Coates International Ltd (OTCMKTS:COTE) Coughs Up an Exciting PR
On August 2, 2013, Coates International Ltd (OTCMKTS:COTE) came up with some exciting news. They said that a letter of intent has been drawn up with a Chinese manufacturer who had agreed to mass produce Coates’ CSRV industrial natural gas electric generator engines. They also said that “firm purchase orders” for as much as $57 million have been placed.
Investors were quite excited about the news. In a matter of mere days, COTE ran from less than $0.04 per share all the way to $0.054.
On Friday, the company issued another press release. They said that 5,000 of the aforementioned natural gas electric power generators will be manufactured and distributed to various clients. This time the orders are estimated to be worth an even more remarkable $90 million.
Naturally enough, investors are excited once again. On Friday, they traded more than $210 thousand worth of shares and they pushed COTE on an 8% surge. The only difference is, while the stock was hovering above the $0.05 a few years ago, it’s now sitting at just over $0.006. Why is that?
As it turns out, the “firm” purchase orders from 2013 weren’t quite so “firm” after all. In fact, COTE have yet to complete a sale of an engine that is equipped with their revolutionary valve train and record the revenues in an official filing. So far, the only income recorded in their reports come from amortization of a license deposit. And it’s not much.
Actually, the whole statement looks rather terrible. Here’s a summary of the figures recorded on June 30:
- cash: $107,831
- current assets: $256,762
- current liabilities: $5,462,396
- quarterly revenue: $4,800
- quarterly net loss: $4,024,135
The figures above don’t look like they belong to the company that has what it takes to turn the world on its head. At the same time, the press releases which tend to come to nothing put some additional question marks around COTE‘s credibility.
It would’ve been better if we saw the multi-million dollar deals in an 8-K form, but for some reason or other, the numerous optimistic promises from COTE‘s press releases usually don’t make it to the official filings. What you can see from the 8-K forms, however, is that the company is still relying heavily on toxic debt in order to fund its existence.
In July, an entity called Southridge Partners LLC agreed to purchase up to $20 million of COTE common stock over the next three years at a modest 6% discount to the market price. As we established from the 10-Q, COTE definitely need the money, and you can see that the terms aren’t too horrific. Instead of relying on this source of funding, however, the management team decided to issue some notes convertible into stock at much higher discounts (between 30% and 39%). These were added to the hundreds of thousands of dollars worth of toxic debt that was already outstanding and they present a massive threat to the stock’s future performance.
Of course, if COTE manage to materialize the massive purchase orders that they disclosed on Friday, they should have no issues repaying the toxic notes with cash. You need to think carefully about whether they can do it, however, especially in light of the company’s sketchy history.
And while you’re weighing the odds, you should probably bear in mind that during the first half of the year COTE issued nearly 435 million shares of common stock (about 45% of the O/S count reported on August 11) as a conversion of debt at an average rate of $0.0016 per share.
