initial public offering (IPO), or company offering (DPO). He also advises clients on investment and capital raising transactions, including private investments in public equities (PIPEs), initial public offerings (IPOs), registered direct offerings (RDs), and shelf offerings. In the litigation and regulatory area, Mr. Ross represents clients in commercial/securities matters from arbitrations before FINRA, the AAA, and JAMS, to court cases nationwide.   Mr. Ross also counsels clients in civil regulatory and possible criminal investigations before self-regulatory organizations, state agencies, or federal agencies, and he regularly appears before the SEC, FINRA, and state securities agencies in connections with their investigations. Mr. Ross also specializes in advising marijuana and marijuana-related companies. In particular, he is very knowledgeable in, and often speaks on, the legal issues associated with marijuana and marijuanarelated businesses, including the interplay between state laws which legalize recreational and/or medical marijuana uses, and federal laws which bar such uses. Mr. Ross teaches the first law school course on marijuana at Hofstra University School of Law, titled Business and Law of Marijuana. In his course, Mr. Ross introduces students to the rapidly-developing legal questions encountered in the operation of marijuanarelated businesses. The course uses a fictional business, Cannabis Inc., to explore (1) the interplay between state laws legalizing recreational and/or medical marijuana uses and the Federal Controlled Substances Act; (2) enforcement and application of other regulatory regimes governing the operation of marijuana-related businesses, such as banking and securities laws; and (3) the ethical considerations for an attorney advising a client engaged in a marijuana-related business. MicroCap Review Magazine



Where Have All the Market Makers Gone?


recently had a conversation about “Where have all the market makers gone?” My curiosity got the best of me so I turned to a Level 2 platform web page to see for myself, who were the market makers commonly seen making markets in microcap stocks? What I found was a surprise. I did not recognize many of the firms making markets and it seemed the lists I viewed were much shorter than I remember. I began to wonder if a shorter list of market makers would influence liquidity, execution and volume. Some stocks are trading with huge volume and with less market makers too. Most investors see stock prices and volume with price and volume either delayed or in real-time and most just hope for good fills, but I wanted to dig deeper into this. Had High Frequency Traders and ETF’s infiltrated microcaps? Was I missing something? If I am asking these questions I figured our readers of this magazine might be wondering what’s going on behind the scenes of the bid and ask and volume in microcaps too. I reached out for answers to OTC Markets and BMA Securities, a market maker, with the same list of questions hoping for answers and opinions to share with you. The two firms responded with their answers. I would like to thank both Mike Modeski of OTC Markets and Greg Averyt of BMA Securities for their time and efforts. We have printed the questions and answers in their entirety. Please feel free to contact Mike or Greg or myself with any questions or comments. 1. How do today’s market makers provide liquidity in the market? OTC Markets: In its simplest form, liquidity in the OTC markets is the direct result of investor orders in a security, and active market makers putting quotes into the market. Liquidity is electronically priced and accessed by broker-dealers through OTC Market Group’s OTC Link ATS.  n BY SHELLY KRAFT WITH



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If the firm’s focus is retail order flow, quotes are often a mix of customer orders and proprietary interest. When executing marketable orders, brokers-dealers may choose to provide increased liquidity to the market by executing a portion or the entire investor order based on their own inventory. In other cases, firms trade their own capital, meaning that they are placing their quotes into the market based on where they feel the price justifies the risk profile.   Then, you have a final group of firms who are running sophisticated electronic models to determine the price points at which they are willing to buy and sell a given security.  These models take into account a selection of data points such security type, price, time and volatility to identify opportunities to provide liquidity to the market. BMA: We provide liquidity by being on both side of the market, by being willing to sell blocks to buyers as a short sale or buy positions into inventory based on market demand. In turn, these positions will eventually have to be sold to the street or bought in the open market. 2. Do market makers specialize in retail or institutional order flow? OTC Markets: Some firms specialize in retail order flow, meaning quotes are tied to customer intent, while others will focus on institutional.  Some firms service both retail and institutional.   Finally, there are firms that have no order flow but choose to make markets in OTC securities and risk their own capital.  We see substantial liquidity from all types of firms.  BMA: We work in both capacities. Our presence in markets we make vary, but typically a small amount of orders would generally be placed through an ECN on an agency basis due to costs involved. 3. / 4. What are the effects of High Frequency Trading market making firms on microcap stocks? Same for ETFs?

OTC Markets: High frequency traders are typically looking for a large volume of transactions so they can get in and out of positions quickly. As microcap stocks are often less liquid, you tend to see electronic traders focusing on market making strategies and there are very few ETFs in this market. BMA: Microcap stocks are not typically subject to high frequency trading activity. There are day traders and firms that trade heavy volume on a proprietary basis that do move the markets in both directions. High Frequency Trading and Algorithms have caused ETFs to trade faster and have added volatility. 5. Some issuers have more market makers than others. Why is this the case? Does the amount of market makers affect liquidity? OTC Markets: The number of market makers is a direct result of the perceived opportunity and investor demand in a given security.  This is largely determined by the trading volume and investor order flow in a security.   Market makers have a direct effect on liquidity.  The more market makers in a given security, generally the tighter the spreads and the more competition for pricing.   Unfortunately, the regulatory environment has a direct impact as well.  Market makers have to be selective about the securities they trade, as there is a FINRA-approved cap on how many securities they can make a market in.  This number will vary based on the size of the firm, their capital and the process they have with their clearing firm.    Market makers in lower priced securities are also impacted by the structure of regulatory fees, such as the Trading Activity Fee (TAF).    TAF is calculated at a rate per share.  As you tend to see larger transactional size in lower priced securities, this results in a higher activity

