Business

Root9B Technologies Inc. (RTNB) Downside On Fraud Allegations, Cyber Failure And Bankruptcy. Strong Sell: Pump Stopper

Root9BTechnologies Inc. (RTNB): -82.47% Downside On Fraud Allegations, Cyber Failure And Bankruptcy. Strong Sell. by The Pump Stopper

root9B Summary

  • root9B Technologies Inc. (OTC:RTNB) is a worthless reverse-merger created by insiders with long history of penny-stock wipeouts, fraud allegations, and disaster while CEO Grano embroiled in “fraudulent concealment”and “breach of fiduciary duty” lawsuit.
  • root9B Technologies Inc.’s claimed “cyber” business is minuscule and imploding, while not a cyber-tech business but largely appears an old employee training program which RTNB resells or other irrelevant, overhyped offerings.
  • Insiders enriching themselves with RTNB through curious related-party transactions, abusive compensation and unloading their failing investments into the public shell at overvalued prices.
  • RTNB insiders have funded their enrichment through astounding 1,000% (so far) dilution while generating -$48 million in losses. Insider-owned preferred shares convert at $2.50, capping RTNB stock at $2.50 .
  • Even assuming RTNB is “real” AND honest management AND fundamentals miraculously turnaround AND using overly-optimistic peer valuations, RTNB has -82.47% downside today. Given precedent of RTNB team, bankruptcy seems inevitable.

I believe Root9 Technologies Inc., is a worthless reverse merger shell led by the “The A-Team” of penny stock wipeouts, questionable board members who have presided over untold shareholder wealth destruction, and a management team with ties to numerous fraud allegations. Starting as far back as the 1980’s, some of these insiders have been involved in numerous securities violations and fraud allegations in what seems a very “interesting” recurring pattern. While RTNB shareholders experience brutal losses, deteriorating fundamentals and egregious dilution this “A-team” of penny stock wipeout masters have gotten amazingly wealthy through questionable related party transactions and foisting their failing private investment onto this public shell, all while collecting unreasonably high cash and stock compensation.

As Root9 has attempted to ramp their promotional “hype machine” with absurd press releases, real cyber security experts have pushed back, debunking their ridiculous claims. Unfortunately unsophisticated retail investors have piled into RTNB on “cyber hype” now. As a result, despite deteriorating fundamentals and RTNB’s claimed miniscule “cyber” business imploding -44%yoy to just $428k of revenue in Q1, RTNB shares have temporarily rallied +400% to the unsustainable valuation of $140m+ for businesses RTNB recently (over)paid just $35m for. Also supporting the view of RTNB’s unsustainable overvaluation, RTNB insiders just filed to sell 10m shares of illiquid RTNB stock. Furthermore, through a convoluted preferred share structure, an additional avalanche of RTNB stock becomes unlocked at $2.50, creating a stock price ceiling with even more insider enrichment for RTNB shareholders.

Even if you somehow believe RTNB is a “real” company led by honest people AND the currently imploding business fundamentals and cash burn miraculously turn around, generously valuing RTNB similar to obviously superior peer companies STILL shows RTNB has -82.47% downside. However, given this “A Team” of wipeout and past fraud allegations, I think it’s clear the much more likely outcome is RTNB fundamentals continue to deteriorate while insiders get rich and the stock will go to $0, just like many other companies this team has been involved in. I believe this likely outcome is likely why insiders are trying to sell 100% of 10m RTNB shares right now.

I recommend extreme caution to anyone considering purchasing this stock or who is currently invested in what I consider likely to become a complete wipeout for shareholders. Below is a summary of my research, although I’m sure if time allowed, investors in RTNB would find much, much more than what I have shared in this report.

RTNB Insiders: The “A-Team” of Penny Stock Wipeouts

In my view, RTNB insiders are clearly the “A-Team” of microcap shareholder wipeouts. To understand who is behind RTNB and what is truly going on with this shell, let’s take a look at the company’s frightening S-1 filing just filed in which insiders are aggressively trying to cash out of nearly ~10,000,000 shares. None of the cash from this offering even goes to the company! It only goes to insiders! If you buy this stock you are basically giving your money directly to these questionable insiders, in my view. Notice the number of shares owned after the offering is nearly 0% in almost every case.

I have highlighted some key, extremely “questionable” individuals for you to understand below and will draw your attention to these people and organizations throughout the report. You may want to print this page out to follow along so you can understand what is truly going on at RTNB.

