Functional Technologies (TSXV-FEB) - extreme spending on investor relations contributes to its demise.
Last year in our blog post (See: 2 IR firms and big losses) we asked this question: Why did Functional Technologies Corp. (TSXV-FEB), a small cap stock, hire two investor relations (IR) firms, to represent the Company to investors for a reported combined cost of $10,500/month plus expenses and a bucket load of options? At the time, Functional Technologies reported $4.8 million in annual losses on a paltry $200 thousand in sales.
One year later (from our post) nothing had changed. The Company still had two IR representatives and continued to report huge financial losses. That was until April 17, 2013: Functional Technologies filed for bankruptcy protection. Today the stock remains halted and the shares traded last for under a penny. Our initial blog post served as an early warning to small cap investors about the bad management practices occurring at Functional Technologies by the excessive spending on investor relations activities.
Right we were!
Coming from an investor relations background, this might sound strange but this blog writer has become very sceptical about third-party investor relations programs for small cap companies.
The majority of small cap companies that hire IR firms are losing money and management has failed to execute on a business plan to produce profits. They use investor relations activities to mask the poor financial fundamentals; to buy time with existing shareholders with the hope of raising more capital from new investors to fund losing operations. In many cases the money spend on investor relations activities just adds to the company’s cash drain and, like in case of Functional Technologies, leads to their early demise.
My point is that investors should always exercise caution should they choose to invest in small cap companies that are not yet profitable. More importantly investors ought to avoid investing in the unprofitable small cap company that spend money on expensive investor relations programs because management too often is trying to disguise the reality of the financial fundamentals of their business.
For shareholders of Functional Technologies this lesson is too late.
Author’s Ownership Disclosure: TSXV: FEB – No
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