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Ecosphere Technologies, Inc. (OTCMKTS:ESPH) Is Drowning In Convertible Debt

Ecosphere Technologies, Inc. (OTCMKTS:ESPH) Is Drowning In Convertible Debt
Written by
Chris Sandburg
Published on
July 14, 2016
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Very few sectors have been as volatile as the cannabis space across the last few years, as waves of recreational legalization across the US have given rise to what is essentially a brand new billion-dollar industry. This, of course, has brought with it a wave of companies, good and bad, looking to draw some of these billion dollar revenues towards their own operations. We've seen 1000% gains collapse in a matter of days, and companies with nothing but promises and a few press releases pick up tens of millions of dollars in market capitalization. They come, they go.Here's another one – Ecosphere Technologies, Inc. (OTCMKTS:ESPH). Where does Ecosphere fit in to the picture?Well, the company is up on the announcement that it just closed on a $1 million financing that will fund what it calls the "first phase" of a cannabis growing facility in Washington:

Proceeds from the issuance and sale of the Note will be used to fund the first phase of EDC’s Cannatech Agriculture Center, a turnkey agriculture growing facility to be constructed in Washington State incorporating the Company’s automated growing and patented water treatment technologies.

This sounds interesting, but there's an issue. It represents a complete shift in focus, from cleaning water using its proprietary technology to becoming a marijuana play.Why would Ecosphere want to do this? Well, we alluded to it in the introduction. Cannabis is a hot sector right now, and any association with the space is an opportunity to draw a quick wave of OTC attention. Ecosphere isn’t the first company to put out a release claiming a seemingly tenuous link to the cannabis sector, but it might be the latest.From a financial perspective, things don't look any better.The company brought in just $6.9K revenues during Q1, and chalked up a net loss of $1.7 million. At March 31, it had just $17K cash on hand. The company is operating on borrowed cash, and will be for the foreseeable future, and this means dilution is a major issue.

During 2015 and through the date of this Report, the Company received $1,954,000 from its principal lender which loan is convertible at $0.115 per share and due in December 2017

And that's just the tip of the iceberg. At March 31, Ecosphere had $3.8 million outstanding convertible debt, and seems to add to this on a monthly basis. January 2016, $300,000 convertible note issue. January 2016, $25,000 convertible note issue. February and March, 2016, $200,000 convertible note issue. March 2016, $29,000 convertible note issue.Essentially, the company is under a sea of convertible debt that could be massively dilutive if its share price raises just a little bit, and that essentially puts a cap on its valuation. Revenues aren’t there, capital reserves aren’t there and management is willing to switch focus entirely based on an industry trend (suggesting they are trying to pull in a quick windfall, perhaps to meet some of its mounting interest rate obligations).Who knows.All we can really say for sure is that there's very little to justify an allocation to this company, aside from a potential quick turnaround speculative shot in the dark. Even then, however, chances are you'll get left holding the bag.It's probably best to steer well clear.We're going to keep an eye on the way this cannabis growing facility plays out, and see whether Ecosphere can take advantage of the shift in focus to sort out its finances a little bit. Subscribe to our newsletter by putting your email address in the field below, and get our latest views on companies like Ecosphere going forward.Disclosure: We have no position in ESPH and have not been compensated for this article.

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