Thoughts on $40 Million Financing
Oh, to have been a fly on the wall and see the daytraders reacting to this news at 3:30 PM this afternoon! Gordon, you devil, you! LOL
"Reduce shares"-- omigod, reverse split! What to do? Panic? Sell? Aaaggghhh!!!. Pat T. asked for spin, so here's some spin.
To briefly review a few facts, the announcement concerns an equity line of credit of up to $40 million. How would this work? Let's say the company wants to draw $5,000,000 from its credit line to pay off debt. It's probably safe to assume the investors would get stock at a discount--let's assume 20%. Let's also assume the stock price is $1.00 when the draw is made. This is obviously a very critical assumption which disregards "share reduction" and the stock price could be a lot higher--more about that later. A 20% discount means that the investors get their stock at $.80. For $5,000,000, they would receive 6,250,000 shares.
To illustrate why TSIG will not do a stock buyback here, let's continue. Suppose TSIG used the $5,000,000 to buyback shares at $1.00. They would reduce the outstanding shares by 5,000,000 through share repurchase, but they increased the outstanding 6,250,000 in the process of obtaining the money. A losing proposition obviously. . . . .
What effect would using the money to pay off debt have? It would reduce liabilities on a dollar-for-dollar basis. To be blunt, it would get the IRS off our backs! This is called "cleaning up the balance sheet." Any oldtimers out there remember when the rallying cry on the thread was "clean up the balance sheet"? Besides the obvious advantage of the IRS allowing the company to continue its existence, what other advantages are there to cleaning up the balance sheet? Bingo! Real world investors look at balance sheets. This will come as a shock to those of us who have spent too much time in the warped reality of OTC-land. NASDAQ investors want a balance sheet that doesn't make them howl with laughter. NASDAQ did I say? First, the dreaded r-word.
How did Gordon say it? "[T]he company must restructure its existing capitalization by reducing the number of shares of common stock outstanding." We have ruled out share buyback. What other alternatives exist to accomplish share reduction? I only know of one--reverse split. (Anybody else who has another suggestion--please speak up.) RS certainly has a bad rep. The war stories on this subject abound. When a company has no other way to increase stock price, when expectations for a company are very low, when a RS is a last-ditch effort to revive the stock price, it is common to see the stock price dip after the split. Is this the case with TSIG?
TSIG has about 250 million shares outstanding. This is a reflection of years of wandering around trying to find its path, spending money, with no significant revenues coming in. Need I remind anybody here of the disastrous PP which accounts for a good chunk of the 250 million? This past negative history is already reflected in the stock price. How many times has it been said that it is ridiculous for a company with the deals and prospects that TSIG has announced to be selling for $.50? The stock price is out of proportion to the potential of the company due to the high number of outstanding shares. The bad news is already in the stock price. Future expectations are high.
Let's assume that TSIG does a 4-for-1 reverse split, taking 250 million shares down to 62.5 million. Claims about a 10-for-1 split are ridiculous IMO because mutual fund managers shy away from companies with small, tight floats. At today's prices, the stock price goes from $.50 to $2.00. But the split can't happen for a month at the earliest. Does anybody expect any big news will be announced in March? Suppose the stock price is $1.50 when the split is effective. That takes the price to $6.00. Let's say that all the deep thinkers on RB sell out, and the stock goes to $4.00. That is the equivalent of the stock falling from its current $.52 to $.35. I would rather not see that happen, but it comes far from triggering my panic threshold.
I believe it is consensus that TSIG could currently meet the requirements for a NASDAQ listing except for stock price. However, if the stock price were maintained over $4.00 for 30 days, TSIG could be on the NASDAQ. Out of OTC hell. Buyable by mutual funds. A dot com company on the verge of profitability. Out of the clutches of the cursed market makers. Of potential interest to real-world investors who wouldn't be caught dead buying OTC stocks. How far would the stock price go up? Back to $6.00? Higher? Your call.
Let's go back to the $5,000,000 draw to pay down debt. The stock price is $4.00, 20% discount, divisor is $3.20, share increase is 1,562,500 shares. What else would TSIG do with $40 million? It should be apparent that TSIG draws as much money as it needs, when it is needed, and when the stock price indicates it is a favorable time to do so. We probably have no idea how hamstrung TSIG has been due to lack of cash. Now they will be able to execute the deals as needed. If some potential partner brings a wonderful deal to the table that requires TSIG to spend $4 or $5 million, no problem. Also, a $40 million line of credit tells TSIG's partner that TSIG is here to stay. How many potential deals have been lost due to companies perception that TSIG is teetering on the financial edge? Anybody remember Signature Group?
Someone on RB asked why TSIG needs $40 million if profitability is just around the corner. An acquisition is a possibility. I suspect that Gordon has not given up on the idea of providing teleservices. Buying a little teleservices company would certainly fit well here. And if the profits come rolling in and part of the $40 million isn't needed, it isn't used.
A snapshot of the hypothetical future: TSIG.com has 70 million shares outstanding, sells for $6.00, is listed on the NASDAQ, is debt free, has $25 million left on its equity line of credit, just reported breakeven in its SEC filing, and has announced deals with UCP, Coke, UCP sponsors, and _______(fill in the blank).
Feel free to jump out of the window if you like. Today I hold my shares.
Regards, Suzanne |