Selling Stock Holder (2) Shares of Common Stock Owned Before the Offering Shares of Common Stock UnderlyingWarrants Owned Before the Offering Total Number of Shares of Common Stock and Shares UnderlyingWarrants to be Offered (1) Shares of Common Stock and/or Common Stock Underlying Warrants to be Beneficially OwnedAfter theOffering Percentage ofCommon StockBeneficially Owned Afterthe Offering
Joseph C. Grano and Robert H. Silver, Trustees of The Grano Children’s Trust dtd. December 13, 2012(3)(14) 2,681,613 2,681,613 0%
Jim Orphanides (3) 1,289,600 1,255,000 34,600 0%
Brian King (3) 620,466 620,466 0%
Centurion Holdings(3) 500,000 500,000 0%
Anthony Sbledorio (3) 300,000 300,000 0%
Lindsay McLean (3) 200,000 200,000 0%
George Pataki (3) 122,000 122,000 0%
Joseph C Grano(3) 50,000 50,000 0%
Sam Jurist(3) 49,880 49,880 0%
Timothy Howell(3) 43,000 43,000 0%
Heather Payson (3) 30,100 30,100 0%
Karen Tilli(3) 30,100 12,000 30,100 12,000 0%
Colin Milner(3) 21,500 21,500 0%
Mark Pando (3) 17,200 17,200 0%
Peter Clarke (3) 0%
Melissa Robbins(3) 8,600 8,600 0%
Michael Arnstein (3) 8,600 8,600 0%
Michael Amicucci(3) 8,600 8,600 0%
Ankur Vishwakarma(3) 8,600 8,600 0%
Carla Short(3) 8,600 8,600 0%
Christina Van Tassell (3) 50,000 50,000 0%
Concetta Kristan (3) 50,000 50,000 0%
Eric Hipkins(4) 1,708,948 1,698,215 10,733 0%
Michael Morris(4) 394,889 382,497 12,392 0%
Eric Fleming (4) 50,000 50,000 0%
James McCarter(4) 51,754 50,054 1,700 0%
Erika Hipkins(4) 10,179 10,179 0%
Greg Morris(5) 4,900 50,000 50,000 4,900 0%

49

Pat Kolenik(5)(11) 185,545 540,000 200,000 525,545 0%
Cary Sucoff(5)(12) 90,000 706,440 200,000 596,440 0%
Isaac Blech(5)(13) 784,231 450,000 450,000 784,231 1.1%
Steve Yarbrough (5) 50,000 50,000 0%
Kevin Carnahan (6) 100,000 100,000 0%
Proactive Capital Resources Group LLC(7)(15) 50,000 50,000 0%
Solit, Tessler & Co LLC(8)(16) 200,000 200,000 0%
Harvey Pitt (9) 250,000 250,000 0%
Alliance Advisors LLC(10)(17) 75,000 75,000 0%
TOTAL 9,378,905 2,483,440 9,879,804 1,982,541 0%

Let’s start by reviewing the highly questionable cast of characters at Root9 Technologies, Inc. one-by-one with all my research, estimates and views cited and linked for the public good. I personally guarantee you will be amazed at what you read!

Joseph J. Grano Jr – RTNB’s CEO and Chairman of the Board of Directors

Grano has an extensive history with both penny stock value destruction and questionable related party transactions with RTNB, among many, many other issues. As I will outline below, these transactions are so self-enriching to Grano that I think it is obvious what RTNB truly is.

To date, Grano seems to have sold two private companies from Centurion Holdings, LLC (a firm apparently controlled by Grano) into the RTNB shell and personally received an astounding $2.7 million in cash from shareholders for sales of Ecological, LLC and IPSA International, Inc. Unsurprisingly, both IPSA and Ecological appear to be financial disasters and failing. On top of cash payments to Grano, Grano’s affiliates were able to enter into lucrative employment contracts that are absurdly generous and I don’t see how they could be in the best interests of RTNB outside shareholders.

In the first transaction, Grano is apparently the co-founder and owner of Ecological, LLC and in December 2012 he successfully sold the company to RTNB for a staggering estimated $7 million despite Ecological only having $430,000 in revenue and a $2.2 million loss recorded in the prior year. How likely is it that RTNB shareholders thought they were getting a good deal by paying 16x sales for a low margin contracting business?

According to Capital IQ, RTNB recently sold Ecological, LLC apparently for an undisclosed amount, which I can only speculate was a fraction of the price they paid for it. Even though this transaction was in my view completely unreasonable, RTNB paid Brian King the former Ecological CEO and current RTNB Chief Operating Officer a remarkable $278,316 in total compensation for 2014, which for the mathematically challenged equals more than 50% of Ecological revenue. It looks to me like non-insider RTNB shareholders took a bath on this transaction.

