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CloudTag – L1 finishes loan conversion. Now for death-spiral-on-steroids warrants. Sell!

By Nigel Somerville, the Deputy Sheriff of AIM | Thursday 16 February 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.

AIM-listed CloudTag (CTAG) has announced the conversion of the final little bit of loan notes held by death spiral provider L1, at 4.5p. The shares have raced ahead, even though this only marks the half-way point in the share price carnage caused by the package. Indeed, it may not even be half, for the warrant exercise terms are far more favourable than the loan conversion terms (from L1’s perspective).

By my maths there are now almost 67 million outstanding warrants in the hands of L1. Given that they are exercisable at a price of 90% of the closing bid price the day before exercise, but then rounded down to the nearest half penny, once can see that the lower the share price gets, the bigger the discount becomes.

Even if by some miracle CloudTag ever actually manages to produce a working model – let alone a saleable product – and some guaranteed order for, say, $5.2 million which causes the shares to rocket higher, L1 has the alternative of a fixed conversion price to resort to. Both yesterday’s and today’s loan conversion RNSs give a maximum exercise price of 5.5p for the respective warrants issued.

But that fixed price looks to be a red herring: there is no working product to demonstrate, there are no firm orders, there is no delivery of product in transit and there is no revenue that we know of.

L1 will be looking to make as much as it can as quickly as it can from the warrants. With the shares having raced ahead today by 20% to 6.875p in the middle (last seen), an exercise notice served today would be based on yesterday’s closing bid price of 5.5p, 90% of which comes in at 4.95p – conveniently allowing the rounding down to have almost maximum effect to leave L1 ponying up just 4.5p a share.

One would imagine L1 will be busying itself this afternoon selling as fast as it can so as to bank the 53% gain on offer.

The pain looks set to get worse, not better, for CloudTag’s still merry band of enthusiasts.

And if that is not enough, we have already been warned that the company will still need further finance when this is all over.

The stance remains sell with a 0p price target – and that is before one considers matters such as the guaranteed order which was neither an order (for there was no product) nor guaranteed (for there was and still is no product), but the announcement of which saw the company get a placing away on the back of the resulting share price rise.

With what looks to be an utterly fallacious relief rally underway, now would seem to be a very good time for anyone still holding this stock to look skywards and be thankful for the opportunity to SELL.

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