A recurring complaint within the OTC is dilution. Notes cause dilution. Continuing my "I suspect this is an undercapitalized company" remarks from earlier, raising money for a company is difficult... especially when you are in the OTC. Time and time again at conferences and on phone calls I have heard CEOs complain that they don't want to "do notes" but that they are their best source of capital as direct-equity fixed-rate financings are quite hard to find and, contrary to popular belief, are not falling from the trees. Other comments I hear are that many, many times the note holders end up not caring about the company at the end of the day ... they just want their return. That's "flipping" vs "investing." A CEO has pretty much no control over how a note holder behaves when they convert. They could do everything from pre-sell their conversion to slam the price to hold and gradually sell. Notes are not fully bad capital vehicles, of course, but I think the real problem is the continued existence of variable-rate financings within notes. Those need to end. Those hurt investors and those hurt companies. There's always going to be a positive and a negative for every action taken by a company; pass up a note and, perhaps, that company goes under. Take the note and that company lives to fight another day but, the note holder might end up being 100% focused on himself and then there's added dilution. None of this is new and there's never going to be a perfect scenario. That's why you need to pay attention to balance sheets, operational history, etc. Those big picture tools can offer the best insight so that you can make your own informed decision. You, and you alone, know what best meets your needs and objectives.