Unfortunately for RTNB shareholders, King’s record as a public company executive seems terrible to me. King previously worked for two other public companies and in both cases, shortly after he assumed senior positions things began unraveling quickly.

Concord Camera Corp

Root9 Technologies

United Energy Corp

Root9 Technologies root9B

In what appears to me another attempt by Grano to unload a failing company of his, IPSA International was sold to RTNB at the beginning of this year. According to CapIQ, RTNB paid 8x EV/EBITDA for what appears to be a low margin consulting business with a very concentrated customer base. I believe this too will clearly end up further destroying RTBN shareholder value since, as others have pointed out, IPSA seems to be a mediocre business with poor, deteriorating fundamentals. Once again, as part of the transaction Grano’s business partner Dan Wachtler entered into a 3 year employment agreement with RTNB that included a $450,000 annual salary.

This of course does not even take into account the low strike options Grano and his affiliates have been granted that are worth multiples of what has been received in cash so far. Grano also receives a salary of $500,000 annually with a minimum guaranteed annual bonus of an additional $500,000. To date, Grano has accumulated 9.7% control and now wants to sell his stock. This kind of compensation and handing out paydays to associates is clearly abusive in my opinion.

As we can see below that just in the direct and stated comppensation we can see insiders have collected almost $10m in comp with virtually all of that happening in just the past 3 years!

Root9 Technologies

(Table made by me based on CapIQ Data)

In my view, this level of compensation is clearly abusive and unreasonable for a company that has delivered little more than staggering losses, cash burn and dilution to its shareholders. How has the RTNB A-team funded this mess?

Root9 Technologies

Source: chart by me based on CapIQ Data

In my view, the only way RTNB insiders can get away with this is because RTNB is primarily held by unsophisticated retail investors who probably don’t understand what is truly going on here. How much longer can this possibly go on?

Root9 Technologies

(Table made by me based on CapIQ Date)

Based on the in depth research I conducted, it seems RTNB is not the first time Grano has milked a low quality public shell. His involvement in another penny stock Amerityre Corporation (a really awesome Boulder City, Nevada penny stock), resulted in Grano receiving 7% of the company, most of it in low strike warrants. Through his holding company Centurion, Grano entered into aconsulting agreement with Amerityre that required the company to pay him$500,000 per year for 2 years and granted him 1,300,000 in options. As part of the agreement, Grano’s friend and associate Nasser J. Kazeminy wasgranted 650,000 options. Not surprisingly, after Grano was enriched with the limited assets that Amerityre had, shareholders were essentially left with nothing and the stock basically went to zero.

Amerityre Corp: Shareholders Get Wiped Out….

Root9 Technologies

Does big Joe just know how to pick ‘em or is something else going on here?

Unfortunately, it actually gets much worse from here. Grano and Kazeminy were also embroiled in a lawsuit which to me appears similar with what is currently happening at RTNB in terms of insiders adversely treating other shareholders while themselves cashing out at favorable terms.

The lawsuit is about a group of minority shareholders that suffered severe losses on their investment in a company due to a group of insiders that allegedly used the business to enrich their own interests at the expense of the minority shareholders. In my view, what follows can only be called shocking and disturbing for anyone long RTNB shares.

The lawsuit alleges Grano and Kazeminy were a part of a group that enabled and benefited from the gross “mismanagement and looting” of the company including sweetheart deals for insiders, improper and dilutive transactions, and excessive payments. According to the lawsuit, Grano gained “the trust and confidence” of other shareholders. Allegedly, “Grano then used that trust – and his relationship with Kazeminy – to enrich himself while deliberately placing [minority shareholders] at the mercy of controlling shareholders who Grano knew were hostile” to non-insiders.

Grano was accused of “fraudulent concealment” and intentionally deceiving minority shareholders that resulted in their interests being wiped out. In what appears to me an interesting pattern, Grano seems to have sold a large portion of his shares for $6.5 million or $4.33 per share and just over a year later minority shareholders received $0.01 per share resulting in a -99.77% loss on their investment! Recall that Grano is now aggressively trying to sell his stake in RTNB stock via the recent S-1 filing. Is RTNB rapidly headed to zero?

Based on my reading of the lawsuit, it’s no coincidence the minority shareholders’ investment in the company was allegedly decimated by Grano and his friend Kazeminy who appear to share a close relationship that includes co-investing in deals together, sitting on the same advisory boards, etc. In fact, Kazeminy used to fly Grano around on his private jet, according to the lawsuit.