fee. Lifting these regulatory burdens would expand the market in lower price securities. BMA:   Stocks with more volume and interest in the company will attract market makers to pick up the market. 6. How do market makers gauge their exposure in the risk vs reward and profit and loss business of market making? BMA: In the OTC space, stocks can move up in price dramatically overnight or in a few hours, so short positions are monitored very carefully on a real-time basis by the trader and several levels of management. Recent improvements in technology have increased our ability to manage risk across our trade desks. 7. Some market makers only trade and some market makers are full service firms, what’s the difference? BMA: Our firm is a full-service brokerage firm in that we accept deposits of stock from retail clients and institutions and make markets representing internal and dealer to dealer clients. A firm that is only trading and making markets is doing so either on a proprietorial or dealer to dealer basis. 8. How has the change from fractions to decimals changed the market making process? BMA: The effect of the markets changing from fractions to decimals 15 years ago, was a reduction in the spreads between the bids and asks. However, the exchanges have begun pilot programs for Nasdaq and OTC stocks which will trade in 5 and 10 cent increments, similar to some markets for options contracts, and will effectively increase the spreads as well. 9. What is needed by market makers to help provide more liquidity to issuers? OTC Markets: One of the biggest opportunities to affect the liquidity in microcap stocks is to influence the regulations that limit the market

makers from providing liquidity. Amending Reg SHO is a prime example. Under this regulation, a market maker can short a stock, but there is increased risk of buy-in with less active securities that are hard to borrow.  The customer may be satisfied with an execution at the offer, however, now the market participant is short the stock and has five days to cover this short position before a mandatory buy-in process.  If the five-day window was longer for bonafide market makers to cover their short sales in less active securities, firms would be more willing to commit capital on both sides of the market.  We should be looking at Reg SHO and other regulatory reforms that will help market makers provide more liquidity while decreasing spreads. BMA: The National Securities Clearing Corporation now requires the clearing firms to place massive deposits of capital for low trades in low priced securities until settlement date. These deposits are based on the average twenty-day volume of the security and are required to be put up with NSCC until the settlement of trades. This has caused clearing firms to put limits on the number of shares that can be sold by the market making brokerage firms and put many broker dealers out of business. While the SEC has proposed changing settlement dates from regular way to a two-day settlement model to reduce this burden, it is not enough. The regulator supported requirements of NSCC, need to be reduced. 10. With reduced IPO’s and Reg A+ private transactions growing, where do new listings for market making come from? OTC Markets: • Reg A+ / crowdfunding • Brokers making Form 211 filings with FINRA to allow them to publish quotes • Voluntary exchange switches and delisting’s from exchanges due to stocks no longer meeting listing requirements • Reverse mergers n

Michael Modeski EVP, Trading Services / President, OTC Link LLC Mike joined OTC Markets Group in 2011. Mike has over 15 years of experience in the financial markets, with a focus on the OTC markets. Previously, Mike served as the Director of BrokerDealer Execution Services and Sales at Citigroup and the Director of Execution Services at Lava Technology, a division of Citigroup. Before working at Citigroup, Mike was the Director of OTC Equities at FINRA and held several management positions at Pershing. He graduated from Lehigh University with a Bachelor of Science in Finance in 1995. Mike is a member of the Board of Directors of the Securities Traders Association of New York (STANY). About OTC Markets Group Inc. OTC Markets Group Inc. (OTCQX: OTCM) operates the OTCQX® Best Market, the OTCQB® Venture Market, and the Pink® Open Market for 10,000 U.S. and global securities. Through OTC Link® ATS, we connect a diverse network of broker-dealers that provide liquidity and execution services.  We enable investors to easily trade through the broker of their choice and empower companies to improve the quality of information available for investors. To learn more about how we create better informed and more efficient markets, visit OTC Link ATS is operated by OTC Link LLC, member FINRA/SIPC and SEC regulated ATS. Greg Averyt Mr. Averyt is a Managing Director at BMA. In his current role, Mr. Averyt helps oversee the firm’s internal investment capabilities including investment strategy, trading, operations and execution. Since joining BMA in 2004, Mr. Averyt has been instrumental in the expansion and implementation of BMA’s offices and trade desks across the country. He is an experienced market making trader and settlements expert and uses his in-depth knowledge of industry best practices to provide integrated solutions to the Firm’s clients. He brings with him more than 10 years of experience in the securities industry, holds his series 7, 63 and 55 licenses and is also registered with FINRA as a General Securities Registered Representative. Mr. Averyt holds a Bachelor of Science in Psychology from Arizona State University. BMA Securities LLC Established in 2001, BMA Securities (BMA) is a recognized leader in financial services specializing in market-making and trade execution. BMA merges an accessible client service approach with modern technology to provide clients with the personalized service they deserve and the cutting edge technology required to keep up with today’s rapidly evolving and volatile financial markets. BMA’s clients include: hedge funds, family offices, broker dealers, venture capital firms, law firms, institutional money management firms, investment banks, and accredited investors. • (P) 310-544-3545

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Fatal Flaws and the Junior Mining Sector Question: What do Shakespeare’s plays have in common with investments in junior mining? Answer: Lots of tragic outcomes. Most of the protagonists in Shakespeare’s plays had tragic or fatal flaws, not unlike some projects being promoted by certain junior mining companies. Our investment thesis for selecting junior mining companies involves identifying the rare quality (economic) projects available today and unmasking any




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potential fatal flaws (if they exist) early on, rather than chasing metal-price leverage or optionality plays managed by companies with marginal projects. In our experience, quality projects are more likely to garner an M&A bid because they are in short supply due in part to falling budgets for grassroots exploration programs, Fig. 1. Conversely, owning companies with uneconomic to marginal deposits is no more than a bet on positive market sentiment and rising metal prices.

