Sonya Colberg

Cool Holdings: Fatally Flawed Business Model

TheStreetSweeper’s ongoing Cool Holdings investigation reveals false statements, the truth about store traffic and how Cool summarily thumbs its nose at regulators.

Executive Summary

*Cool Holdings operates a faulty business model, underpinned by pump-and-dump features, in our view.

*Cool is broke, has reduced its handful of money-losing cellphone/computer stores and our investigators logged light traffic in those stores. Giants like Amazon and Walmart dominate the field.

*Yet, Cool uses paid promotions to promote lofty goals such as plans to expand from 16 to 200 stores. We consider such suggestions ludicrous.

* TheStreetSweeper is calling for Cool to correct misleading promotional statements and an incorrect market capitalization that the firm allows its promoters to perpetuate.

*A looming $25 million stock offering is poised to surprise and dilute stockholders who buy anywhere near the current lofty stock price levels.

***

Cool Holdings ( AWSM ) is a cell phone reseller that doesn’t work, has never worked and, in our view, will not work in the future.

Yet stock promotions ( TheStreetSweeper previously reported here ) have pushed the stock precariously high, putting recent stockholders in jeopardy of getting crushed when the stock plummets – which we have no doubt will happen. Small stocks flying on paid promotions are always a concern because they can become pump-and-dump vehicles, which the Securities and Exchange Commission is jumping all over these days.

Yet paid promotions lay the groundwork for Cool’s fatally flawed business model.

The company has not responded to our repeated requests for comment and our demand for corrections regarding misleading promos, but investors may find the website here . Meanwhile, consider the ways that Cool’s broken model may push investors into the deep freeze…

*Cool’s Proposition

The company claims the goal is to grow to 200 stores by 2021 and to become one of Apple’s largest retail partners . Recent promotions , for which Cool paid $415,000, recklessly claim 200 stores “by 2020” could mean a $900 million revenue stream.

But Cool is broke and we believe can’t even make payroll (only $429,000 cash in June, quarterly cash burn at $1.63 million) .

Cool owns only 16 stores. And the store count has actually dropped by about 8.

That’s right. Last year, Cool reported the two companies that merged to form Cool had “over 20 stores in the Americas,” and 4 stores in the U.S.

We must admit, something is growing …

Cool’s losses have grown to $15.5 million .

Cool can claim all day long that it’s going to Pluto. But its rocket ship is broken. Average investors just don’t know it yet.

Now, consider what else Cool endures …

*Clobbered By Giants

Cool has nothing proprietary . It’s not an early-stage biotech or healthcare with assets or intellectual property that might someday turn into viable products.

The firm simply buys cell phones, computers and accessories from Apple and resells them for a low 10.6% margin, so low as to make a profit virtually unobtainable.

Almost anybody can just rent space in a strip mall, contact Apple, commit to purchasing $100,000 in inventory and begin selling their products. 

There are thousands of Apple resellers ( 11,000 in 2000), including the  giant, global resellers that offer diverse products and can negotiate cheaper wholesale purchases from Apple. Giants include:

*Amazon        *Walmart      *Staples      *T Mobile    *Best Buy  

*US Cellular   *Sam’s Club   *AT&T     *Office Depot   *Target   *Costco

Cool has fewer than 20 stores, compared with roughly 7,570 stores operated by Walmart, Target and Costco, though they may not all carry Apple.

Amazon, of course, is crushing all the brick-and-mortar stores as well as everything else.

To make matters worse, while customers can see products on Cool’s OneClick website , we could find no way to purchase items online from Cool, thus shutting out a potential avenue for sales.

(Source: Cool Holdings’ OneClick website)

Apple customers tend to fall into two categories: trendy, name-brand fans and deal-shoppers.

Customers who want a deal will visit Amazon, Walmart, Best Buy, etc . Customers who want the Apple experience will go to one of Apple’s 500-plus stores.

What about the Cool experience? We recently stopped by to find out …

*Immaterial Traffic

During peak traffic hours last week, we visited Cool’s One-Click stores in Orlando and Miami, Florida.

From 2:45 to 4:55 p.m. Sept. 20, a private investigator hired by TheStreetSweeper counted customers visiting Cool’s store at Dolphin Mall, the very busy Orlando, Florida mall next to Disney World. The visit took place during some of retail’s highest weekday traffic hours.

Just 79 people went into the store in those two hours.

“A majority of the customers walked in and out spending less than a minute in the store,” the investigator wrote.

Our investigators also logged foot traffic on Sept. 20 at Miami, Florida’s Sawgrass Mills mall during typically busy hours of 4 p.m. to 6 p.m.

A total of 103 people entered the store.

The majority of those customers walked into the store and back out in 40 seconds or less … Not enough time to pull out a credit card.