The lawsuit goes on to claim “breaches of fiduciary duties” and “purposefully nefarious actions”. These claims are incredibly relevant and disturbing for RTNB shareholders, in my view, given the recent and ongoing attempts of insiders to cash out after engaging in what I believe were one sided deals to benefit these insiders, as I have outlined throughout this report.

Questions you should be asking

What is actually happening at RTNB? Why is Grano trying to blow out his stock? Does this explain the curiously timed and highly questionable “hype machine” press releases RTNB has recently issued, at the same time insiders have registered to sell their stock?

This is the question: Who in their right mind would want to buy stock from Grano and the other S-1 sellers listed here?

As the lawsuit alleges, “Grano was richly rewarded when he sold his stock” while other investors were “decimated.” I view Root9 as a high probability bankruptcy eventually given what I perceive as a clear lack of viability of its products, and poor financial state, and believe that non-insiders are likely to once again be decimated by taking the other side of “Grano & Friends”.

A product I really love and enjoy, which shareholders taking the other side of Grano’s and Root9 insiders may want to look into purchasing with their RTNB investment, is the One Trip Grip Bag Holder (pictured below).

Unfortunately, it gets even worse: The RTNB Blech Family Connection

Although there is an overwhelming number of red flags with Root9 that would likely take regulators months or even years to fully untangle, another huge red flag in broad daylight is the involvement of the Blech family. Most likely RTNB’s largely uninformed retail shareholder base isn’t familiar with the Blech family history, so allow me to shed some light on these highly questionable characters.

I believe convicted and jailed fraudster David Blech is one of the original “wolves” of the modern Wall Street era and the way David used family accounts were used is an “interesting pattern”. In the A-Team picture, I believe he most closely resembles Mr. T (no disrespect to Mr. T intended). Blech seems to be a repeat offender penny-stock manipulator and apparently a bipolar gambling addict sentenced to jail and lofty multi-million dollar fines on criminal charges of market manipulation after a judge ruled that his crimes deserve “no mercy”. In fact, the judge recommended Blech serve time in the same prison as “Fat Man Raj” Rajaratnam, convicted insider trader.

David Blech: Not a face you can trust (from behind bars)

From what I can tell, Blech’s business model was to acquire shares inexpensively through backdoor financing agreements, pump the shares up through manipulative trading in over 50 related-party (mostly family) accounts, and then dump shares on unsuspecting investors. He did this many times, with many companies, and used a wide variety of his family members to execute his crimes, something I refer to as “pulling a Nelly” by doing it “over and over again.” David Blech is now in jail for these activities.

A recent 2012 lawsuit that is publicly available on the SEC website that should be read by everyone includes the following excerpts about the Blech family circle:

involves a complex market manipulation scheme carried out by Blech, an individual previously convicted of securities fraud and barred from association with a broker-dealer by the Commission. Since at least 2007, Blech, in furtherance of the scheme, established over 50 accounts using various nominees – including Blech’s wife, defendant Chassman; Blech’s uncle, Aaron Eiger (“Eiger”); Blech’s sister-in law, Elizabeth Moore (“Moore”)…” and “Blech traded in the Nominees’ [his family members] accounts with the intent to artificially inflate each company’s stock price and to create the false impression of an active and liquid market…” and on and on…

In addition to accounts in David’s wife’s name used above, David apparently has a longtime business association with his brother, Isaac Blech. Given what we know about his stock market partner and brother above, along with using accounts in family names, I find it very interesting that Isaac Blech is so deeply involved in RTNB on the board, and cornerstone investors along with his wife Miriam.

What does it say about RTNB these people are apparently the “best” investors Root9 could find to partner with? Where are the “real” industry experts or othe credible investors?

Isaac Blech: Brother and Longtime Associate of David Blech

Isaac Blech is the Vice Chairman of Root9 and along with his wife (sound familiar?) Miriam Blech, is a substantial shareholder in RTNB. We also know Isaac was also named in some of the David Blech legal documents regarding securities fraud but apparently was not prosecuted.

Furthermore, Isaac Blech has been involved in other disasters as well, for example Isaac’s involvement as Vice Chairman of Restorgenx (OTCPK:RESX) has been nothing short of a complete disaster for shareholders as the stock fell a whopping -98.9% (so far) from a split-adjusted $199 in July of 2010 to a current price of $2 per share.

RESX -98.9% Decline: The future of RTNB?

