Toxic Convertible death spirals...
are usually the result of the issuance of a Convertible Debenture. I won't go into all of the gory details here (there are a couple of excellent articles over on VOICE concerning CD's), but suffice it to say that the kind of issuance we are being led to believe ASTN is exploring (according to an unnamed but prolific poster with red hair) and what the filing describes are two very different things. This is not to say that the financing arrangement won't be dilutive...it will. But I haven't found the key ingredient to a CDDS, the adjustible conversion clause, in the information so far made available. That does not mean that one isn't there. Nor does it mean that they won't do one either.
To try and simplify things so that the inexperienced are not mislead by a "pied piper".
This deal shows that ASTN has a group of investors willing to purchase common stock up to a set amount directly from the company. It does not indicate the price these purchases will be made at. Further, they are selling preferred shares for a set amount. We do not know the conversion rate or when those shares may be converted. It is possible that the preferred agreement contains the ACC that will trigger a death spiral. Until we see the terms of the agreement we won't know.
Why is the ACC so important? Because that is the mechanism that allows the holder of the CD to short the stock without risk. With an ACC in place the CD holder is rewarded for the decline in the stockl price with more shares which allow him to continue to short without risk, which rewards him with more shares and so on. Thus the death spiral. When the stock reaches a low enough point the CD holder calls for a conversion and the company must register the required shares and deliver them. It is not unusual for a 2 million dollar CD to yield 50 million shares at conversion.
So if our intrepid little scambuster can locate (and document with links to the terms of this agreement) the ACC. I would agree with the death spiral argument. However, without that proof, this is just standard dilution. Yes we will likely see a drop, but it probably will be short lived, and might prove to be a good buying opportunity should the cash gained from this agreement lead to sales of the product and possible profitablility.
David Weed
aka the Bird of Prey
www.warp-drive.com
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