Pink Sheets

Let's take a look at some of the companies audited by Sherb & Co. and their predecessor, Feldman Sherb. I'd like to know if these guys are crooked, or incompetant, or misunderstood, or simply wonderful.

These guys are still around. Their 10-K was filed late (because they did not obtain all information prior to the filing date and the attorney and accountant could not complete Mgmt's Discussion in time) on April 14, 2005.

Sherb actually had a pretty much unqualified opinion here. The 10-K includes financial information from Sept 1994 through Dec 2004, but they only audited 2003 and 2004.

In this 10-K, the balance sheet appears fairly strong in that about half the assets are cash (plus there's lots of marketable securities) and there are almost no liabilities. However total assets are only $5.2 million. In the income statement, revenues are $300K while expenses are... ready for this?... $28 million. In other words, at their current rate, they would burn through all of their assets in far less than a single quarter and Sherb & Co. has no doubts about them as a going concern.

Ok, so the cash flow from ops burn rate is only $13 million so it theoretically might take more than a quarter to burn up all their assets.

Here's the ProNetLink 10-K for 2000.
Feldman Sherb gave them an unqualified opinion on Sept 28, 2000. Looking at the balance sheet, ProNetLink had a current ratio of 1/6! Their revenues were $81K while their expenses were over $4 million. Yes, they were a development stage company, but there were already running a shareholder deficit (i.e. they burned through all $7.6 million of their money).

It seems insane for Sherb & Co to give them an unqualified audit opinion. However, before the 10-K came out, ProNetLink announced funding commitments of $3 million (from Collardeau himself, I don't know what the rule is for related party loans and going concern qualifications).

But later they did announce a $10 million equity line of credit with Corpfin.com (these guys must be idiots). Another announcement for $5 million from Waveland Capital.

Anyone reading the 10-Q released on May 21, 2001 would have seen that revenues were only seventy dollars (vs $24K in the prior year). Total current assets dropped to $41K. Total assets sank to $343K despite a large infusion of capital from Collardeau.

They announced bankruptcy on July 2, 2001.

ProNetLink lawsuit

The individual defendants told the public that the Company still had access to a $5 million line of credit and other capital resources at its disposal. These statements were blatantly false, as shown by the testimony of the Company’s Chief Operating Officer, David Walker, taken in connection with the Company’s bankruptcy proceeding in this District.
7. Nevertheless, the Company’s outside auditor, Feldman Sherb & Co., P.C. and its
successors named as defendants herein (collectively referred to herein as “Feldman Sherb”), together with non-defendant Philip Weiner (a partner of Feldman Sherb), issued an unqualified audit opinion, dated September 28, 2000 on ProNetLink’s financial statements that was contained in the Company’s annual report on SEC Form 10-K for fiscal year ending June 30, 2000. Feldman Sherb also authorized the Company’s use of this unqualified audit opinion in a Registration Statement the
Company filed with the SEC on May 4, 2001. Feldman Sherb, however, knew or recklessly disregarded numerous red flags showing that the Company had inadequate resources to sustain operations for 12 months, and accordingly should have at least given ProNetLink a “going concern” opinion, rather than an unqualified opinion on its financial statements. For example, according to the Collardeau Indictment, on March 16, 2000, defendant Collardeau sent instructions to American Stock Transfer to reissue 1,500,000 shares of Pro Net Link stock previously issued in the name of one individual (Eric Niger) and reissued in the name of another (Muriel Prochasson). Feldman Sherb ignored this red flag which should have alerted them to the defendants’ securities fraud scheme. Although securities fraud was rife at Pro Net Link -- as the Collardeau Indictment readily shows -- Feldman Sherb either knew of the fraud or recklessly ignored it.

and in case you think Feldman was the defendent and not Sherb...

Defendant Sherb & Co., LLP broke off from Feldman Sherb at some time at or after the Grassi merger.

According to the complaint, ProNetLink was formed by defendent Jean Pierre Collardeau in July 1997 (he eventually pled guilty to fraud worth $20 million). It did a reverse merger with Prevention Productions Inc. a Nevada corp.