Root9 Technologies

Source: CapitalIQ

If it were me, I wouldn’t in a million years even consider investing even one penny in Root9 as long as any of the Blech family is involved. RTNB’s company filings themselves seem to agknowledge the risks of Blech involvement, calling them out specifically by name:

Miriam Blech and Isaac Blech have substantial influence over the business, due to their large ownership stake in our capital stock, giving them the ability to exert influence over us to the eteriment of minority shareholders, which will limit shareholders ability to influence the outcome of key deicision.”

Given how the Blech family has apparently “influenced” a number of shareholder wipeouts in the past, I recommend extreme caution to all current and potential RTNB investors.

The Penny Stock General (of Wipeouts)

Wesley Clark is a Director on the board of Root9 , I speculate to provide some façade of credibility with retail investors to this obviously absurd shell of a company. RTNB, which clearly has insane insider compensation for a company that has lost money hand over fist, paid The Penny Stock General a whopping ~$184,000 in additional compensation since 2012 (see insider compensation chart earlier in this report).

I’m not the first person to identify Wesley Clark’s connections to stocks which wipe shareholders out and face fraud allegations. After leaving the Army, Wesley had the goal of “making $40 million,” apparently by any means necessary given his involvment in an uncanny amount of penny stock fail. Bloomberg Business did a great job uncovering related shenanigans in this article that reveals Clark’s ties to numerous bankruptcies and a CEO who pled guilty to fraud. In fact, Clark’s ties are so crazy that one of his colleagues apparently formed the basis for the character Bud Fox in the famous movieWall Street, due to ties to Ivan Boesky and Michael Milken. Clark also served as Chairman of the notorious and now bankrupt Rodman & Renshawinvestment bank where analysts and the chief compliance officer were fined and suspended from the securities industry by FINRA . Apparently, all this disaster is highly lucrative business for Clark though who I estimate makes as much as $250,000 per board appointment.

When confronted about alleged China stock frauds that Rodman & Renshaw participated in under Clark’s watch, Clark apparently refused to comment. Denial is not just a river in Egypt!

The Penny Stock General: Just Say No

Hilariously, even after all of the above Clark is apparently proud of his “business record“. Let’s review this record:

Ram Venture Holdings

Root9 Technologies

Argyle Security Acquisition

Root9 Technologies

Viaspace

Root9 Technologies

Summit Global Logistics

Root9 Technologies

NutraCea

Root9 Technologies

Rodman & Renshaw

Went bankrupt in 2013 and filed for Chapter 7!

Juhl Energy

Root9 Technologies

Torvec:

Root9 Technologies

Grilled Cheese Truck:

Root9 Technologies

Clark is proud of this record?! In my view, this is a record only a mother could love!

That’s Enough General, Just Stop Already

RTNB: Just Another Worthless Penny Stock Hype Machine?

Despite the shocking mess of awfulness that is Root9, it gets even worse. After some additional digging, it appears to me RTNB is also associated with members of a number notorious stock promotion outfits, including Proactive Capital and Alliance Advisors.

The Unfortunate Proactive Capital Connection at RTNB

We know the Proactive Capital Group were famously humiliated for their role in a number of promotion stocks, including Unilife (NASDAQ:UNIS), a stockexposed several times (including by me) for pillaging its shareholders and coming under investigation by the SEC as it fumbles onward towards its own bankruptcy.

RTNB used to be called “Premier Alliance Group” before recently changing its name, where Proactive Capital acted as IR firm. Also concerning, Proactive Capital and its founder Jeff Ramson filed to sell 100% of their shares in Root9 as recently as May 1st, 2015.

Jeff Ramson: This Guy Wants to Sell You All His RTNB Stock

Jeff also has what I consider to be a very “remarkable” past. When Jeff was the CEO of the Great Eastern Securities Inc. brokerage firm, his firm the notorious Luchese and Bonanno families accused of being involved with “mafia style” organized crime were associated with his firm. To quote a publicly available article citing lawsuits:

“As part of their criminal activity, between 1994 and 2004, the mobsters ‘controlled stock promoters, brokerage firm owners and brokerage firm principals, brokers, traders and other employees’ of 15 branch offices” through violence and coercion.

Furthermore:

The defendants reportedly used both licensed and unlicensed brokers and cold callers to flog more than a dozen penny stocks, most of them trading on the lightly regulated and heavily prosecuted OTC Bulletin Board, in which the mobsters had manage to acquire large blocks of cheap shares.”

And perhaps most shockingly:

To protect their financial interest in and to ensure the success of these criminal schemes, the defendants exploited their affiliation with organized crime to control and discipline stock promoters, brokerage firm owners, brokers, cold callers, and other employees at the brokerage firms through extortionate tactics, including threats of physical harm, beatings and stabbings,” the U.S. Attorney says.”

