By Nigel Somerville, the Deputy Sheriff of AIM | Wednesday 4 January 2017
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.
Yesterday the bear raider Waseem Shakoor tweeted that he expected another conversion notice within 24 hours as L1 sought to offload another line of its death spiral loan funding onto AIM-listed CloudTag’s gullible shareholder base. Right on cue, this morning we learnt that the conversion notice was served yesterday, seeing L1 convert £250,000 of notes into shares at just 6.5p. That, against the current bid price of 8.5p. Having thought that my plan for great riches as an AIM death spiral financier might be fraught with danger, I wonder whether I should reconsider.
Despite all the pressure on the company’s hapless Nomad, Cairn Financial, there is still no sign of it throwing in the towel although it is hard to imagine that it can be all that far away. L1 will, of course, be very grateful for this morning’s conversion means that L1 can offload the stock at a very tasty 41% profit. Unless, that is, the stock has already long since been forward-sold.
Waseem Shakoor suggests that the rather smaller magnitude of the latest conversion (£250,000 as against the £700,000, £1.15 million and £600,000 of recent transactions) indicates that it is getting progressively more difficult for L1 to offload the resulting shares. I should coco, but with £1.1 million worth of notes left to convert and dump I would imagine that L1 will be fairly relaxed.
So with my death spiral financier hat on, I look with envy at the position thus far achieved by L1. What would I do next? Well, of course, I’d be forward-selling as much as I can whilst doing my best not to collapse the share price just yet. That comes later.
With direct market access one can place lines of stock into the market and see if they get nibbled. On a current (last seen) spread of 8.5 – 8.75p, I might be tempted to put up stock at, say, 8.65p and just sit back and wait. If my shares are the cheapest available, they’ll be the ones to go when some BBM comes along to buy stock thinking that those nasty people at ShareProphets need to be taught a lesson. Or perhaps CloudTag will put up a new super-glitzy countdown clock on its website – that should be enough to draw out the buyers!
It does mean that the share price won’t be going up very fast since I’ll just soak up all the all the buying with greedy appreciation.
I could try to get really clever by operating a price support mechanism – a few grand’s worth of shares on the order book to give it some apparent depth should do the trick, making it look as though there is a bit of a queue of buyers. But that is terribly complicated so perhaps I’ll just stick to my simple plan.
After a while, having forward-sold a stack of shares I would need to settle the trades. For that I need more shares – preferably obtained at a far cheaper price than I’ve just offloaded them for. Easy: a few clumsy lumps of stock dumped in the market should see the price drop nicely and then I issue my next conversion notice, taking advantage of the drop in share price - and the rounding down to the nearest half penny clause which seems to have appeared out of the blue.
Rinse, repeat. Rinse, repeat.
When all the loan notes have been converted and the resulting stock dumped I can then get to work on those warrants. The exercise pricing terms are not quite as flexible as the loan conversion terms in that I have to use the previous day’s closing bid as opposed to the lowest of the last three. But then the 10% discount and the rounding down to the nearest half penny should see me safe. I guess I’ll be happy to get my 10% and simply cut and run. After all, I don’t care what happens to the share price by then.
I’ve made my money on the loan conversions so if things get too volatile to exercise the warrants and dump the resulting stocks at a profit, I’m not bothered – it is just the icing on the cake. I don’t need to exercise at all.
So I guess it will be back to 6p (or preferably just below) in fairly short order. When it comes, watch for the next loan conversion.
Meanwhile, I see that CloudTag announced a previous death spiral loan facility for £1.25 million with an outfit called Hector Limited back on 15 January last year. It doesn’t seem to have been used. If you thought the L1 deal was bad for shareholders, the terms of the Hector deal make the L1 package look like a best-buy table topping effort.
Any loan drawn under that package attracts 10% annual interest, a 3.7% administration fee and is convertible at just 2.25p (subject to the company having sufficient authority to issue the resulting stock).
With CloudTag already having conceded that it will still need further funding even after the L1 funding has been fully drawn (as it now has been), are we going to see this package resurface?
Answers on a postcard to CloudTag’s hapless Nomad, Cairn Financial.
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