Their last filing was an NT 10-K which says they'll be late filing the 10-K. The reason was "Important information needed for the filing is not yet available." That was March 31, 2003. We're still waiting. In the section where they're supposed to indicate whether or not it is anticipated that any significant change in results of operations from the corresponding peroid for the last fiscal year, they said no.

They filed an 8-K before this indicating the company would issue "23,242,200 to Dreamwind LLC". 23,242,200 what? Magic beans? Of course they mean shares of stock because later they say it will results in Dreamwind owning 34 million shares due to having acquire blah blah... there's a terribly complex ownership structure that leads back to the CEO.

They exchanged 23 million shares of stock for $1.7 million worth of Dino Babies animation cels. I'm sorry, but I don't believe such a thing could exist: finding 1.7 million people to buy 1 cel each for $1 or finding 170,000 people to buy $10 worth of cels or whatever.

In the last 10-K [2001] issued by the company, Feldman Sherb was the auditor with an unqualified opinion on the company. The current ratio is around 2. 2/3 of the assets are real estate investments. The gross profits are $337K while the costs and expenses are $3.6 million. But revenues increased from $84K in the prior year to $922K. The company lost $3.2 million which is half of the remaining assets of the business. But cash flows from ops only lost $300K of cash while they borrowed $712K.


These guys are still around. Their latest 10-K was filed on Sept 28, 2005. Sherb & Co signed Sept 27, 2005. OMG! They actually gave these guys a "going concern" qualifier. But all it says is...

The Company has incurred significant losses and has a working capital deficiency

Let's see what it takes to get one from Sherb.

Assets are $4 million. $1.6 million in cash. $2.1 million intangibles.
Current ratio is 1/3.
The shareholder deficit is almost as large as the total assets.

Revenues are $430K (down from $533K). Gross profits are $55K. Expenses are $2.8 million. There's a $3.9 million loss on debt restructure. Net loss is $7 million.

Operations ate up $1.8 million in cash. They invested $279K in "patent protection". They borrowed at net $3.6 million, pushing $1.1 million in short-term debt into long-term debt.

Sherb's wording seems a bit weak, but it's better than nothing.


10-K/Amended They just engaged Sherb & Co on June 14, 2005. I just noticed their audit fees are only $17,500. Sherb gave these guys a "going concern" qualifier, which is not surprising.

the Company had a net loss of $428,592 for the year ended July 31, 2005. This raises substantial doubt about its ability to continue as a going concern.

Total assets: $48K
Total CURRENT liabilities: $4 million
So current liabilities are nearly 100 times larger than all assets combined.
They have a gigantic shareholder deficit.
Sherb is certainly correct about the loss.
prior amended 10-K still has the going concern qualifier
The original 10-K seems to have no auditor opinion. The prior auditors also only had a going concern qualifier.

They withdrew this SB-2 statement. No explanation. Feldman Sherb & Co. was the auditor for 2000 and 2001. The principal accountants left that company to start Sherb & Co. On May 11, 2002, they dismissed Grassi (who acquired the other part of Feldman Sherb & Co) and hired Sherb & Co. for 2002 and beyond. However, in that SB-2 prospectus, Sherb invokes the "going concern" qualifier and mentions that 2003 had been restated.

During the fourth quarter of 2004, the Company re-evaluated its prior accounting treatment for the acquisition of Airport Network Solutions, Inc. with regard to the convertible note issued at closing. As a result, the Company recorded a beneficial conversion of $200,000 on this loan which resulted in a reduction to "Common stock to be issued for settlements" and a corresponding increase to "Additional paid-in capital".

The current liability about common stock to be issued for settlements shrank by $200K along with the shareholders' deficit. I can't tell if it's fishy or not.

They amended the SB-2 with updated financial info. The thing is totally different so I can't really diff it.

They acquired Wise Technologies, also from Warwick, Rhode Island, for $2 million in stock, but get this: Sherb & Co was their auditor, too. Sherb gave Wise a "going concern" qualifier. The total assets of Wise was only $236K. Revenues were only $345K and gross margins were practically zero. So why did ICOA pay 10 times book value, and nearly 6 times sales for Wise?