Fig. 1: Major gold discoveries and exploration expenditures Source: SNL Metals & Mining and S&P Global Market Intelligence)

mining sector, Fig. 2. At the start of an exploration play, it is never clear where (or if) a fatal flaw will turn up. Inevitably, many early stage “discoveries” generate considerable share price appreciation as results suggest the possibility that company XYZ is on the path to an economic (real) find. As the project moves forward, the company releases increasingly detailed technical data. This is the point where things can start to go wrong and potential fatal flaws surface. It is also the period during which an investor can make a substantial gain on a failed project if time was taken to evaluate the company’s news in the context of the likely capital and operating costs of the project and it was possible to identify the flaw or flaws ahead of the crowd. Fig. 2: Junior mining cycle: Where you should buy and sell

miNiNg projeCt risK assessmeNt CHart

Source: Lassonde and Exploration Insights

These plays require almost daily reassessment of random factors that are beyond an investor’s control, such as global economic and/or geopolitical uncertainty.

KNow wHere you are oN tHis CHart The following chart is a highly valuable tool for speculators investing in the junior

To be able to identify flaws on a project, a useful tool is a risk matrix. Each of the potential risks a project could face is tabulated, Table 1, and graphed on the matrix as a function of its impact versus the probability of its occurrence. The matrix is then colored like a heat map, with the reds representing risks with a high probability of occurrence and a significant negative impact on the project. These hot spots are what we call fatal flaws. There are literally thousands of junior mining companies vying for our attention and money. It is, therefore, imperative that they provide us with all the information needed to make an informed investment decision. To help us in this process, we created a chart that shows the majority of sources of information we rely on and the degree of success we might achieve in finding a fatal flaw or flaws by using one or more of them, Table 2.

Table 1: The heat is on Source:

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Table 2: Risk categories for a given project versus their source of information and the resulting probability of finding a fatal flaw or flaws Source: Exploration Insights

tHe sCreeNiNg proCess for filteriNg iNvestmeNt opportuNities We always begin our investigation by reviewing the publicly available data, a task often referred to as a desktop study. These sources include the company website and/or presentations, technical reports filed on SEDAR (System for Electronic Document Analysis and Retrieval), financials, and management discussion and analysis (MD&A). If the company and the project pass this cursory assessment, we dig deeper into the geological setting, consult with industry colleagues, and do a background check on the management team. Providing the project is still looking good, we follow up with a one-on-one meeting with management and, finally, organize a site visit to complete our analysis. For those inclined to conduct their own desktop study, a company’s website is, by

maNagemeNt risK—joCKeys or Horses?

Value of a one-on-one meeting

far, the best place to begin. The way the information is presented is critical: is the first image you see on the homepage a sampling crew, a drill rig on site, or a mining truck on the company’s operation? You should also make sure that: the company’s share structure and financial status are laid out in detail. Without the full share count and working capital details

For those inclined to conduct their own desktop study, a company’s website is, by far, the best place to begin. The way the information is presented is critical: is the first image you see on the homepage a sampling crew, a drill rig on site, or a mining truck on the company’s operation? 80

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there is no way to value its assets; it’s like walking down a grocery aisle with no prices in sight; the company’s presentation provides a good overview of what and where it is focused on and what it intends to find or mine; and the news releases provide all the information needed to evaluate the results. They should include plan maps with all the trenches, samples, and drill locations, including (and this is important) past results from previous operators—it is rare that a “promising” project hasn’t seen previous work. Renaming and recycling old dog projects is a favorite game of junior mining promoters.

The investors debate between supporting jockeys (management) or horses (asset) has been prevalent in the junior mining sector for decades. Unfortunately, given the high probability of failure, any investor will need to look for both a solid management team and a top-tier project.

When it comes to a potential M&A transaction, given the number of writedowns from the cycle, suitors are asking for more project de-risking prior to any potential transaction. A management team, which includes the executive and board members, must have the capacity to handle the de-risking. An effective management team should have excellent technical skills backed by a previous history of success, relevant experience and capital market knowledge. A competent technical team with no capital market experience may execute a poor financing plan or sell the project too cheaply. A capital market-heavy management team may get involved in a marginal project with no hope of ever being built or acquired. Also, a management team with minimal insider ownership that considers the company a lifestyle choice is a sign the company is best avoided.

Some professionals look good on paper but are, in fact, unreliable, making speaking with management at conferences or by phone remarkably useful. During site visits it is possible to observe the interaction between management and the rest of the staff, and make sure everyone is aligned. teCHNiCal risK—gettiNg tHe geology rigHt is CruCial Searching for fatal flaws in the technical aspects of a project requires further due diligence based on public sources of information (National Instrument 43-101 compliant technical reports) and site visits. Getting the geology right is critical. The market has absorbed a number of failed resource estimates over the past few years due to wrongly interpreted geology and/or faulty metallurgy. The mineralogy and stratigraphicstructural controls on mineralization of a deposit determine if and how the ore can be profitably mined (open pit or underground, dilution percentage, strip ratio) and processed (heap leach, milling free gold, or refractory). Although grade is often touted as king, it is actually the profit margin that counts and the ability to payback the original capital investment. Note potential suitors would seek a quicker the payback for an asset located in a higher geopolitical risk jurisdiction. exeCutioN risK—goiNg big leaDs to bigger HeaDaCHes Significant execution risks revolve around proximity to infrastructure (or the lack thereof) and the ability to permit the project’s development. If a company is exploring for or building a mine at the back of beyond of some tin-pot country, the upfront capital and capital cost escalation could kill an otherwise decent deposit. Large projects can be attractive from a volume perspective, but they tend to generate