*Oh, Those Numbers; Why Cool’s Ready To Dilute Stock

It’s no surprise Cool is losing money on these stores.

The financial facts are clear. On $9.4 million revenue, Cool lost a whopping $-3.6 million last quarter alone. Terrible news but predictable for this company with $24.5 million in current debt and auditors’ doubts it will continue as a going concern.

Now, recent investors can see why they’d better hold onto their wool caps.

Cool is financially distressed and has registered to sell up to $25 million worth of stock. The amended stock offering was filed Sept. 10 , incredibly, one week before the Sept. 16th and 17th paid promotion kickoff that fueled the current stock rally.

*Promotions Go Uncorrected

Cool doesn’t let financial facts get in the way of promotions. And these bought-and-paid-for promotions, in our view, go way beyond misleading.

PR Newswire , Yahoo , Nasdaq , Morningstar, SilverDoctors , The Globe and Mail , Proactive Investors and ATT.net were among sites that recently ran Cool’s promos or used incorrect information from the promos. Like this:

Here’s another example:

The disclosure shows Cool paid $415,000 for the promotional ad campaign.

The truth is this: Cool isn’t earning a penny per square foot.

The firm’s stores are losing millions.

The $900 million potential appears to be fabrication.

And Cool is paying promoters to perpetuate falsehoods.

TheStreetSweeper has repeatedly called and emailed to ask Cool to acknowledge these errors and set the record straight. To no avail.

Below is an excerpt from one StreetSweeper email to Cool investor relations on Sept. 17:

The bought-and-paid-for article seems deceptive and the timing seems odd. Please comment on why this looks much like the beginnings of a pump-and-dump scam.

We followed up the next day, after getting no response, with another email.  Here’s a snippet:

TheStreetSweeper is once again requesting a comment for readers.

 We're concerned that Cool continues to pump out more versions of the same old deceptive Cool-paid advertisement dressed up as news. 

 Please explain how Cool's characteristics, timing and promotions are not indicative of a developing stock manipulation scheme.

  Cool has not responded to these questions, as well as those regarding the incorrect market valuation …  

*Incorrect Share Count

Despite TheStreetSweeper’s demands, Cool has refused to correct its outstanding share count, which results in an incorrect market valuation. The count is misstated on popular financial sites such as Yahoo Finance, where we have requested a correction.

Here is a snapshot of Yahoo’s Cool information:

 

  Cool’s promotion dated Sept. 18 by Charles Kennedy clearly states “the company has a market capitalization of just $28.4 million today.”

"Cool Holdings (AWSM) - has the potential to turn every square foot of retail space into $3,750 per year. The company is planning 200 stores in the U.S. by 2020. With an average size of 1,200 square feet, that's a revenue stream worth $900 million. That is a staggering figure given that the company has a  market capitalization  of just $28.4 million today."

This promoter's information is false and misleading. 

That day, the stock traded at $5.50-$7.10 and $6.01-$7.56 the day before. So the stock averaged about $6.30 the day of publication, and about $6.79 the day before, when Mr. Kennedy may have been writing the piece.

Mr. Kennedy’s $28.4 million capitalization figure, then, suggests an outstanding share count that is way too low at about 4.5 million shares. (The promoter has not responded to our request for clarification or an interview.)

The promoter’s share count is even lower than Yahoo’s misstated figure of 7.09 million.

The correct fully diluted share count is 12.7 million shares .

(Common shares of 7,376,421 ; 4,682,435 warrants; and 657,710 Series A convertible preferred.)

People don’t realize that this insignificant cell phone reseller had a whopping market valuation of $241.3 million at the closing bell Sept. 21.

So, Cool is thumbing its nose at investors, TheStreetSweeper and regulators.

Cool paid for and approved these promotions. The promos contain lies. Cool is culpable and refuses to correct the misinformation. On behalf of stockholders, TheStreetSweeper has notified the SEC of our concerns.

*Conclusion

Cool Holdings is among the three worst companies TheStreetSweeper has covered over the past nine years.

Cool’s fatal business model, in our view, is essentially a pump-and-dump scheme. Typically, insiders throw together a reverse merger, load up on cheap stock, register a stock shelf, pump the stock - even though the business is unviable - so they can sell high.  Ultimately, the stock craters. Stockholders who bought at very high levels lose. Insiders win. Freshly minted millionaire insiders typically leave the broken company and go out to repeat the procedure. But maybe not this time. Maybe not this time.

We think Cool stock is a zero . Yes, we said a zero.

 

* Important Disclosure: The owners of TheStreetSweeper hold a short position in AWSM and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to streetsweepereditor@yahoo.com.

This story and many others are published on TheStreetSweeper's free website at www.thestreetsweeper.org .

 

 

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