These guys just reached profitability in the latest quarter and gave up a bunch of stock to the participants in celebration, presumably. But cash flow from ops is terrible and burned up $1.26 million on revenues of $2.7 million in the 3rd quarter.

In the amended 10-K, Sherb's audit fees actually decreased from $36K in 2003 to $26K in 2004. Sherb gave them a "going concern" qualifier. They lost $4.3 million on $2.8 million in revenue with $5.3 million in assets and a $3.4 million deficit.

These guys also got a "going concern" qualifier in the last 10-K back in 2002. But this one has a lawsuit associated with it.

The Complaint alleges that the Independent Auditor Defendants, Slayton (auditor for fiscal 1999) and Feldman Sherb (auditor for fiscal 2000) falsely represented that year-end results had been presented in compliance with generally accepted accounting principles (“GAAP”) established from an audit that was supposedly operated pursuant to generally accepted auditing standards (“GAAS”). Moreover, it is further alleged that LMG falsely stated that it had received commitments for outside funding. Additionally, LMG deceptively represented that backlog orders for its outdoor media projection systems had increased by $20 million.

Some more detail:

(a) booking sales that later had to be reversed; (b) failing to account for escalating costs and non-salary based compensation; ( c) misclassifying inventory as capital equipment; (d) failing to account for expenses incurred by LMG which were paid by related entities in the period incurred; (e) failing to book expenses due to the settlement of debt with related parties; and (f) substantially understating interest expenses.

But the claims were dismissed with prejudice.

On May 7, 2004, all claims in plaintiffs' consolidated amended complaint were dismissed as against defendant Feldman, Sherb & Co., P.C., with prejudice, which plaintiffs moved to appeal.

Here's the actual claim. Feldman Sherb became auditors on Dec 2000.


At some point, LMG claimed backlog orders had increased by $20 million. In the next two years, revenues never even came close. LMG eventually disclosed that all that backlog was from a single company, Amplified Light Technologies which was controlled by the CEO's brother, which relationship was not disclosed.

The fiscal year 1999's net income was overstated by 500% according to restated financials. Expenses were understated by 250%. Q1 2000 sales were overstated by 49%. SG&A was understated by 295%. This continued on during 2000. Feldman Sherb was the auditor for 2000's results.

I got this from this page on Siliconinvestor.com

The second auditor, Feldman Sherb, successfully applied to have the case against it dismissed. In a December, 2003, decision, U.S. District Judge Richard Owen wrote that while Feldman Sherb could have been more thorough in its audits during the three months it acted for Light Management, the auditor's conduct was not "highly unreasonable" to the point where a class-action lawsuit was in order.

Perhaps you get what you pay for. What this tells me is what I already know: you must pay very close attention to red flags in these obscure investments.

Here's the most recent 10-K. These guys are still going. BDO Seidman were the auditors for years 2003 and 2004. Sherb was for 2002. Sherb notes that the 2002 statements have been restated. Sherb raised substantial going concern doubts in the 2001 statement.

During Q3 and Q4 of 2003, the company re-evaluated its statements for 2001 and 2002. Uh oh. Sherb was dismissed on Dec 17, 2003 and BDO Seidman was selected. It seems to me that BDO was the one who found the problems and caused the re-statements. The company had BDO look over the tax returns of 1997-2000, prepare the 2001 and 2002 tax returns, and consult with management on the tax provision for Q3 2003. I suspsect BDO found the issues and brought them forward, then the company probably decided to throw out Sherb.

The fact that they brought BDO in probably means that they already had issues with Sherb or were suspicious.

Sherb was consulted about the issues and agreed.

The proxy statement says audit fees for 2001 were $55K (page 7). But 2 months later this changed to $57K (page 6). Look at page 33 of this proxy statement for 2003. You'll see a very telling table of audit fees. While Sherb is still doing audit work of $72K in 2003 and $12K in 2004, BDO's audit fees are huge. $351K in 2003 plus $137K in audit related fees, $207K in tax fees, for a total of $695K in 2003 and $586K in 2004 (as they probably got into their groove).