Apparently, in order to pursue a “‘pump-and-dump’ scheme, the defendants purchased vast quantities of low-prospect stocks, then cold-called investors and tricked them into buying in and driving up the price.

A portion of this criminal enterprise apparently took place in connection with alleged purchases and sales of securities at Great Eastern, while Jeff Ramson was CEO. Note that Great Eastern itself was apparently not charged with any wrongdoing, nor was Jeff Ramson. But how could the CEO not know what was happening at his own brokerage business? Especially if people were seemingly getting beaten and stabbed along with all this other craziness allegedly going on? And how did Jeff then go on to promote numerous companies with SEC investigations and fraud allegations? You can make your own decisions but to me these are obviously not the type of people I would want to invest with or buy stock from.

Alan Sheinwald of SEC Lawsuit Infamy: Also Registered and Trying to Sell You His RTNB Stock

Alan Sheinwald runs Alliance Advisors, LLC, which was sued by the SEC for its participation as an unregistered securities broker for a Chinese reverse merger company that collapsed in 2009 with reports of fraud concerning its chief executive officer. According to the lawsuit:

“Sheinwald assisted China Yingxia and received transaction-based compensation in connection with two successful capital campaigns in which the Company raised approximately $10.7 million for US-based investors.” Further, Yingxia signed an “agreement that provided that, in exchange for $8,500 per month ‘credit to account of Alliance Advisors’ plus an allotment of China Yingxia shares, [Alliance] would develop, implement, and maintain an ongoing stock market support system for China Yingxia…”

Alan Sheinwald has also filed to sell 100% of his Root9 shares to anyone foolish enough to buy them.

Yingxia: A Sheinwald Wipeout

Root9 Technologies

Unsurprisingly, Sheinwald was also heavily involved in the Elephant Talk debacle that I exposed last year prior to its collapse.

Root9 Technologies

Based on this it seems obvious to me all investors should avoid any involvement whatsoever with any company that Alan Sheinwald and Alliance Advisors are supporting.

RTNB’s “Cyber products”: A Complete Joke And Upsetting To the Cyber Community

Root9 claims to have an advanced cyber security product offering, but has recently been exposed by insiders in the cyber community as being dubious. Specifically, famous cyber industry expert and security genius Brian Krebsrecently appeasr to have debunked claims made by Root 9 related to an alleged Russian cyber-criminal attack.

Given the questionable timing of Root9’s “hype machine” press releases while insiders register to sell stock. Let’s take a closer look at what is actually going on by looking at this as a timeline:

4/30/2015 and 5/1/2015: Root9 and the “A-Team” insiders file to sell vast quantities of shares with the SEC. Importantly, the prospectus says, “We will not receive any proceeds from the sale of these securities.” which means all of the shares sold will benefit insiders exclusively and not the company in anyway. This is a highly questionable move given that RTNB is badly undercapitalized and is burning cash at an alarming rate. If RTNB had such revolutionary cyber products then why are they in such a hurry to sell hand over fist at $1.75 and lower?

5/12/2015: RTNB releases a highly suspect press release touting Root, but which Cyber experts later debunked. From RTNB’s release:

“While none of the targeted organizations are clients of root9B, we felt it imperative to disclose the findings to them…” said Hipkins. That’s probably because these customers are using real cyber security products such as possibly those offered by Palo Alto Networks and FireEye! It’s absurd to me to think that a large bank such as any of those mentioned in the press release would ever think of using Root9. I would like to take this opportunity to dedicate a magical song by Aerosmith to the entire “A-Team” at RTNB.

5/19/2015: RTNB stock rallies close to the $2.50 preferred share conversion price (see below) set to unleash an avalanche of stock for sale and insider enrichment. Any unsuspecting retail investor purchasing shares at this price because of the original press release is immediately and severely bagged.

5/20/2015: Krebs thoroughly and completely debunks Root9’s absurd claims:

Unless the company (OTCQB:RTNB) is holding back key details about their research, their definition of APT can more accurately be described as “African Phishing Threat.”

But root9B appears to have scant evidence connecting the individual(s) who registered those domains to the Sofacy APT gang.

From what I can tell, the vast majority of the report documents activity stemming from Nigerian scammers who have been conducting run-of-the-mill bank phishing scams for almost a decade now and have left quite a trail.”

Where I’m from, that’s called RTNB getting pwned by the truth. Furthermore, I’ve heard of anti-phishing software: I get mine from McAfee and it costs me$4.98 per year.

