On January 28, 2013, the Fraud Research Institute published its first research report on a penny stock in the graphite sector that was subject to a massive stock promotion campaign. This promoted penny stock was the perfect subject for our first investigation: zero revenues, $2,212 total assets and a very questionable stock promotion that included the dissemination of unsolicited commercial emails (SPAM) are all perfect ingredients for an inevitable collapse of a pre-revenue mining company valued at more than $100,000,000.
Since the publication of our research report titled USA Graphite: Why This $100 Million Company Could Fall By 85% Or More, the stock has dropped by 79% in a mere 8 trading days.
Our current investigation began when we noticed an increase in the trading volume of a development stage company led by a president with a checkered career as an executive in the automotive industry. More specifically, he was very closely involved with a number of automotive companies that eventually went bankrupt. Now this individual is leading a technology-oriented automotive company and he has brought aboard several other executives who have been involved in their own failing automotive ventures.
After the discovery of a stock promotion campaign with an astonishing $3,000,000 budget that has greatly contributed to this stock's recent explosion from $0.75 to $3.61, we are very certain that this current investigation will be an equally successful win for both experienced traders that take the trade and also for traders just starting to get their feet wet in the market because the facts presented in this 2-part series will very likely save them from a potentially catastrophic loss.
As an added bonus, after reading all of the promotional materials on this company and realizing how brutally dishonest this campaign is versus many others we have witnessed recently, our team will get a lot of satisfaction from publishing a very in-depth, factual 2-part series.
Considering the focus of our current investigation and how it is arguably the most exciting short-biased trade setup we have come across in over twelve months, it is time we begin picking apart the overly hyped and fundamentally lacking high flying promoted penny stock doing business as Echo Automotive (ECAU.OB).
It is our team's opinion that Echo Automotive presents a very exciting opportunity for short-biased traders because there are a massive number of big red flags surrounding this company and also because the stock has recently peaked and rebounded, so the inevitable drop back down to a rational valuation is quickly approaching - almost exactly like we recently experienced with USA Graphite Inc. (USGT.OB):
- The annotated chart above depicts the price movement across the entire stock promotion from start to finish for USGT.OB. You will notice that the campaign from start to finish is broken down into A, B, C & D;
- Between A & B the stock promotion is underway and the price usually trends higher;
- Between B & C the peak is reached and the stock plummet;
- Between C & D there is a modest rebound; and
- Once the stock begins to show weakness around point D then you can reap massive % gains.
If we look back at our last investigation, short sellers that entered the trade at the beginning of weakness during point D have been able to generate profits greater than 70% within 8 trading days.
ECAU.OB is incredibly exciting because it is trading at a much higher price per share and it traded over $80,000,000 total volume during the past several weeks. We believe this is important because it is likely many more sellers will panic once they see weakness at point D.
So one of many reasons for short sellers to be excited to learn more about ECAU.OB is because it is trading in a very similar fashion to the way USGT.OB did prior to the publication of our report.
The team's goal with USGT.OB was to wait for the initial run of the promotion (A-to-B), wait patiently through the first big collapse (B-to-C) and then once it is rebounding towards D it is time to take a position.
This is precisely what I believe will make a lot of us money this time around:
Wait patiently for it to move towards point D and short the unbelievably overvalued $155,000,000 company that generated $6,000 in sales and booked a $1,480,000 net loss during the 3 months period ended September 29th 2012.
After Echo Automotive's initial run from $0.75 to a high of $3.61, the stock fell to the low $1.20's. Since then it has rebounded all the way back to $2 - making now the precise time to short this promoted penny stock because it is on the very tail end of the campaign and is very likely to fall apart sooner than later.
So let us get started and look into the reasons why we have been very confident for a long time that ECAU.OB would end up being a profitable trade setup at some point in time:
On The Surface
Immediately at the start of our investigation we noticed a number of similarities that, in our team's experience, fit the characteristics of a penny stock that is likely to be the subject of an eventual stock promotion:
- Recent public market entry via reverse merger with a "shell status" company that had very little in the way of a real business;
- Subsequent name and ticker symbol change along with the resignation of former officers and directors and the appointment of a new management team;
- Execution of a recent five-for-one forward-split during a time when insiders and affiliates owned a large majority of the trading float; meaning that the total number of shares outstanding increase by a factor of five while the share price remains the same;
- Development of a corporate website that one could reasonably argue is marketed more towards potential investors rather than customers or business partners;
- Production of a well-crafted investor relations video and presentation emphasizing the opportunity and the future business prospects while leaving out most company fundamentals; and
- A substantial increase in the stock's trading volume after months of very little activity.
