Strengthened balance sheet
BreedIT Corporation (OTCQB:OTCQB:BRDT) announced earnings on March 31, 2014 for fiscal year 2013. The company ended the year with a net loss of $1.45 million and $487,550 in equity as of December 31, 2013. The increased equity is due to issuance of shares by the company. The balance sheet has strengthened since the company's last 10-Q filling, which showed assets of $20,742.
The following is the latest balance sheet that the company has provided us:
The company's assets have increased to $656,278. This is driven by higher cash and cash equivalents, which in turn have been driven by issuance of stock options, warrants and shares. The company's liabilities have also increased to $168,728. This is primarily driven by higher accounts payable and accrued liabilities. The increased assets have led to increased shareholders' equity, which as of December 31, 2013 had increased to $487,550.
The increased equity has primarily been due to dilution, which more than trade-offs the benefits of increased equity for shareholders.
In my first article on the company I estimated that the company's fully diluted shares outstanding amounted to more than 111 million shares, which is considerably higher than the basic shares outstanding as of the last 10-Q of approximately 52 million. I furthermore wrote the following in my previous article on the company:
"The company's authorized shares are 500 million, so we might see management continue issuing stock to them [insiders] in the future."
I was right. The company has continued to issue shares to insiders at a discount to the market price of the stock.
The following transactions was described by the company in its 10-K filling with the SEC:
"During the period from February 19, 2014 to March 4, 2014, the Registrant granted a total of 5,050,000 stock options (the "Options") to the Registrant's 4 directors/officers. The Options, which vest over the period of 3 years in 12 equal quarterly installments, are exercisable at a price of $0.05 per Share"
The following chart shows the development in the stock price of BreedIT Corporation in the period February 19, 2014 to March 4, 2014 and compares it with the exercise price of the newly issued options to the company's insiders.
As the chart above shows, the stock price of BRDT was several 1000% over the option exercise price. This stock option issue to 4 of the company's directors/officers doesn't incentivize them enough to create long-term shareholder value, as the directors/officers are getting such a low exercise price.
The company has also announced two other transactions where warrants and options were issued with a very low exercise price. The company granted 30,000 warrants exercisable at $0.6 to "an entity for bona field services" on Mach 12, 2014. The stock closed at $0.67 on March 12, 2014. So, this transaction hasn't been as dilutive as the ones that preceded it.
The second transaction was 850,000 stock options that the company granted to its Chief Technical Officer exercisable at a price of $0.05 on April 10, 2014. The stock closed at 0.49 on April 10, 2014.
The least the company could do is to grant long-term (5 year- 10 year) stock options with an exercise price significantly above the company's current share price. This would align management's interests with shareholders' interest and incentivize management to create long-term shareholder value.
I have updated the table that I provided in my previous article on the company, so it now includes the recent equity issuances. The following is the updated table:
As the table above shows, the company's fully diluted share count has increased to 132,373,055, which at Thursday's closing price corresponds to a market cap of $59,567,875.
Conclusion and final remarks
BreedIT Corporation continues to trade at high multiples, despite the 48% drop in share price since I published my last article on the company, where I advised investors to sell the shares and wait for proof of business concept.
We haven't seen of proof of business concept yet, but the company's recent joint venture with Sheifa Le'Haim is surely one step closer to proof of business concept.
The company's strengthened balance sheet is a positive for the company, but this more than traded off by the continued dilution of shareholders, by granting and issuing securities with exercise price heavily below the trading price of the stock. It would be better for shareholders if the company had made at-the-market offerings instead.
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.
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Editor's Note: This article covers one or more stocks 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.