The data here seems to suggest that Sherb are cheap accountants who are not particularly very good. This case doesn't seem to be at all sinister, just damn cheap-ass accountants, which is merely an opinion and not fact. This matches Judge Richard Owen's decision regarding Light Management above.


Sherb started auditing these guys in 2004, taking over from Daszkal Bolton LLP on Feb 13, 2004. This 8-K actually gives a reason for the switch: cost.

The Company engaged Sherb & Co., LLP ("Sherb") as its new independent accountants as of February 13, 2004 as the Company's Board of Directors determined that it would be more cost effective and efficient using the services of Sherb.

I swear I didn't cheat and look ahead to this before writing the stuff above. Daszkal Bolton had no disagreement.

Audit fees [page 29] for 2003 were $29K, for 2002 it was $19K (and that was too much???).

Audit fees [page 36] for 2004 were $29.6K, which is even larger than what Daszkal Bolton charged. But fees everywhere were going up even more. This would make sense since they had audited related fees in 2004 of $18K (none in 2003). As a check, Daszkal Bolton audited 99 Cent Stuff (sec) and the audit fees [page 11] were $55K for 2004, $51K for 2003. Audit related fees were $23K for 2004 and $21K for 2003.

The business is still going. In the latest 10-K, Sherb gave them a "going concern" qualifier.


Here's their most recent 10-K. Audit fees for 2005 were $32K paid to Sherb. Radin Glass & Co. audited 2004 for $27K. Tax fees for both years were $4K to each company. Both auditors gave unqualified opinions. Results improved in 2005 and the company had both profits and positive cash flow from operations after capex or depreciation. 2004 had profits but small negative cash flow from ops.

The CEO issued a very good note to shareholders type press release.

One question that Shareholders often ask is "how much sales and income growth will occur, and when?" Unfortunately, this is not easy to answer for a business like ours. We have gone beyond selling mainly smaller nozzle systems in the $5-$10K range, to selling large systems in the $40-$250k range as well, so having one or more of these large sales in a given quarter can have a large impact on the results, and the apparent quarter-to-quarter growth of our business. Shareholders have come to expect corporations to issue guidance on sales and income for upcoming quarters, with the implicit goal of seeing a smooth and constant growth forecast for each quarter. Yet this practice can lead to a short-term focus to "make the numbers", as opposed to a healthier longer-term focus on growing the business.

This was weird. They kept doing a registration, then withdrawing it (here) from 1998 to 2002. The first time didn't have any audit opinon. The second one had Feldman Sherb giving an unqualified opinion, which makes no sense. The company lost $10.8K in 1998 and $12.6K in 1997. They only had $3K in assets (pretty much all cash and all equity). They had NO REVENUES. Cash flow was only the $10K loss, nothing else was going on. They were claiming to be a development stage company, but I don't think that matters for a "going concern" qualification, no?

When CasinoBuilders attempted yet another registration, Sherb audited the results of 1998 and 1999. This time they added the "going concern" qualifier.


They just released their 10-K three days ago on Dec 28, 2005. The auditors are Rothstein, Kass, & Co. Audit fees were $48K in 2005, $21K in 2004.

They were the auditors in 2004 also, and 2003 and 2002 and 2001. The 2003 fee was $23K.

Ok, they dismissed Feldman Sherb on Aug 14, 2001. This caused them to be late in filing their 10-Q.

The Company is in the process of changing its independent certified
public accountants. As such, the Company hereby requests additional time to prepare its financial statements for the quarter ended June 30, 2001. Further, the Company hereby requests additional time for its new independent certified public accountants to review the Company's financial statements as required by Item 310 of Regulation S-B.

This was their first 10-Q. They had done a registration in June 2001. Their original prospectus had to be amended 1, 2, 3, final/4 times, the earlier ones were known to be preliminary.

Feldman Sherb audited the prospectus financial statements with an unqualified opinion. The assets were almost entirely construction in progress. Almost no liabilities. They had no revenues and costs of $20K. They only had $8.7K of cash and current assets. But the offering would be raising cash.

It looks to me like Feldman Sherb was found to be incompetant or unfit for some reason when it was time to do the first financial statement so the company replaced them, causing a delay in the financial statements.


The last thing we heard from these people in 2002 was that they'd be late in filing their 10-K.

