Eco Building Products Inc (OTCMKTS:ECOB) Drowning in Toxic Debt
Eco Building Products Inc (OTCMKTS:ECOB) registered quite a session on February 13. The ticker managed to shift more than $4 million worth of shares and gained a whopping 333%. The reason for the impressive jump was an amendment of the deal with The Home Depot which would result in more exposure for ECOB‘s products.
The ticker opened Valentine’s day session at $0.009 per share and everyone thought that getting out of the sub-penny levels was all but guaranteed. Instead of doing that, ECOB slumped back down and less than three weeks later, it was sitting at $0.0027 (pretty much back where it started). So, why did it fail to climb further?
There are plenty of reasons, actually.
For one, Moving Pennies sent out a no-compensation email after the huge jump telling us how excited they are about the stock performance. They also announced that they hold half a million ECOB shares and said that they’re not afraid to sell them. Then came a Schedule 14 form according to which, the authorized capital was being increased to 10 billion shares.
The company also published the reports covering Q4 of 2013 and Q1 of 2014 and they showed that investors didn’t really have much to be excited about. Here’s a summary of the most important figures as recorded on March 31:
- cash: $49 thousand
- current assets: $1.2 million
- current liabilities: $46.6 million
- quarterly revenues: $285 thousand (an 83% drop year over year)
- loss from operations: $2.4 million
You don’t need to be an expert to see that the company is not exactly thriving, but sadly, ECOB‘s financial woes aren’t even the biggest problem.
The company has a history of funding its operations through convertible notes. This is the primary reason for the increase in the number of authorized shares and it’s also the cause for the rather devastating dilution that the shareholders have been put through.
If you want to get an idea of how bad it is, you should consider the fact that back in May 2013, the number of issued and outstanding shares was hovering around 400 million. According to the latest 10-Q, it’s now closing in on the 3 billion mark. As is often the case, the creditors have the right to convert the debt into stock at some huge discounts and it’s pretty clear that so far, they are exploiting this advantage.
Unfortunately, ECOB‘s management team don’t seem to be doing anything about it. They said in the latest 10-Q that the number of shares that could potentially be issued as a conversion of notes amounts to more than 6.7 billion and since then, they have picked up some more toxic debt. All in all, there’s very little to lure investors in at this point.
And yet, yesterday, ECOB managed to log a dollar volume of around $426 thousand. The price went through some wild swings and finished the day with 3% in gains which is not exactly encouraging, but the respectable trade value suggests that investors are paying attention once again.
The reason for the increased interest is a press release that hit the wire about an hour and a half before the opening bell. It said that the company is about to fill a few purchase orders which, ECOB say, should boost revenue growth. But will this be enough to offset the effects of the catastrophic dilution?
We wouldn’t bet the farm on it. In order to satisfy the aforementioned orders, ECOB have signed a $3.4 million financing deal. Apparently, part of the proceeds will be used for the satisfaction of existing convertible notes, but at the same time, the new creditors will get some preferred shares which could be turned into common stock later on.
You can see pretty clearly that the dilution has eaten away a rather large chunk of ECOB‘s value. If they don’t manage to cut down on the stock issuance, the ticker could sink deeper. That’s why, treading carefully and considering all the risks is absolutely essential.
