By Tom Winnifrith, The Sheriff of AIM | Wednesday 7 December 2016
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Shares in LGO Energy (LGO) have raced ahead by 33% to just over 0.14p on news that the company has signed up to a new uber expensive death spiral. Truly some folks just do not get why death spirals are called death spirals. But every cloud has a silver lining: the cash means that LGO can repay French banksters BNP Paribas.
The new deal is with vultures Lind Capital and is for $8.6 million of which the first $1.825 million will go to repay the Froggies. LGO can repay this $1.825 million over 24 months from monthly free cashflows - in the unlikely event that it has any (after capex and PLC costs). And Lind can convert into equity at 0.15p if it wishes. Monthly repayments can, if LGO wishes, be made in equity "calculated at the prevailing price at the time of payment". What is the exact calculation here?
The loan is not cheap. Although the interest rate is not stated in the release it works out at 12.4% per annum. So Lind will make a 25% return on its first tranche of debt - and we guess on any subsequent drawdowns - if LGO repays in cash. Or LGO can pay in equity under terms which we assume are normal death spiral terms.
My guess is that LGO will pretend this is not a death spiral for a while by repaying Lind in cash, that is more cash borrowed from Lind. It will also clearly use the Lind cash to fund a capex programme which it clearly cannot fund from operational cashflows.
Pretty soon it will become apparent that the only way to clear the debts is via death spiral share issues. And that makes LGO an uber lousy investment. But at least it cannot now have the rug pulled by the Froggies. That explains the relief rally in the shares today. It will not last as the reality of this death spiral sinks in among the Bulletin Board morons who are the only folks trading this stock these days.
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