Further quoting Krebs:

I wanted to know if I was alone in finding fault with the root9B report, so I reached out to Jaime Blasco, vice president and chief scientist atAlienVault – one of the security firms that first published the initial findings on the Sofacy/APT28 group back in October 2014. Blasco called the root9B research “very poor”. Actually, there isn’t a link between what root9B published and Sofacy activity,” he said. “The only link is there was a DNS server that was used by a Sofacy domain and the banking stuff root9B published. It doesn’t mean they are related by any means. I’m really surprised that it got a lot of media attention due to the poor research they did, and [their use] of [terms] like ‘zeroday hashes’ in the report really blew my mind. Apart from that it really looks like a ‘marketing report/we want media coverage asap,’ since days after that report they published their Q1 financial results and probably that increased the value of their penny stocks.”

In my view, there is just no reason to issue the type of press release that cyber security experts know is obviously inaccurate unless you are trying to blow out of your stock, which as we have seen, Root9 insiders are very aggressively trying to do right now.

Cyber Community has “never heard” of RTNB

Furthermore, there are some interesting comments from people who are actually in the cyber community in the article debunking RTNB‘s claims:

I live in Colorado Springs and we have a strong ISSA chapter here. I have never heard of this company. Looking at their website at their many “offices” really casts doubt, especially when they evidently have less than 50 employees. [Author’s note: A large number of these employees do not work in the Root9 cyber business at all, so really this number is much smaller than 50].”

I’ll ask the two questions on everyone’s mind:

Does RTNB even have a real cyber product?

  1. If the answer to 1. is “Yes,” then why are insiders trying to blow out of 10,000,000 million shares for their own benefit?

These questions answer themselves, in my view, but I would encourage all employees of the company to ask this question as well since I believe the majority of employees at Root9 are likely honest people unaware of the shenanigans that could leave them holding the bag.

RTNB Failing Internally: RTNB Employees State Management “Full of False Promises” with “No Niche”

To understand what is going on internally at RTNB, let’s take a closer look at Root9’s own employee internal sentiment based on glassdoor.com, where the company seems to have a 2/5 star rating from its own employees (emphasis mine):

“Cons: The good people that were initially convinced to join by fast-talking higher-ups have either left or are on the way out. Everyone has lost complete faith in the leadership team and realizes they are at bestfull of false promises or at worst delusional. The next deal is always “right around the corner” or “coming on fast,” but little ever materializes. The same goes for organizational changes. Management is opaque,…

Cons: The company has no niche, and because of this they have lost most of their technical talent. [-] Top level folks are full of open promises. During my entire time there, they were unable to follow through on most of their promises. [-] Lack of work. Went over 2 months without any operational work.

Cons: No overarching strategy or vision is present… “

Note these are comments from the people who make up Root9 itself and RTNB is a tiny company. In fact, RTNB’s CEO has a one of the worst employee ratings I’ve ever seen: a dismal 34% approval rating on glassdoor. In my view, there are likely to be a lot of innocent folks left holding the bag both in and outside the company.

Don’t take my word for it, I talked to RTNB’s CFO and he didn’t even know RTNB’s “cyber” product name!

Since RTNB’s “cyber” product is so obviously a bad joke while the cyber community and Root9’s employees are publicly upset, I felt compelled to double check with the company in case I missed something, how can there be nothing of value at Root9. I called Ken Smith, RTNB’s CFO to get more perspective on the paltry $4.07 million in shrinking, unprofitable cyber revenue and the company’s product claims.

I was told a large portion of “cyber” was actually a one-time low marginhardware installation, projects Root9 will be apparently moving away from going forward so it seems we can expect even more cyber revenue declines. Best I can tell, another component of revenue is largely what appears to me an old training and certification service for a product RTNB acts as a resellerfor. During our conversation, Root9’s CFO Ken didn’t even seem to know what the product was called! RTNB’s investor presentation is also literally one of the worst presentations I’ve ever seen in my life, full of useless blathering about the “TAM” and listing global issues without discussing what RTNB actually does in any useful detail and ZERO discussion of any of RTNB’s financials or investment aspects at all!

Doing more work, despite CFO’s apparent ignorance and vague company rambling, it appears to meRTNB’s cyber claims are also based on a product called Digital Shield,a product RTNB resells, and installs for other companiesand municipalities with a price point of $3,600 – Root9 is going to have to do an impossible amount of reselling this old “training module” to justify the current market capitalization of $134 million!