The registrant cannot, without unreasonable effort and expense, file its 2002 Form 10-KSB within the prescribed time period because the registrant and its accountants are pending additional financial information necessary for finalizing its financial statements that will be included in the registrant's Form 10-KSB.

Additionally, the registrant currently has insufficient operating capital to fund completion of its Annual Report on Form 10-KSB. The Registrant is currently seeking additional financing. Accordingly, the registrant requires an extension for filing the Annual Report with the Commission.

We stand silently over the accident scene wondering, how did things get to this point? What happened?

The latest 10-Q shows a balance sheet with current ratio approaching 1/10, net losses consistently greater than revenues, but yet a strongly positive cash flow from ops. The estate of a former principal officers filed suit accelerating payment of a note due.

Let's go back to the most recent 10-K. Feldman Sherb gave the company a "going concern" qualifier.

..the Company incurred losses of approximately $5,712,000 and $3,195,000 for the year ended June 30, 2001 and for the six months ended June 30, 2000, respectively. Additionally, the Company had a working capital deficiency of approximately $1,125,000 at June 30, 2001. These conditions raise substantial doubt about the Company's ability to continue as a going concern....

In the prior year, for results of 2000, they gave an unqualified opinion. In that year, the current ratio was close to 1. But the net loss was $3.2 million. The comprehensive loss was $4.8 million, while remaining equity was only $4.4 million and total assets were $8 million. However, they almost had a positive cash flow from operations due to using common stock for services (ah, the glory days of the stock bubble!). They sold $3.1 million in preferred stock and overall they had a net increase in cash.

I suppose they can get away with this one.


An australian company filing 20-F statements. Feldman Sherb were the auditors up to 2002. A BDO auditor took over in 2003 and 2004. CityView switched to Sherb & Co, so you can't blame anything on Feldman here.

The 2002 20-F. BDO Chartered Accountants are the auditors for Australian results while Sherb & Co do the US obligations. Sherb gave them an unqualified opinion. They lost $9.3 million on $595K of revenues due to writedowns and provisions. They had lost $4 million in the prior year and $5.5 million in the year before that. The balance sheet had been ok, but deteriorated as nearly half the equity disappeared.

The 2003 20-F. BDO were the auditors. Their opinion said...

Without qualification to the opinion expressed above, attention is drawn to the following matter:

As disclosed in Note 10, the ultimate recovery of the loans amounting to
$7,952,187 from Medco Madura Pty Ltd and Medco Simenggaris Pty Ltd are dependent upon the future development and successful exploitation or possible sale of the underlying areas of interest.

In that year, they lost a lot less money (only $1 million) and things seem to have stabilized. Maybe Sherb's unqualified opinion wasn't so bad?


Most & Co are their auditors now, with a going concern qualifier in the latest 10-K. They had $3K in cash and $29K in somewhat depreciated PP&E. But they also had $63K in accrued liabilities and a $31K shareholder deficit while losing $66K for the year. They did have positive cash flow from ops, but had to pay back an officer $7.9K.

The most surprising thing is that this plane crash type situation was less than a year after going public (apparently not raising money but dumping shares on an unsuspecting public).

Sherb audited the prospectus. Was it Motley Fool who said "prospectus" is Latin for "open you mouth and close your eyes"? To Sherb's credit, they gave the opinion a "going concern" qualifier.

As discussed in Note 3 to the financial statements, the Company had been inactive for several years and restarted operations in early 2004. It has no significant revenue producing engagements which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Here's something you don't see every day: Form RW-WD, Withdrawal of Registration Withdrawal Request. So they want to withdraw their request to withdraw their registration request.

Such Form RW referenced an incorrect registration statement number. A corrected Form RW is being filed with the Commission today.

Thankfully, the registration request that they incorrectly referenced in their withdrawal request which itself was withdrawn, was not audited by Sherb. No, they were the auditors who replaced Sherb a long time ago, probably because they were more competant than Sherb.

Here's the last 10-K audited by Sherb. Sherb gave them a "going concern" qualfier.

