We find stock pumping in general distasteful but Frog-Ads (PINK:FROG) has swooped to a brand new low not only in stock price, but also in business practices. Their site is quickly turning into an internet red light district.
Recent ads popping up on FrogAds include Seedy escort services in London looking for girls to pay 500 pounds a day in cash. Escort services in Dubai looking for indian and pakistani girls to send over to Dubai for Employment. And “Hot busty latinas” in southern California selling services to the local population, pictured below in Exhibit A.
Exhibit A: Photo from an Adult Related advertisement on Frog-Ads
While their is a certain loophole where management can claim something along the lines of “Well we are not responsible for what our users post on the site.” A line does need to be drawn when your site turns into a watering hole for sleaze. This abuse by users shows a pattern of just how sloppy management of FrogAds really is. It would have been extremely easy for them to put a filter blocking out ads with words obviously related to filth, but they are letting these ads go through.
A few days ago, FrogAds finally filed their 10-k which came in late. The annual report can basically be summarized in one line. Sales went down 99.8% for the year to finish the year at $580. The company’s total annual revenue is less than the london agency will pay their escorts for a day’s work.
Another nasty development in the 10-k is that frogads has been floating the business by issuing convertible debentures with a floating conversion price. This is what is known as “Toxic Debt” or “Death Spiral Convertibles”.
The basic structure of “Toxic Debt” is the lender gives cash, and then he can liquidate a bunch of stock. But instead of converting at a fixed price which non-toxic debt would do. Toxic debt uses market rate conversions. In the case of FROG it converts at 55% of the lowest price over the last 10 days. These market rate conversions mean that an unlimited ammount of shares can be issued and result in massive dilution to investors.
In the subsequent events section of the most recent 10-k you can see a long list of these toxic debentures being sold. And over the same period shares have fell by over 90%. There are no documents out there explaining exactly how much dilution has occured so far. All we can see from the document is that this is an ongoing thing. With the last Toxic Debt issued just a few weeks ago on June 29th 2012.