Significant execution risks revolve around proximity to infrastructure (or the lack thereof) and the ability to permit the project’s development. If a company is exploring for or building a mine at the back of beyond of some tin-pot country, the upfront capital and capital cost escalation could kill an otherwise decent deposit. extensive footprints that also draw the ire of third party stakeholders. fiNaNCiNg risK—Not a problem to fuND g&a aND exploratioN, but No baNK Debt if it’s Not feasible Potential investors in advanced plays must consider a company’s financial position, market capitalization, and ability to fund a project. The number of equity financings in 2016 suggests a recapitalization of the junior mining sector. However, the ability to put together a financing package for a marginal project (which includes bank debt) is still a significant hurdle. summary The risks associated with any junior mining project are part of the package and can’t be avoided. The onus is on the management team to develop a viable strategy for its asset and execute upon it while mitigating such risks. All the protagonists of Shakespeare’s tragedies had a fatal flaw that sealed their fates. In the case of a mining project, an extreme risk or fatal flaw has a high potential impact and an elevated probability of occurring (red zone on a risk heat chart), and it will likely end the project’s chances of advancing, regardless of its manage-

ment team’s capacity. Your ability to find fatal flaws ahead of the crowd is the critical element to profiting from imagined and real discoveries in the junior mining sector. By focusing on reality and discarding enchanted tales emanating from persuasive promoters you will do better over the long run. n Joe Mazumdar is a Co-editor/Analyst at Exploration Insights. Prior to that, he was a senior mining analyst at Haywood Securities, then Canaccord Genuity. His work experience includes Director of Strategic planning, Corporate development at Newmont and Senior market analyst/trader at Phelps Dodge. Mazumdar also worked in technical roles for IAMGOLD in Ecuador, North Minerals in Argentina/Chile and Peru, RTZ Mining and Exploration in Argentina, Chile, Peru and Ecuador and MIM Exploration and Mining in Queensland, Australia, among others. Mazumdar has a Bachelor of Science in geology from the University of Alberta, a Master of Science in Geology and Mining from James Cook University and a Master of Science in Mineral Economics from the Colorado School of Mines. Brent Cook Economic Geologist and Author Exploration Insights. Brent Cook, a renowned exploration analyst and geologist, is the author of Exploration Insights, ( He has over thirty years of experience providing economic and geologic evaluations to major mining companies, resource funds and investors. He was principal Mining and Exploration Analyst to Global Resource Investments from 1997 through 2003 where he provided analysis to retail brokers and two in-house funds managed by Rick Rule. He has worked in over 60 countries on grassroots through mine feasibility projects evaluating virtually every mineral deposit type. Exploration Insights is an independent newsletter that discusses what Brent is buying, selling and avoiding in the junior mining and exploration investment sector. MicroCap Review Magazine



Pricing, People, and Politics Ending an Era of Bad Management – Innovation is Coming –


o long to the days of finding a new use for an old generic in a small patient population and charging a 600% premium, or commercializing drugs with little to no efficacy (or running over-powered clinical trials in order to achieve statistical significance for that matter).




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The days of holding on to aging pipelines and enjoying hefty annual net-price increases are also over. But why is that a bad thing? When did novel drug discovery become passé? When did R&D departments turn from innovation generator to business development validator? Drug discovery and drug development was founded on the notion that through rigorous scientific research and clinical experimentation, we could solve the world’s deadliest diseases. And the newly discovered solutions to such diseases are meant to have a profound impact on society, not just in the United States, but around the world. Every time I see a Hilary Clinton, a Bernie Sanders, or now a Donald Trump tweet about drug pricing my response is dramatically different than what is exhibited across the pharma and biotech market. I see a changing political landscape as a road back to supporting true innovation. Let’s not focus primarily on profit maximization but on the survival of mankind and the resolution of human suffering, the real goals that motivate us scientists and the rest of the workforce in the biopharmaceutical industry. Today, we have most of the necessary framework already in place. We just need a few minor adjustments and some actual enforcement of existing policies that are currently being over-stepped. The corner stone

of drug development policy is the HatchWaxman Act, which gives drug manufacturers 14 years of exclusivity for their marketed drug. The kicker here is the clock starts when the drug is approved so long as you can prove that you conducted the appropriate clinical trials continuously, with a few exceptions. This is ample time to recoup any development costs associated with the R&D efforts as well as build a very profitable business to support future research. The problem is, biopharmaceutical firms have used various patent prosecution techniques to extend the patent life beyond the 14 years. Not only does this extend the amount of time the drug is listed at a higher price, it also disincentives Pharma from pursuing innovation. Why would anyone engage in the 8-year clinical drug development journey, spending hundreds of millions of dollars on clinical trials, with only a 12% chance of approval (from IND filing to FDA approval) when you could essentially do nothing, just expand your legal team, and sit on your currently approved products, growing the business by at least 6-8% per year through price increases? No brainer, right?! Well, that needs to end, drug exclusivity is limited for a good reason, now we just need proper enforcement. Despite the current environment of profit maximization, biopharmaceutical

tion is still alive and well. That is, if you stick to the ideals of drug discovery and development. I listed a few of them in the beginning of this article. Perfect examples of this in 2016 were Tesaro (TSRO), CoLucid (CLCD), and Akaogen (AKAO). All three companies exhibited true innovation, producing stunning clinical data on the back of ground breaking science. Shares of each firm have more than tripled (+300%) from the production of validated clinical data. Focus your investments on innovation, it will always payoff. All three companies represent the type of biotech firm that we continue to research for future investments here at Point Sur Investors. With 2016 now in the books, I am excited to see how the policy landscape unfolds in 2017 and it’s potential to support innovation once again. Perhaps this could lead to an increase in calculated risk-taking on profound science that supports new medicine to make a significant improvement for the betterment of patients around the world.