As our investigation progressed, we identified a number of red flags pertaining to the history of the company, the company's former sole officer and director along with the current officers and directors. Some of these red flags relate to the internal business itself while others pertain to actions made by past and present officers and directors that fall outside the scope of their involvement with Echo Automotive.
We strongly believe that a number of these red flags could arguably be considered material information despite the fact that none of them appear in SEC filings.
The Tipping Point
There are probably hundreds if not thousands of OTCBB companies with a large number of red flags and it is impossible to investigate them all. In this instance, the tipping point that led to our full blown investigation was the discovery of an online tout sheet backed by an alleged $3,000,000 budget that can be viewed at ECAUReports.com.
Shortly after the $3,000,000 stock promotion campaign was discovered, shares of ECAU.OB soared from $0.75 to a high of $3.61 with over $75,000,000 worth of stock changing hands during the 19-day span. Promotions of this magnitude are very rare so our team made the decision to allocate a large majority of our resources towards this investigation in order to shed light on every identifiable fact related to:
- The company's internal business environment including the history of the management team; and
- The $3,000,000 stock promotion featuring Chuck Hughes; the carnival-barking editor of the Micro Cap Research Report with alleged research led him to the conclusion that ECAU.OB "could fly past $10.00 by mid-year!"
In light of the fact that there was not a single new material event disclosed that would have been likely to alter the fundamentals of the business and its intrinsic value, it is not at all unreasonable to attribute the meteoric rise in share price to Echo's stock promotion campaign. Therefore, we expect that once promotional activities cease, then the stock will retrace back towards its original levels prior to the start of the promotion ($0.64).
However, the Fraud Research Institute believes that an eventual 64% decline from prevailing market prices is too conservative of an estimate. This is because it is based on the assumption that Echo Automotive traded with a fair valuation prior to the start of the campaign and will continue to trade with a fair valuation over time. As we will prove in upcoming sections, the company's market cap was extremely lofty before the promotion got underway and if the market corrects this lofty valuation over time, then shares could drop by an amount much greater than 64%.
In order to try and accurately value Echo Automotive prior to the promotion, it is very important to look all the way back starting with the inception of the company.
The company was originally incorporated in the state of Nevada on September 2, 2008 as Canterbury Resources, Incorporated. At that time the company was a pre-exploration stage company engaged in the acquisition and exploration of mineral properties. The Company owned no physical property although it acquired a 100% interest in a mineral property referred to as the Kaikoura Property from Plymouth Enterprises Resources, Inc. for consideration of $5,000.
At the time of Canterbury's incorporation, their corporate office was listed as 69 Stanley Point Rd., Devonport, Auckland, New Zealand, which also happened to be the personal residence of their sole officer and director - Bruce A. Wetherall. The company incurred a $300 monthly expense for its use.
On December 30, 2008, Canterbury completed a private placement whereby 11,500,000 shares of common stock were sold to Bruce A. Wetherall at $0.001 per share for proceeds of $11,500. Wetherall sold 5,000,000 of his shares to some private investors for $0.01/share shortly thereafter. Wetherall's 6,500,000 shares gave him a 56.5% ownership of the company's issued & outstanding shares.
Bruce Wetherall was listed as the mining company's sole officer and director although the S-1 registration statement discloses the fact that he does not have any formal training as a geologist.
A quick glance at Canterbury's balance sheet and income statement from the company's annual report for the fiscal year ending December 31, 2009 would lead any rational investor to believe that few, if any, mining operations took place during that time:
(click to enlarge)
Above, you will notice that Canterbury did not generate any revenues in 2009 and its exploration expenses totaled $0. Combine the company's lack of operations with the zero assets recorded on the balance sheet and it is very fair to say that Bruce A. Wetherall was either unwilling or unable to execute Canterbury's exploration business since its inception.
In our experiences, it is almost always the latter. Public shells like Canterbury Resources make some of the best stocks to be promoted because the float is ideally in the lands of a small # of people.
Beyond acquiring the Kaikoura Property from Plymouth Enterprises Resources, Inc. for consideration of $5,000, Canterbury had very little in the way of a bona fide business with real operations and it is not unreasonable to suggest that Canterbury was created merely to act as a vehicle for a reverse merger.
