Editor’s Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Not a week has gone by since the GankIt.com promotional banner ad started to appear on this and other financial website pages prompting a critical article of the investment opportunity, and lo and behold, another company ad has crept forward. Once again, rather than advertising the company's product or service, the promotional piece presents the company as an investment option. In the past, I have found banner ads a poor source of investment options, and initially feel this one is similar.
This article will introduce you to the company, Eternity Healthcare (OTCPK:ETAH), the most recent news that is garnering interest in the company, and review financial information, including recent reverse mergers, stock issuance, and debt settlements.
The company is in the medical device industry with technologies in "drug delivery, specialty pharmaceuticals and medical equipment." The historic sales of the company have been a needle-free injection system to deliver injectable drugs. However, recently the company has made announcements offering a gel-based cooling vest (December 2013) and most recently, the plan to develop a saliva based glucose monitoring test.
The latter announcement should garner the most interest, as the proposition of not having to stick one's finger in order to check glucose levels would be extremely attractive to anyone with diabetes. But, we should temper our expectations because Eternity Healthcare is not the only company working on such a device. And, although the company's February 4th news release via COMTEX stated, "Eternity Healthcare, which focuses on various aspects of diabetes management, including a needle-free injection device, will be the first company to focus on the development of an alternative glucose monitor test.", this is not entirely accurate.
The presence of glucose in bodily fluids other than blood, (saliva, sweat, and tears) has been known for at least 50 years. It's taken a while, but Brown University actually announced in 2012 that they had developed a method of measuring glucose levels in saliva. And, more recently, a Connecticut-based health startup Quick LLC introduced its glucose monitoring device that uses saliva, the iQuickIt Saliva Analyzer.
Reviewing the most recent financial statements from the company's last quarterly filings do not seem to raise an immediate red flag. The company had more than half a million dollars in the bank, and less than $10K in liabilities. That means that there is already positive shareholder equity. For a development stage company, this information initially abates liquidity or working capital concerns.
The income statement, on the other hand tells a different story. Revenues have been lacking, and only amounted to $16 for all of fiscal '13. The most recent quarter's numbers have been just as light, while losses continue to mount. Since agreeing to distribute the needle-free drug delivery system (a year and a half), the company has only generated a net $31K in revenue. For a development stage company, the lack of revenue growth does raise some concerns, but not enough to drive potential investors from the room.
Reverse Mergers and Dilution
The real concern for this author has been the reverse mergers that have brought us to this point, and the high level of dilution that has occurred to bring the balance sheet up from a shareholder deficit to where it is today.
The company was initially Kid's Book Writer, Inc, but purchased 100% of the equity of Eternity Healthcare Inc. The purchase was done with 60MM shares of stock, resulting in a change in control, or in other terms, a reverse merger. On top of this, last October the company entered into an agreement (Binding Letter of Intent) to purchase all outstanding shares of Global Medical Equipment of America using 40MM shares of ETAH stock. At the time of this writing, I have not found an announcement or 8K filing that the transaction has been consummated, therefore, I assume it is still pending.
And that is not the only dilution that current shareholders are facing. In order to alleviate the shareholder deficit and settle outstanding debts, the company agreed to distribute 1.7MM shares to debt holders and sold an additional 1MM shares in a private placement at $0.50 per share. The aggregate debt canceled was more than $862K, and $500K in cash raised. The net result is the balance sheet that we looked at above.
The Risks and the Reward
Potentially, given the merger with Global Medical, the company could realize a significant increase in revenue. The 8K filed last October disclosed the company's 2012 revenue at more than $10M. However, there was no discussion of margins or net income. Therefore, we do not know if that level of revenue was profitable. Additionally, we do not know if Eternity Healthcare is going to be able to retain Global's customer base. Within the highly competitive marketplace in which the companies operate, there is very little switching cost.
However, the biggest risk that I see is the extremely thin trading volume. Most days this company doesn't even trade, and the average trading volume over the past 50 days has been less than 1000 shares. With that kind of liquidity, per share prices are bound to be extremely volatile.
Under most any circumstance, I wouldn't consider buying stock in a company that is advertising itself in a banner ad on the internet. To me, it's too much like buying jewelry from some guy in a trench coat on the subway, or picking up "new" software at a flea market.
Sometimes you look at these companies and run screaming from the room, arms flailing wildly. Other times you look and shrug, then just walk away. Such is the case with Eternity Healthcare. Thanks for the banner ad, but I think I'll pass.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.