At Point Sur Investors, we are solely focused on biopharmaceutical investments. We started this fund to help with the innovation of patient friendly therapies that significantly improve the standard of care. We are a long only fund, we avoid rumors and speculations. Our work is data driven. We believe that over time valuable innovation in this field will lead to significant value appreciation. We are experts in this field, as we contributed to create and operate one of the most successful biotech companies, Pharmacyclics Inc. (formerly PCYC). We know what a successful biotech company looks like and how it operates. We know what it takes to develop a novel mechanism of action from the first drug design through clinical and regulatory success into a

mercial launch. We have a strong network of functional experts to help evaluate but also support the portfolio companies on their path to clinical or commercial success. For more information, please visit www.

tHomas butler, msC, mba Founder and Co-Managing Member Prior to forming the General Partner, from June 2013 through October 2015, Tom managed Investor Relations at Pharmacyclics Inc., where he helped grow the company from a market cap of $6.74B to over $21B, which included the execution of one of the largest biotech acquisitions to date. Prior to Pharmacyclics, Inc., Tom spent 6 years as a medicinal chemist at Gilead Sciences Inc. engaging in novel drug design and drug development for HCV polymerase and protease inhibitors. Tom holds an M.B.A. from the University of California Los Angeles (2012) and a Master’s degree in Organic Chemistry from the University of California Santa Barbara (2007). As a research scientist, Thomas Butler has been awarded numerous patents in the U.S. and internationally, as well as published in top academic journals such as the American Chemical Society Journal of Medicinal Chemistry.

worth equity investors and large European closed-end funds. In addition to co-founding several companies and serving on boards of directors, Ramses has also worked with Robert W. Duggan & Associates, providing analysis and due diligence that led to investments in several companies, including Pharmacyclics, Inc. Ramses began his career at Commerzbank AG in Germany, where he was an investment banker and portfolio manager for international clients. He earned the Diplom Kaufmann degree with distinction in Finance and Banking from the Westfaelische Wilhelms Universität of Muenster, Germany. n For more information about Point Sur Investors, please visit:

ramses erDtmaNN Founder and Co-Managing Member Ramses most recently served as the Executive Vice President of Corporate Affairs for Pharmacyclics, Inc. At Pharmacyclics, he helped grow the company from approximately 40 employees with a market cap of $40M in 2009 to 650 employees and a market cap of $21B in 2015, when it merged with AbbVie, Inc. Ramses was involved in the operational expansion of the company and oversaw various departments during the growth phase including Finance, HR, Legal, Communications, IR, Facilities, Events, and IT. Prior to joining Pharmacyclics, Inc., Ramses managed assets for US high netMicroCap Review Magazine



OPEC and Oil Stocks in 2017


fter the OPEC decision, November in Vienna, the NON-OPEC countries are rallying, led by Russia, they have agreed to reduce their monthly output. The reaction was

quick and from a price reference of $45 since early 2016, the new reference is now $50. The bump in price anticipated by many traders triggered a rally in much of the microcap US stocks with an average of 20% increase in market valuation among a group of stocks listed thereafter.



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What’s next? First the OPEC members need to follow the recommendation. As a reminder, under the OPEC deal, Saudi Arabia, will take the lion’s share of cuts by reducing production by almost 500,000 barrels a day to 10.06 million barrels a day. United Arab Emirates, Kuwait and Qatar - would cut by a total 300,000 barrels a day. Iraq, agreed to reduce production by 200,000 barrels a day. Kuwait, Venezuela and Algeria all agreed to monitor compliance of the OPEC agreement but there are no penalties for non-compliance. It is however in the interest of everyone to follow the agreement and our opinion is that the members will follow the recommendation. Now the Non-OPEC countries have agreed to reduce their output by 558,000 barrels a day. Lead by Russia, the nonOPEC countries attending a meeting at OPEC Headquarter on December 9 were: Azerbaijan, Oman, Mexico, Malaysia, Sudan, South Sudan and Bahrain. Should prices continue to go up? The first immediate reaction was a higher price with a barrel reaching $52 and climbing but will it continue? This is where there are a lot of conflicting agendas. From a US and Canadian perspective these announcements are good news because price is trending up. For the past two years, the North American producers have suffered with a depressed price that forced them into mergers, staff reduction, debt and eventually

bankruptcy. The surviving operators have learned to manage with lower revenue, and therefore the higher price is going down directly to the bottom line, this explains why prices of such stocks shot up 20% since November. WPX Energy, Marathon Oil, Oasis Petroleum, Murphy Oil, and Carrizo Oil & Gas were among the winners off to the races last month. If you look at some of these companies, you understand why OPEC news is important. Marathon Oil for instance spent much of the past year repositioning its portfolio so it could grow at lower oil prices. These actions included sales of non-core assets for nearly $1.2 billion providing the capital to invest $800 million on additional land in one of its core shale plays. This transformation put the company in position where it can deliver 15% to 20% compound annual production growth from its shale assets through 2021 while living within cash flow at about $55 oil. An oil price which seems to be reachable and would allow Marathon to deliver growth at or above the top end of that range. WPX Energy spent the early part of 2016 selling assets, including closing the sale of its Piceance Basin subsidiary and San Juan Basin gathering system for $1.2 billion. These asset sales enabled the company to clean up its balance sheet and reposition the portfolio to grow at much lower prices. Thus,

U.S. Energy (NASDAQ:USEG) Callon Petroleum (NYSE:CPE) Matador Resources (NYSE:MTDR) Contango Oil and Gas (NYSEMKT:MCF) Par Pacific Holdings Inc. (NYSE: PARR) I wrote this article myself in reviewing public disclosures, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Please be aware of the risks associated in investing in any of these stocks and this Article should not be considered as an invitation to purchase any of these stocks. n

WPX Energy announced that they are in the position to increase oil production by 25% next year at $50 oil and by 50% at $55 oil the following year. The question now is what will happen to the Price of oil? Will we see $65 a barrel or like the EIA (Energy Information Administration) analysis should we expect to stay below $52 for 2017? According to several analysts the level of $55 is the key point for shale production to become sustainable so the question is will OPEC allow it or will the price settle around $50 and less than $55. Inside OPEC the Saudis need money. ARAMCO is going public in 2018 so they need to improve the balance sheet and show good results and like all the large companies higher price means higher margins means more cash and higher valuation so clearly, they will want a higher price. Iran also needs higher prices. In the past 12 months after the sanctions were lifted Iran rushed to go back to output like the prior sanctions period and they continue to do so up to last month but like every member of OPEC they will need higher pricing. Will $50 enough to satisfy them? OPEC must balance price toward

petition from North America, it looks like there is a new front line now on the war on oil price and it is Texas versus OPEC. This “war” will drive the traders in their evaluation of investing in a few Oil stocks. The anticipation of November generated this rally and if you look at the charts of all these stocks, it is a “U”, value was at the top in Summer 2014 at a bottom in December 2015 and are climbing back. Can we expect to reach the same level from 2014 perhaps not exactly but close to certainly and there is money to bet on the rebound!

