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CloudTag – L1 converts, company takes the piss. Will Nomad Cairn now finally walk?

By Nigel Somerville, the Deputy Sheriff of AIM | Thursday 22 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.

Well surprise, surprise. AIM-listed CloudTag (CTAG) gets its shares unsuspended and a few days later L1 converts another batch of loan notes, as announced in last night's no-one-is-watching o’clock RNS. OK, no great surprises so far – especially in view of the price action since the suspension was lifted, but look at the terms: has there been an unannounced change, and if so, when?

We are told that:

The £700,000 of Notes have been converted at a conversion price of 6.5 pence per ordinary share ("Conversion") resulting in the issue of 10,769,231 new ordinary shares (the "Conversion Shares").  

Ok, 6.5p. Now I thought that L1’s conversion price was the lowest closing bid over the last 3 trading sessions. On Friday that was 10p, on Monday it was 7.75p and yesterday it was 6.75p. But apparently the conversion price is 6.5p? How?

Under the terms of the Conversion the Company has also issued L1 with a warrant over 10,769,231 new ordinary shares in the Company with an exercise price the lower of:-

 Yeah, no surprises there

a)   90% of the closing bid price per ordinary share on the day immediately prior to the date of exercise of such warrants, or

yup, all “in line with expectations” as they say…

b)   8.0 pence per share.

Oh! This is supposed to be calculated as being 125% of the closing bid price per Share on the day immediately preceding the date of issue of the relevant conversion notice in relation to conversion of either the Tranche 1 Notes or the Tranche 2 Notes as the case may be.

So let’s do the maths: 125% of 6.75p is 8.4375p. So why 8p, then?

Oh, er…..

The terms of the Warrants are as stated in the Notes Announcements.  Both the conversion price in respect of the Notes and exercise price in respect of the Warrants have been rounded down to the nearest £0.005 in accordance with the terms of the relevant agreements.

Well that’s news to me! I expect it is news to the merry band of CloudTag shareholders too, for I cannot find any reference to the warrant exercise price or the loan note conversion price being rounded down to the nearest half penny in either of the announcement of 7 November (the original RNS detailing the L1 funding package) or of 28 November (the RNS announcing revised terms).

And to underline the point, the conversion notice RNS of 9 December told us that the resulting warrants were exercisable at 90% of the previous closing bid price on the day prior to exercise, or at 9.6875p. That’s not rounded down to the nearest half penny, is it?

So when was that change to the previously announced terms agreed? I put it to you that this was post the last conversion RNS of 9 December – just ahead of the suspension of the shares pending a “cleansing” RNS. So did L1 rule that the shares being suspended met the default condition that an event occurs or a circumstance comes to subsist which would in the reasonable opinion of the Investor be likely to have a material adverse effect on the Company and thus demand more favourable terms in return for not calling a default?

I put it to you that this is exactly what has happened, and that the company has not told the market until after the fact.

So well done to L1: a great piece of business there. So long as the closing bid price is not at an exact half penny there is an automatic discount now built in to the conversion and exercise prices. Perhaps I should look at becoming a death spiral financier on AIM after all.

Meanwhile, with a previously unannounced (and by inference, in fact, denied) expense cost added to the Tranche 2 loan drawdowns, we now appear to have slipped in this rounding down to the nearest half penny condition.

Note to Nomad Cairn: is this not just taking the piss? Will you now, finally, resign?

Note to shareholders: that death spiral has just taken a shot of Russian Olympic steroids.


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