In my view, the level of incompetence here even rivals that of The KEYW Holding Corporation (NASDAQ:KEYW), another company with incompetent management and a failing cyber product I previously exposed here. Similarly, it seems clear both KEYW and RTNB are likely to fail and wipe out their shareholders.

Preferred $2.50 Share Conversion = No Upside for RTNB Stock

In 2011, Root9 issued 2,380,952 shares of Series C Preferred Stock to the Blech family for approximately $3 million. SEC filings show that these warrants convert automatically to 3 shares of common stock if RTNB trades above $2.50 for 30 consecutive trading days. Not only does this indicate massive dilution is coming if the stock ever does trade up, it means Root9 shares effectively have a ceiling already priced in. After the recent “questionable” press releases, the stock immediately bounced off $2.45, which I view as no coincidence. The stock that comes to mind for this type of selling pressure is Glori Energy (NASDAQ:GLRI), which I debunked last year and in which shareholders who ignored my report met swift and brutal capital losses, and in my view, will end up bankrupt alongside RTNB, KEYW, CDZI and others.

In connection with the Series C Preferred Stock, 3 warrants with an exercise price of $0.77 expire in 5 years from the issue date. The Series B Preferred Stock has similar dynamics except the shares automatically convert at a 1 to 1 ratio upon the stock price exceeding $2.50 on any given day. Together, both of these preferred classes of stock create a significant supply overhang and a ceiling in the stock price as millions of shares would be created and insiders would likely be ready to begin selling their shares to retail investors. As absurd as it is it ponder the idea of Root9 being worth $2.50 per share for the right to own a collection of lousy businesses operated by overpaid insiders with a history of fraud, I estimate that it would take years to liquidate the Series C Preferred’s in the open market in an orderly fashion. If liquidity were to dry up, for whatever reason, it could take much, much longer than that.

In my view, based on this incredibly generous preferred share capital structure, Root9 has basically given the company away to these highly questionable insiders. Based on all of the proceeding information in this report, I think it’s very clear that insiders are incredibly desperate for the stock to get to $2.50 by any means necessary so that they can convert their warrants for incredibly lucrative gains and enormous upside for themselves personally. Of course this means shareholders who are not part of the “A-Team” of insiders would get buried in a tidal wave of dilution, but hey, caveat emptor, right?! Don’t worry though, you would still apparently get a cyber security training course that helps detect phishing threats.

RTNB Fair-Value Analysis: Current -82.47% Downside, Shareholder Wipeout Likely

Perhaps the most absurd part of this whole debacle is that even if you assume RTNB is a “real” business lead by honest people AND the current trajectory of failure turns around, fair value STILL shows Root9 is worth a maximum of $0.337 per share for immediate -82.47% downside today.

Root9 Technologies

(estimate chart built by me)

RTNB Value Based on Acquired Business Purchase Price: -83.04% Immediate Downside

Another way to see what Root9 is truly worth is to look at the price RTNB paid for the businesses which currently make up RTNB. In my view, it’s clear they have overpaid for these businesses and destroyed capital, a view their own goodwill write-downs also support. However, even if we assume RTNB management are honest deal makers and the deteriorating businesses they have acquired are worth what they paid for them, RTNB still has -83.04% downside. Stated another way, how is it possible RTNB’s deteriorating businesses are suddenly worth 350-400%+ what they just recently paid for them?

Root9 Technologies

(estimate chart built by me off Capiq numbers)

Further supporting this fair value valuation, RTNB just recently last year was trading at ~$0.52 per share and since then has diluted investors considerably more and destroyed value with more overpriced acquisitions that enrich insiders.

My price target for Root9 is one hundred trillion Zimbabwe dollars, or $0.0000 per share but when all is said and done, I believe it is obvious RTNB faces inevitable bankruptcy.

Given the countless penny-stock wipeouts and fraud allegations this team has been involved in though, I believe the clear outcome here is that as RTNB fundamentals continue to deteriorate insiders will get even richer and the stock will go to ~$0. I believe this is likely why insiders are trying to sell their 10m RNTB shares right now and I would do the same if in their position.

Avoid the RTNB “A-Team”

Yes, RTNB has the “A-Team” alright – the A-Team of wipeouts, fraud allegations and shareholder lawsuits. RTNB clearly seems to me the most ridiculous cast of characters ever assembled at one penny stock, and I expect Root9 to be just another example in the long lineage of stock wipeouts these people have been involved with. I could keep going and write another 25 pages but there’s no point as the research seems clear: Sell RTNB shares.

Extreme caution advised for all and be careful out there in this market.