Frederic Scheer is CEO of L6 Chemicals & Logistics, an Oil trading company. He is also the CEO of Libra6 Management, Corp, a small private equity company operating in new alternative technology, media and chemicals. Scheer was the Ceo of several public companies including Cereplast a biomaterial company, the Cannon Group, an entertainment company and Imperials Hotels a hotel management company.

list of stoCKs we revieweD for tHis artiCle: WPX Energy (NYSE:WPX), Marathon Oil (NYSE:MRO), Murphy Oil (NYSE:MUR), Carrizo Oil & Gas (NASDAQ:CRZO) Pacific Ethanol Inc. (NASDAQ: PEIX) Tesco Corporation (NASDAQ: TESO) American Midstream Partners LP (NYSE: AMID) Arc Logistics Partners LP (NYSE: ARCX) Oasis Petroleum (NYSE:OAS) Abraxas Petroleum (NASDAQ:AXAS) MicroCap Review Magazine



Cannabis Sector Sentiment Strong Despite Uncertainty of Federal Policy 2016

was a great year for cannabis stocks, as the market ended a 23-month downturn in February and sprinted into end of the year with a big run fueled by interest in the elections, which featured 9 different cannabis legalization votes (5 states for full legalization and 4 for medical initiatives), as well as excitement over the continuing move towards full legalization in Canada, where the biggest gains in the sector were achieved. From a high-level perspective, it is very clear where the industry is headed in the long-term as society is quickly embracing the idea that taxation and

regulation of cannabis is sound policy. After a collapse of 97% from the peak in March 2014 to the trough in February 2016 as measured by the 420 Investor Cannabis Stock Index, prices exploded. Through mid-December, the index was us up 63.4% year-to-date to 64.14. For some perspective, here is how the market has performed in 2016, maintaining a large gain despite a big pullback that began in early November in advance of the elections: Cannabis stocks were likely to correct somewhat after the big run into the elections, as the fundamentals of most of these



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companies don’t come even close to justifying the valuations, but, despite a landslide for cannabis initiatives, with only legalization in Arizona failing, the elections introduced a major overhang for the sector. While the Trump Presidency in and of itself wasn’t necessarily a negative, the Republican retention of control of the Senate was a setback, as important legislation that would be beneficial for the industry has been held up by the Senate. More importantly, though, Trump has selected Jeff Sessions as the Attorney General. Sessions is passionately against even medical cannabis, and several other Trump Cabinet appointments share similar views. While it’s not yet clear how the Trump administration will proceed, the entire industry is at risk due to the reliance upon a memorandum issued by the Obama administration in 2013, the Cole Memorandum, which defined rules for states with legal cannabis programs to follow in order to avoid federal enforcement of the Controlled Substances Act within those states. Sessions isn’t yet confirmed and might not be, and Trump hasn’t issued any statements since the election regarding his intentions, so the range of expectations is all over the place. Some are not concerned at all, as Trump has previously spoken positively about medical cannabis and has said he supports the rights of states. Others are worried that the entire industry could be shut down. The likelihood is that there is little risk of pushback from the federal government with respect to states with medical programs, but there is a reasonable chance that new rules could be introduced with respect to recreational cannabis. An extreme view would be that it could be shut down, but a more likely outcome is regulation that could limit it to some degree. The genie is out of the bottle, though, and trying to roll back legalization in four states (soon to be eight) is extremely unpractical. An alternative extreme view is that the Republicans will look to Canada and see the light! How the federal government will deal with the issue is likely to be the biggest driver of cannabis stocks in 2017.

Cannabis stocks remain highly speculative. Despite the concerns about how the federal government will proceed, the legal cannabis industry is performing well, but the stocks, for the most part, don’t really reflect the underlying industry. For those who wish to invest in the cannabis sector, the best areas to focus upon include the Canadian licensed producers, GW Pharmaceuticals (NASDAQ: GWPH) and the revenue-producing OTC names. The Canadian story is much better appreciated today than six months ago, and the stocks have soared. The country has a robust federally legal medical cannabis program with over 120K registered patients that is growing 10% per month and is on the path to full legalization. Other international markets are opening up too, including Germany, which is likely to adopt a broad medical cannabis program in 2017. As far as GW Pharma, it remains on track to file a New Drug Application with the FDA for its potential blockbuster drug Epidiolex by mid-2017, with potential approval by the end of the year or early 2018. Epidiolex, which contains CBD extracted from cannabis, has been shown to be safe and effective in late-stage clinical trials in the treatment of rare childhood epilepsies and has broader potential. Finally, I recently identified nine names that trade on the OTC that have annual revenue in excess of $5mm, with some at or near $10mm. Most of these are ancillary companies that don’t grow, process or sell cannabis, and a few of these have moved to cash flow breakeven, reducing their reliance upon external financing. Cannabis stocks remain highly speculative. Despite the concerns about how the federal government will proceed, the legal cannabis industry is performing well, but the stocks, for the most part, don’t really reflect the underlying industry. A milestone

