Case Study: final stages of the death spiral?
I wonder if The Panda Project (NASDAQ:PNDA)is now well and truly beyond the point of no return. They filed a preliminary prospectus today, and one of the things up for shareholder approval is a vote to permit the issuance of shares such that more than 20% dilution would occur. According to the preliminary prospectus, NASDAQ rule 4460 (applicable to NASDAQ NMS securities) requires that such dilution be approved by the shareholders. (Interesting aside: if PNDA is delisted from NASDAQ NMS, of which action they have been notified, this rule would no longer apply. I don't know about the rules applicable to, say, OTC-BB stocks -- might the company be able to issue unlimited shares without seeking shareholder approval?)
Why should shareholders vote to approve such a large dilution? Well, something to encourage them would be the $100,000 monthly penalty payable in the event that Panda is unable to provide sufficient shares for the A-3 convertible preferred holders. The private placement investors (the "fill up" shares) are also entitled to $100,000 per month too, under these circumstances. With this added cash drain, and the fact that the private placement is preferred stock (and therefore ahead of the common shareholders), bankruptcy could leave the common shareholders with absolutely nothing. Of course I suspect that "nothing" is what the common shareholders will be left with anyway.
What happens if the shareholders give the company carte blanche to create as many shares as are required to satisfy the company's obligations?
The degree of damage will depend, of course, on the price at which the conversion is done. If the conversion is done while the share price is 50 cents per share, that is to say the conversion of $5.5 million of preferred stock would be converted at a rate of 0.85 * $0.50 = $0.425, that would result in 13 million new shares being issued.
Also, some "fill up" shares would have to be issued (to the private placement investors), too. It's somewhat of a contorted formula, however my guess is that another 4.44 million shares would have to be issued, if the stock is trading at $0.50.
So in addition to the existing 14.7 million shares, there would be 17.4 million new shares issued (!), for a new total of 32 million shares outstanding. Some dilution, eh?
What's the company worth? My most optimistic guess is that they might have, at most, $1.5 million worth of current assets by the end of this month (assuming they have cut their $1 million per month cash burn down to $0.5 million, since the beginning of July).
They also have about $3.25 million in non-current assets - dunno how well those will hold their value. Realize that they have announced that they will be discontinuing their Rock City line of business, so there will probably be some write-offs.
Spread this over 32 million shares, and the company has just under 5 cents per share of current assets, or 15 cents per share total net assets. Max.
Of course if the share price is less than 50 cents per share (it closed today at 28.125 cents), "things could be worse".
FWIW.
- Daniel |