...the Company's need to generate cash from operations and obtain additional financing raises substantial doubt about its ability to continue as a going concern. Additionally, during April 2001, the Company expects to lose its major customer that accounts for approximately 80% of the Company's revenues. Management's plans as to these matters are discussed in Note 1.

Note 1: "Run awaaaayyyyyy!!!!"

...which means doing a reverse merger.

From what I see (and I didn't look that closely), Sherb seems ok.


Grassi, who acquired Feldman Sherb, audited the results for 2002. Feldman Sherb audited the results for 2001.


The last thing they filed was a late filing notice for their 10-K three days ago, saying they need more time to extract financial information from their overseas operations.

The prior 10-K (which was also late for unspecific reasons) was audited by Sherb & Co. with a "going concern" qualifier.

...the Company has an a accumulated deficit of $15,662,992 and has net losses and cash used in operations of $1,591,002 and $940,600, respectively, for the year ended September 30, 2004. This raises substantial doubt about its ability to continue as a going concern.

Their last 10-K was for 2001, audited by Feldman Sherb with a "going concern" qualifier.

the Company has a stockholder deficit and negative working capital of $4,313,064 at March 31, 2001, and has incurred significant recurring operating losses which raise substantial doubt about its ability to continue as a going concern without the raising of additional debt and/or equity financing to fund operations.

These guys were pathological serial acquirers.

There was an SEC investigation starting May 7, 1999 and they halted trading in the stock. At that time, Schnitzer & Kondub were the auditors. I don't see much at all in the 8-K statements about it, which seems very odd.

Feldman Sherb were the auditors for the last 10-K for 2001. They had a "going concern" qualifier.

The Company has incurred significant losses and as more fully described in Note 1Q, the Company anticipates that additional funding will be necessary to sustain the Company's operations through the fiscal year ending December 31, 2002. These conditions raise substantial doubt about the Company's ability to continue as a going
concern.

That last 10-K was amended later on. There was a big change in the equity statement starting with Dec 31, 1999. 1.2 million shares of preferred stock appears out of nowhere. Common shares decrease from 20 million to 237K. It's totally different.

Then there was a bizarre change of auditors. Feldman Sherb was dismissed on April 24, 2001. E&Y came on board. Jan 23, 2002 they dismiss E&Y and go back to Feldman Sherb. In May 2002, Grassi acquires Feldman and Sherb (accountants who had been doing the auditing) goes to Sherb & Co. The company switches to Sherb.

The CEO and CFO resigned as well as a director, then another director. And that was the last SEC filing, back in Dec 2002. But at that point, the latest 10-Q had shown a current ratio of close to 1/10 and a net loss of $13 million with $4 million assets and a shareholder deficit of $7 million.

Vermont Pure Holdings
Toilette and Douche were the auditors for the most recent 10-K. Before that, it was Grassi in for 2002 and Feldman Sherb for 2001. I'm not so concerned about anything that went from Feldman Sherb to Grassi, so I'll leave it at that.


Sherb & Co seem like cheap accountants that have been willing to OK situations that are truly horrifying. Call it the "Homer Simpson Safety Inspector Syndrome". I say: Don't trust these guys. Perhaps they screw up things more than usual, but it doesn't seem like they're particularly shady, perhaps just terribly negligent. You get what you pay for. However, they do seem to have gotten better over the last few years.

An important question to ask is: How much better is it to have Sherb & Co as an auditor vs having no auditor at all?

It seems dangerous to deal with obscure small public companies that are in financial trouble or even close to being in financial trouble. Objects in mirror can be worse than they appear, so I'd say Ben Graham's margin of safety is very important (always has been, always will be).

UPDATE mid-Feb 2006: I've seen two different people find this post based on searching for anything about Sherb and company. Take that for whatever it's worth.

UPDATE May 13, 2007: I'm not now, nor have I ever been a Canadian, eh? Now let me get back to running my shady hedge fund.

I had never heard of Optionable until about 10 minutes ago. I may look at it soon to see if it's all smoke and no fire (although that seems unlikely).

UPDATE May 13, 2007 later that day: I've looked through some details of Optionable and I must say I was surprised. I expect to post the results on Monday or later. If I owned the stock right now, I wouldn't panic.