High Plains Gas, Inc.(fka HPGS)

[Jukimol]

Ironridge = Toxic Financing for HPGS

http://www.smallcapnetwork.com/Toxic-Financings-A-Case-Study-For-Small-Cap-Retail-Investors/s/via/21121/article/view/p/mid/1/id/8/


Public company financings, when done well, are supposed to make a company healthy and thrive. The allows companies to grow by letting them compete in new markets and create new products.

These days it seems an increasing number of small cap companies are being cornered into signing toxic financing agreements. Gcan turn the boon of extra capital into a cancer that can cripple or kill public companies and their inexperienced investors with them.

To understand how toxic financing works and how devastating it can be, consider the highly volitile, high profile lawsuit case involving financeer/investment firm Ironridge Global and NewLead Holdings, (OTCMKTS:NEWL) an international shipping company that owns a fleet of dry bulk carriers and double-hull product tankers.

Toxic financing is not just a colorful phrase to describe a bad situation; it describes a specific financial scenario. These financing deals are usually restricted to companies that are fiscally weak. An investor purchases convertible equities or debt that allows the investor to exchange those instruments for common stock in a weak company. In most scenarios, the instrument converts to a fixed number of shares. In the toxic financing scenario, the weak business is so desperate for capital it allows the investor to convert the instrument for a number of shares based on a specific dollar value allows the investor to put the company in a death spiral.

The "investor" converts some of its equities for common stock and sells it. This causes the market value of the shares to go down, which allows the investor to receive more shares as it converts additional equities. Eventually, the share price plummets, and all the original investors bear the expense. The perceived “malicious investor” gets all the profits.

In the NewLead case, one look at the firm’s historic stock chart tells the devastating story. More recently, the firm decided to "voluntariy" exit the Nasdaq Stock Exchange after numerous efforts to retain its public status ultimately failed. A dispute with Ironridge Global has been perceived by many as the main reason for its horrific share price drop, but a June court ruling said Ironridge had nothing to do with share declines.

Ironridge Global describes itself as an “equity investor in micro-cap public companies.” That means it invests in companies that are traded on a public exchange or over the counter and whose stock is valued between $50 and $300 million. Generally, companies with a smaller capitalization are considered riskier than large cap companies, such as Coca-Cola or Walgreens. However, since the risk is higher, so is the potential return.

To say there is growing hostility against these “toxic” investment firms is an understatement. One message board on the popular investment site InvestorsHub, spews contempt through its use of dry humor, features links to the firm’s growing number of lawsuits, an SEC subpoena and even points to the extravagant wedding of one of the firm’s principals, John Kirkland.

NewLead Holdings, like so many other public firms, needed financing to help support its operations and was publicly traded on the NASDAQ. Apparently. thats where Ironridge came in. In exchange for $2.5 million in cash, Ironridge received 500 preference shares in NewLead. In addition, Ironridge paid another $22.5 million in promissory notes in exchange for another 2,250 preference shares.

Things got interesting for Ironridge and disastrous for NewLead. When Ironridge chose to convert its preferred shares into common stock, it also got dividends. These dividends were to be paid in either cash or in more of NewLead stock.

How much NewLead stock Ironridge got was defined by contract, but the dividend stock was always valued below the current market value of the NewLead shares. If the value of the common stock dropped, Ironridge got more NewLead shares with every dividend payment.

Once the agreement was set, every week for a month, Ironridge converted its preferred stock and received stock dividends. The common shares were promptly sold, causing the stock value to drop. Every week, Ironridge got more shares to sell. The result was a drop in NewLead share value from $17 to 29 cents. NewLead refused to convert any more shares, claiming that Ironridge fraudulently entered into the contract and maliciously destroyed the stock’s value.

NewLead’s filed civil claims against Ironridge for damages exceeding $125 million are getting more and more attention. NewLead contends that Ironridge breached its contract with NewLead, participated in several acts of fraud, and manipulated the securities market. However, it may be too little, too late. As stated earlier, NewLead was basically delisted from the NASDAQ earlier this month.

Delistings are nothing new here. PositiveID Corporation (OTCMKTS:PSID) ended up being delisted from the Nasdaq shortly after announcing a deal, initially reported to worth up to $13.8million, with Ironridge. The firm would later acknowledge that it never received the anticipated funds. In fact, it claimed that the deal was to be revised to involve lower funding and months later said that there was no funding. Inevitably, the firm nosedived and its position in the market plummeted.

Another lawsuit against Ironridge involves High Plains Gas (OTCMKTS:HPGS). High Plains entered into a deal with Ironridge and received approximately $1.12 million funding. However, less than a month into the deal the CEO resigned due to massive stock disintegration. It was noted that High Plains and its creditors had not received funding almost one month since the deal was completed. Some regulators and politicians are starting to wonder if entering into a deal with certain financial companies based on promises about funding or long-term investment may not be what they appear to be. Indeed, many firms of these firms saw their stocks lose value significantly within one month of entering a deal with firms like Ironridge.

The lesson for small cap investors is to learn to read the terms of the financings your companies agree to. “There are two dance partners in every transaction,” writes one Seeking Alpha contributor who has been following the story. “The lender and the management team which agreed to do the deal. Hold each one accountable.
These days most retail investors fall for news releases that proudly announce many of these financings as positive developments which provide much needed capital and help push products and projects forward, but most don't have the qualifications or knowledge to understand that the companies they invest in are, in more and more cases, being sent into "death spirals."

Altogether, toxic financing companies appear to worsen small investors’ already risky situation. Promised about long-term investment must be carefully studied and considered.

Regulators and politicians are often called upon to do a better job of protecting the public from some of these otherwise legal schemes, but until they step in and realize the damage these types of financings are causing the markets, retail investors, small cap company management teams and others who get snared into these situations have to take responsibility for their actions.