Hydrocarb Energy Corp (OTCBB:HECC) Immobilized

There’s no market like the OTC Market. Here’s an example. While it is currently bouncing, the price of crude oil has had a rough ride over the last few months. Yet, Hydrocarb Energy Corp (OTCBB:HECC), an OTC oil and gas company, doesn’t seem to be affected by this at all.

In fact, it stormed out of the sub-dollar levels in April and, at least by penny stock standards, it’s been doing relatively well since then. That said, there are days when it seems a bit reluctant to move. Yesterday, for example, it went through a few wild swings in both directions, but it eventually came to a close of $1.67 per share (about 0.6% in the red). And that’s a bit strange considering the news that hit the wire about half an hour before the opening bell.

We’ll get to the news in question in a minute, but before we can do that, we need to open HECC‘s latest 10-Q and see what we have on our hands. The report covers the three months ended April 30 and it looks like this:

• cash: $90,261
• current assets: $1,195,369
• current liabilities: $7,134,423
• quarterly revenues: $1,139,278
• quarterly net loss: $3,456,582

Straight away, we can see that this isn’t your typical development stage penny stock company. Although it changed its name last year (it was previously known as Duma Energy Corp), HECC has been working on its oil wells for quite some time and it has managed to reach a point where the quarterly revenues are in the seven-figure range. Unfortunately, profitability is still nothing but a distant dream, and that, in turn, has led to some other problems.

The company was in need of some cash at the beginning of the year, but it was struggling to find a financing deal with favorable terms. The management team eventually decided to bite the bullet and they issued more than a few convertible notes which, in typical OTC fashion, can be turned into stock at discounts that reach 50% in some cases.

This is where yesterday’s press release comes in. The management team proudly announced that some of these convertible notes have been repaid with cash. This is definitely good news, but, as we established already, the stock failed to move. So, why are investors unsure about HECC?

Only about 31% of the toxic debt was satisfied with money which means that the threat of potential dilution is still very real. Of course, the management team told us yesterday that they are going to repay the rest of the toxic notes with cash, but then again, they did that just a month after asking the shareholders whether they should raise the number of authorized shares to 1 billion, despite the fact that there were a little over 23 million shares issued and outstanding at the end of July.