for the sector was the first NYSE IPO, a cannabis-focused REIT, Innovative Industrial Properties (NYSE: IIPR). While the deal, which was priced at the end of November, was a bust initially, with the size reduced by more than 50% and the price dropping once it began trading, this stock broadens the base of potential investors, opening the market to institutions. A lot of money was made by people speculating on cannabis stocks in 2016, and 2017 may be a year when longerterm investors will finally have some better options to participate in the growth of the cannabis industry through publicly-traded stocks. Alan Brochstein, CFA, began his career as a bond trader in NYC in 1986 with Kidder, Peabody and worked with CS First Boston and Criterion investments until transitioning to equities as a analyst/ portfolio manager in 2000. In 2007, he began AB Analytical Services, where he provided research and consulting to several investment advisors while also becoming one of the most popular contributors at Seeking Alpha.  In 2013, Alan launched 420 Investor, an online community focused on publicly-traded companies in the cannabis sector, and, more recently, he began New Cannabis Ventures, a news & information platform that highlights the most promising companies and influential investors in the cannabis industry. n

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amplitech group, inc. otCqb: ampg iNtroDuCtioN AmpliTech was founded by CEO, Fawad Maqbool in 2002 to fill the need for high quality, reliable, state-of-the-art, RF components at an affordable cost, with quick deliveries, hassle-free customer service and a passion for taking on complex customer requirements that competitors would not touch. Mr. Maqbool is a Biomedical and Electrical Engineer and has over 33 years of experience in the design of microwave amplifiers and components. He has developed a wide variety of amplifier product lines, from LNA’s (Low Noise Amplifiers) and MPA’s (Medium Power Amplifiers), to broadband telecom amplifiers for the microwave and fiber optic communications firms. Among the many leading companies were MITEQ, Motorola, ITT, Harris, Northrop Grumman, Raytheon, L3 Communications, Aeroflex, and TRW. Mr. Maqbool has been at the fore-front of developing, and managing the development of high performance, low noise amplifier products, as well as other amplifier products and has received a Best Technology Award from one of the industry’s leading trade magazines, and various Supplier Quality

Awards. As an electronics design and manufacturing leader, AmpliTech represents a source of innovation in high-technology products and is one of the few commodities that cannot be replaced by inexpensive labor forces from outside the U.S. Low Noise Amplifiers, or LNAs as they are called, are devices that boost the amplitude of signals without amplifying the inherent noise, thus allowing for better signal integrity and extending the distances signals can travel. The improvement of signal integrity allows for better signal clarity, higher bandwidth and much higher reliability, all of which are critical in ANY type of wireless communication from cellular networks, radar, satellite communications in many different sectors including commercial, military and space exploration. The Company manages to minimize research and development and production costs so that AmpliTech’s revolutionary technology can be introduced to retail and individual consumer markets in addition to OEM manufacturers of various products such as cell phones, handheld devices, drones, etc.

marKet strategy As a specialized “high-tech” provider, AmpliTech believes in keeping intellectual property from leaving the U.S. in the quest to save American jobs. The Company business model is to use a contract manufacturer for high-volume production in the U.S. instead of outsourcing to foreign countries. Mr. Maqbool’s vision is to make advanced technology affordable enough so it can be available to individual consumer retailers in the commercial sector. Previously, the technol-


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ogy was only available to government divisions and telecommunications giants. Why would consumers want LNAs? These high performance LNAs, once commercialized into high volume consumer applications, such as next generation cell phones, airline/ hotspot Wi-Fi, drones, automotive radar, etc. will greatly improve the quality of life of the average consumer. The actual method of accomplishing this goal is to reinvent our current discrete designs in the form of lowcost, specialized, patented ICs, or Integrated Circuits.

DeDiCatioN to “New” teCHNologies Company R&D efforts are creating designs for a new generation of communications products that include automotive sensors, long range cell tower front ends, highspeed satellite internet service, 4G/5G, IoT (Internet of Things) devices and secure servers/routers that prevent cyber-attacks. These are just a few of the many applications of the Company’s proprietary LNA technology. In addition to the many communications applications, AMPG will apply its High-Power Amplifier (HPA) technology towards Life Science and medical solutions, especially for the non-invasive diagnosis and treatment of cancers and other anomalies. AmpliTech is positioned to provide both industry and consumers with new advanced technologies and provide shareholders with an experienced management team focused on corporate and technical excellence. n The company paid consideration to SNN or its affiliates for this article.

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Looking Beyond Lithium Lithium was one of the best-performing commodities of 2016, with spot prices more than doubling from below $10,000 per tonne of lithium carbonate to over $20,000. The obvious driver is the market for lithium for batteries. Deutsche Bank has forecast global lithium battery manufacturing capacity to quadruple by 2020. Everybody has a smartphone in their pocket nowadays. And electric vehicle sales are forecast to pick up in a dramatic way, so we need an increase in supply of lithium to make all these batteries. But there’s a host of metals and minerals that go along with that beyond lithium alone. There’s more graphite in a lithium battery than there is lithium, since graphite is the main ingredient in battery anodes. Hitachi recently announced that it is quadrupling its lithium battery anode material production capacity by 2020. And China, which produces most of the world’s graphite, has announced that it is starting to build a stockpile that will equate to a 20% increase in graphite demand – a sure sign they see


supply woes ahead. Many small and microcap graphite companies are out there. When evaluating them, make sure they can economically get to spherical graphite production, which is needed for batteries. Most of them can’t. There’s also more cobalt in a lithium battery than there is lithium. It’s the main ingredient in the cathode. It’s cobalt that gives the lithium-ion battery the high energy density that allows it to power cell phones and lap tops for long times. Like we’ve already seen with lithium and graphite, look for new cobalt companies popping up this year looking to ride this trend. And let’s not forget about rare earths, either, which are also needed for today’s hi-tech electronics. That supply is still dominated by China and new supply will eventually need to come online. We saw a lot of companies run up last year in the initial “lithium mania.” Some of them were up several thousand percent. These equity gains are being made possible by the price disparity in these strategic metals right now. The lithium price is running up because a supply gap is emerging, and so the commodity price is rising so producers are incentivized to bring more online. You have a situation being created now where dozens of companies are now

