Balance sheet share count.
2. Share count on the balance sheet.
Since the preferred shares are listed as a separate liability on the balance sheet, they are not included in the common share count. You and Zeev are confused about the face value of the preferred shares shown on the balance sheet.
I believe your confusion is due to the fact that you think that they sold 7500 preferred shares each time for $7.5M.
Actually they sold 7500 preferred shares plus 447,761 warrants each time for $7.5M less expenses.
The total of 895,522 warrants sold to CC, plus the 175,000 warrants issued to Gemini Capital, should show up in the common share count on the balance sheet. Some of the original proceeds of $7.5M (reduced by Gemini's fee) for the units should be allocated to the warrants. These warrants are included on the balance sheet as a component of common stock (essentially Valance has set aside common shares to fulfill the eventual warrant exercise requirements). This is explained in the DecQ SEC filing:
5. PREFERRED STOCK
In July 1998, the Company completed private financing arrangements of up to $25
million. The Company issued 7,500 shares of Series A convertible preferred stock
and warrants at $1,000 per share of Series A convertible preferred stock,
raising gross proceeds of $7.5 million, with transaction costs of $425,000. In
December 1998, the Company completed the equity portion of the financing
arrangements, issuing 7,500 shares of Series B convertible preferred stock and
warrants at $1,000 per share of Series B convertible preferred stock, raising
gross proceeds of $7.5 million, with transaction costs of $375,000. The Series A
convertible preferred stock and Series B convertible preferred stock accrete at
an annual rate of 6% per year, and are convertible into common stock based upon
defined conversion formulas. The remaining $10 million of the financing
arrangements is in the form of a line of credit arrangement (Note 6).
In connection with the equity financing, the Company issued warrants to purchase
895,522 shares of common stock to the Series A and B investor. The warrants are
exercisable at a purchase price of $6.78 per share and expire in July 2003. In
addition, the Company issued warrants to purchase 175,000 shares of common stock
to the placement agent. The warrants are exercisable at a price of $4.94 per
share and also expire in July 2003. The warrants have a fair value of
$3.2 million using the Black Scholes valuation method and were recorded as a
component of common stock.
My comments:
It appears that Valence allocated about $3.2M to the warrants (this figure should include about a 20% of Gemini's transaction fees), and thus ended up carrying the Series A preferred on the books at about $6.0M and the Series B on the books at about $5.4M. The number of common shares shown on the balance sheet increased by the number of warrants out, offset by other changes such as employee or ex-employee option exercises or forfeitures. I don't see an obvious inconsistency in the share counts with what the company says in the filings. And …
This is all consistent with the statements in the filings, that Castle Creek still held all 7500 shares of the Series A shares and all 7500 shares of the Series B shares as of February 10.
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