This is a quick addition to the one I just posted.
I was going to post this on StockTwits, but its a little too much for that, but not much.
Continuing with the idea that CVI International is setting up to exercise their warrants, I’ve come across another reason why they’d want to do that sooner than later. I could probably go look at their earnings report to get more recent numbers, but I’m going to be lazy. Feel free to look it up and correct me on the numbers.
So, we’ve established CVI International has 9,689,923 warrants for $2.89 a share that are due to expire 11/15/19. Now, let’s add to that, on 3/21/16 SGYP announced that they had reduced the their outstanding senior notes by 50%. So, as I mentioned, I’m doing this based on numbers from 2 years ago. Maybe the outstanding notes have decreased since then.
In case you don’t know what a convertible senior note is, it’s basically a loan and you are the bank. The investor gives so much to the company as a loan and the company agrees to pay you back principle and interest based on the amount you gave them. The convertible part means you can, at any time, convert your notes into equity. The senior part means that if the company were to go bankrupt, you as the senior debt owner get first dibs to their remaining assets to help recoup your losses.
Ok, so as of 3/17/16 (they reported in on 3/21/16, but the deal actually closed on 3/17/16), they had $79.2 million in outstanding notes. This means they have $79.2 million in debt outstanding. The terms of the notes are:
- SGYP would pay the note owner and annual interest rate of 7.5%
- It would be paid on 3/1 and 11/1 of each year
- The note matures 11/1/19 (do you see where this is going?)
- The note can be converted at any time to equity at $3.11 (Now you must see where this is going!)
- The amount of shares you get is 321.5434 per $1,000 you loaned them.
Based on these number there is $79,200,000 outstanding, so the total amount of shares that’s worth is $79,000 x 321.5434 = 25,466,150 shares. So, that’s potentially 25.5 million shares that can be created at $3.11 a share.
This means 2 things.
- CVI and whomever else owns the total 21.7 million in warrants has to compete with the 25.5 million note holders. They all have conversion rates in that $3 range and must make a decision by 11/19. Each event will drive the price down and whomever converts and gets out first gets the best deal. Of course, that’s assuming that everyone’s intention is to just convert and bail right away. The risk to the note holders isn’t so bad because they’ve at least been accruing interest and if they don’t convert by 11/1/19, the note will mature and they will get their principle back. My thought is that the warrant holders would want to convert ASAP because they don’t have the security the note holders have. If it gets above $3, the note holders may not jump to convert because they are making assured returns now. I would think they would choose consistent stable gains over higher, but riskier gains. My point is, I think the need to get out sooner is on the warrants and the closer it gets to 11/1/19 the more desperate they will be to get out before the note holders.
- The company has a big incentive to get the price up into at least the $3’s by 11/1/19. In fact, not just get it there, but get it there with growth. If not, then all those notes will mature and the holders will be happy to just take the cash. The company wants them to convert, and they sure as hell aren’t going to convert to $3.11 when the price is currently $1.63. If the company can not give them the incentive to convert, they will owe lots of money to the note holders come 11/1/19. That will hurt earnings and possibly more depending on their cash position at the time. Now, before I make it sound too doom and gloom, in such a situation the company will usually renegotiate the terms of the note to buy themselves more time.
The point is that all this adds another wrinkle to the charpie. I think this works in our favor, but if we get into the $3’s and you are break even or even have a negligible loss, I’d really consider selling a portion because they most likely will be. I’m not saying $3 is all it worth either. I’m just saying there will likely be a lot of push-back if we get there. A lot of people sound overextended, like me, and it would probably be a good place to trim your holdings down to a more reasonable position. If you have less stress, then you are less likely to be overly emotional and make bad decisions.
On Another Note
Here is a little random thing. I’ve seen people post about Gary running another company, ContraVir (CTRV) into the ground and how he is doing the same to SGYP. Perhaps there is something shady, but I don’t think so.
Years ago SGYP bought an asset called FV-100 from Brystol Myers. It was a drug being evaluated to treat hives. For whatever reason, Gary and the board thought it would be a good idea to buy it and develop it. It could have been something shady, but more likely just a bad idea. Then back in 8/13 they decided to spin the drug off into its own company, which is called ContraVir. After the spin-off the existing SGYP stock holders got shares in that company and they went looking for a new CEO for ContrVir. There may be more to it that I don’t know, but all the talk is more fear mongering that anything. The whole thing just sounds like a bad decision, not some covert mission to screw people out of their money.