rushing in and staking claims or consolidating assets wherever they can for lithium, cobalt, graphite, and all of a sudden there’s 50 companies traded on the TSXV with lithium in the name. That’s the nature of the mining sector, the ebbs and flows. It comes in cycles. It may be a different metal, but the story’s the same. But the gains are always real. Investors who can identify microcap companies early that have the management prowess, dealmaking ability, and capital market experience to “get it done” will be handsomely rewarded. I don’t think this is going to play out overnight. New mineral supply doesn’t come online imminently. There is permitting, environmental tests, engineering, mine construction, and many more steps that come between listing a company on an exchange and extracting metal from the ground. Find the companies that are aggressively pursuing a path to bring new lithium, graphite, cobalt, and rare earth supply online – not just a path to market a stock in a hot sector. n Founder and President of The Outsider Club, and Investment Director of Early Advantage, Nick Hodge has been in the investment publishing business since graduating Loyola University in 2006. Known for a “call it like you see it” approach to money and policy, his insights have led to numerous appearances on television and in various outlets on the Web, including the Business News Network and Yahoo!’s Daily Ticker. MicroCap Review Magazine



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The Risks of Engaging Unregistered Finders in Securities Offerings


any start-up and small-cap companies seeking to raise capital employ “finders” to assist in locating and introducing qualified investors. However, in light of increased enforcement activity by the SEC and many state securities commissioners aimed at unregistered broker-dealers, issuers should be mindful of the risks associated with using finders to obtain capital. Failure to do so could result in severe monetary penalties and other negative consequences, not only for finders, but also for issuers and their senior executives, and other agents who employ them. Federal and state securities laws prescribe a comprehensive regulatory scheme for any person or entity engaged in the business of effecting transactions in securities for the account of others. Whether a person characterizes himself as a finder is irrelevant in the analysis of the securities administrators. Unregistered broker-dealer activity can arise in the context of a private securities offering where persons not registered as broker-dealers act as bankers, consultants, advisers or finders. In these instances, the SEC has taken the position that finders who are engaged in such activities and fail to become associated with a registered brokerdealer have denied investors the protections of regulatory oversight and firm supervision. While the consequences to an unregistered broker-dealer can include both civil and criminal penalties and potential bars from participating in the securities industry, issuers who employ such persons also face adverse consequences. For example, under federal and many




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state securities laws, investors may have the right to rescind their investment in an issuer’s securities on the basis that they were materially misled by not being informed that the finder was not a registered broker-dealer. Some states may also permit investors to seek monetary damages from the issuer. Moreover, issuers that engage unregistered broker-dealers may be barred from future private placements under Regulation D, which is an important element in confirming an exempt offering. There is no bright-line rule for determining whether a finder “effects” a transaction in securities and has therefore acted as an unregistered broker-dealer. Instead, the SEC and state securities regulators typically employ a facts and circumstances analysis. Under this approach, finders who merely open up their contact lists and make introductions to potential investors have not been required to register as broker-dealers. In contrast, those who take on incremental responsibilities in connection with an offering often tip the analysis toward the need to register. Activities which have been found to create a presumption that a finder is acting as a broker include: • Soliciting prospective investors for an offering of securities; • Offering or providing advice or recommendations with respect to the merits of an offering of securities, or the likelihood of success of the issuer’s business activities; • Negotiating the price or other material terms of an offering of securities; • Assisting the issuer with the preparation of offering documents; • Distributing offering or sales materials or other related financial data; • Handling or assisting in the transfer of investor funds in a securities offering; • The payment of transaction-based compensation (i.e., compensation that is based on the size or success of the securities transaction); and • Previous involvement, the frequency of involvement and possible future involve-

ment in the sale of securities. While any one or more of the activities outlined above may lead a regulator to scrutinize a particular private placement offering for possible unregistered broker-dealer activity, the existence of transaction or success-based compensation is one of the two activities that are most likely to draw regulatory scrutiny and result in the classification of a finder as a broker-dealer. Although early no-action letters to the SEC did not prohibit percentage-based commissions for successful introductions absent any of the other activities outlined above, in a recent noaction request the SEC determined that the receipt of compensation directly tied to the success of investments in an offering gave a finder a “salesman’s stake” in the offering, therefore heightening the incentive for the finder to engage in sales efforts, which, in turn, required broker-dealer registration. As such, the most cautious compensation route for issuers and finders today is to provide a fixed fee for the finder, regardless of the outcome of the offering or the success of the finder in introducing investors. Unfortunately, this is not a possible alternative for many early-stage companies. The second most scrutinized factor is the finder’s prior involvement in securities offerings. This provides evidence as to whether the finder is “engaged in the business” of effecting securities transactions. However, a finder’s prior experience and success in raising capital is often a critical factor in an issuer’s willingness to pay a flat fee that is not based upon success. Without a successful prior track record, a finder is unlikely to be retained. In conclusion, any issuer contemplating engaging an unregistered finder to assist with a private placement of securities should carefully consider the compensation scheme paid to such finder, the activities of the finder in connection with the offering, and the interactions of such finder with potential investors. In most cases, it may be more prudent to limit the individuals or entities engaged in the solicitation of potential investors to those that are registered broker-dealers. n

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MicroCap Review Winter/Spring 2017  
MicroCap Review Winter/Spring 2017  

MicroCap Review, The Official Magazine for the MicroCap Stock Market, is pleased to bring to you the Winter/Spring 2017 edition of the Micro...