Echo Automotive: The Surviving Public Company
On May 16, 2012, Canterbury entered into a letter of intent with Controlled Carbon, LLC dba Echo Automotive to execute a reverse merger whereby Canterbury acquired all of the issued and outstanding units of Echo in exchange for the issuance of approximately 52,500,000 shares of common stock to the members of DBPJ Stock Holding LLC.
According to the Arizona Corporation Commission, members of DBPJ Stock Holding, LLC consisted of Jason Plotke, William D. Kennedy, William W. Kennedy along with each individual's family trust.
Effective May 16, 2012, Bruce A. Wetherall resigned as the President, Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Secretary and Treasurer of the Company.
The newly formed Board of Directors would consist of Jason Plotke, William Daniel Kennedy, Jim Holden, Eric Crown and Daniel Clark. Plotke would take over as President of the company and Kennedy was appointed Chief Executive Officer.
Take a quick glance at the dissolution of DBPJ Stock Holding, LLC below. It is a subject we will cover in much greater detail in Part II but never forget that research will always pay off in this niche because it is unlikely that even 2% of retail penny stock traders are aware of this document:
Echo Automotive Inc. is a developer of technologies designed to convert traditional fleet vehicles into electric hybrid plug-in vehicles by adding a modular plug-in battery pack to an existing vehicle drivetrain. Its platform is marketed as the EchoDrive™.
According to the company's website, the EchoDrive™ can be easily bolted onto new and existing vehicles to reduce fuel usage by up to 50% in a cost effective manner that offers a rapid return on investment.
The EchoDrive™ platform utilizes technology owned by Clean Futures LLC through an exclusive worldwide license that was granted as part of the licensing agreement dated February 1, 2012.
Before we take a look at the company's current and former officers and directors, it is important to understand the vast number of competitors in the automotive plug-in conversion marketplace. These competitors have already made far greater strides than the company's EchoDrive™ platform, which is still being operated in "stealth mode" for a reason we cannot figure out. The corporate video on Echo Automotive's website alludes to a "radical and new approach for converting fleet vehicles into highly efficient plug-in hybrids" although there seem to be other companies that have made far greater advancements with very similar technologies:
- Wrightspeed, Inc. received a $5.8 million grant from the California Energy Commission to accelerate manufacturing of Wrightspeed's Route™, a retrofit powertrain for the medium duty commercial fleet market. Wrightspeed also raised $10 million in private investments during 2010 and 2011. The company uses electric drive with onboard power generation to make powertrains with unlimited range.
- SINOEV Technologies Inc. is an EV power-train company backed by Cleiner, Perkins, Caufield and Byers ("CPCB"). According to the Wall Street Journal, CPCB is one of the largest and most established venture capital firms in Silicon Valley.
- ALTe PowerTrain Technologies is a developer of electric and hybrid propulsion systems for use in the retrofit of light to medium duty fleet vehicles. According to the company's website, the ALTe powertrain retrofit takes 13 man hours to compete and results in an 80-200% improvement in fuel economy.
- Mission Motors creates powertrain solutions for hybrids and EVs based on its own technology and manufactured components.
Besides the tough competition in this sector, Echo Automotive's management team has been involved in several failed automotive companies and it makes us question how they can possibly expect this company to perform any different.
Part I serves as a primer so that everyone can understand why this is one of the top short-biased setups to come across our team's desk in a long time. This is a $155,000,000 company that just posted $6,000 revenues and a $1,480,000 loss for the most recent quarter.
- The competition is incredibly tough and ECAU.OB's competitors continue to make real strides forward on a daily basis;
- The fact that Echo Automotive licenses its technologies and focuses on the build out of platforms means that there is nothing patentable to prevent competitors from making nearly identical products;
- They are also in the very early stages and purport to stay in "stealth mode" until March; and
- The formation of the company since inception fits just about everything I look for when seeking out future large scale stock promotions.
In Part II we dig much deeper into the company with the goal to publish all the facts about this overvalued and underperforming company that investors need to understand.
We also take a look at some of the most blatant red flags that I have ever seen from one small public company.
It is already very clear to see how lucrative this one trade may be for anyone interested in short-selling the most irrational and hyper inflated stocks on Wall Street.
However, once you have a full understanding of all the red flags surrounding Echo Automotive, you will probably agree with my speculation that this will move south of $0.75 during the coming months.
Disclosure: I am short ECAU.OB.