This is the first step in raising the necessary capital to fund the company. This moves us in the right direction. However, with that being said, the downside is the large amount of dilution that will take place. At this point in time, they have no choice.
The current share structure is 500m authorized shares, with 380m as of 2/28/13 outstanding. They will have to increase the authorized shares soon, depending on how many preferred's are sold.
Example:
200 of the 2000 preferreds @5,000 are sold in an offering. The company receives 1m less fees. (200 @ 5,000)
The purchase of those 200 shares have the option, anytime after the issuance, to convert those preferreds to common stock at a conversion price of .04 per share of common stock. 1 preferred share would convert into 125k shares of common.
To make it simple, let's say I buy 200 shares @5,000 for 1m. If I choose to convert those into common, I would get 25m shares @.04 which equals my 1m original investment. Warrants, in most cases, are tied to these types of transactions as a way to entice the investor. I'll go into that another time as I really am trying to keep this simple.
This transaction would add 25m more shares to the 380m outstanding share. while the holder may not convert right away, the 25m has to be accounted for.
If I decide to hold my preferreds, and collect my 8% dividend the company has the option of paying me in cash or common stock. The dividend is paid monthly. Most pinks pay in stock which dilutes even more. 8% of my 1m investment pays 80k a year in div's. If they pay in stock, and the avg. pps during the computing period is .04 I would be receiving 2m shares of common stock over the 12 month period.
I've tried to keep this as simple as possible. Feel free ask any questions.
Never fall in love with a stock.
