frog...last things first...
DNAPrint's 18% stake preceded the Bond. You'll recall that DNAPrint's initial purchase also included an obligation to take a much larger stake in Biofrontera (49% comes to mind), should Biofrontera have failed to secure at least a 10,000,000 Bond prior to January 2006. Biofrontera, in fact, secured 20,000,000 by the end of August 2005, which alleviated DNAPrint's obligation to take a further interest.
Concerning any dilution pending conversion, it is true that conversion will ultimately add approximately 25% to the float, but remember that the float is quite small at this stage, and the conversion rate is fixed.
I think it's reasonable to assume that the other Biofrontera insiders shares carry the same one year restriction as DNAPrint's shares. As we've already established, that means fully 2.5M of the 4.4M are restricted. At this time, the only freely trading shares are the 655K IPO shares, about 15% of the total. Presumably, Biofrontera should be well along (perhaps completed) with their first Stage III Clinical trial before the restrictions are lifted this time next year. Assuming they are successful, the share price should benefit from the extremely low float.
As far as the convertible shares are concerned, the Bonds are convertible at a fixed price of $16.13 euro share. In other words, it doesn't even make sense to convert until the price advances beyond $16.13 euro, and shorting the stock will not get the bondholders more shares, it would only reduce the likelihood that they could convert. The only way the bondholders benefit by converting is if the share price has exceeded the conversion price (which would also be good for us).
As importantly, the bonds themselves are a relatively low risk investment. The principle is secure, it is producing an 8% coupon return, and the holders stand to receive a return of capital at maturity. Thus, there is no great urgency for the holders to convert, and certainly no incentive to convert in a way that would drive the market price of the stock below $16.13 euro.
Should the share price appreciate it will be up to each bond holder to determine when it makes sense to convert based on the additional risk he will be assuming by trading a fixed income position for an equity position. But even if the market value of the shares appreciates to a point that makes it desirable to convert 100% of the bonds, this company will have a tradable float of only about 1.9M shares.
I haven't been a great fan of management these last two years, but I have to give them their due on this one. And whoever put together the strategy did a nice job IMO. By structuring the financing this way, the interests of the bondholders are directly aligned with the interests of the shareholders, which is the way it should ALWAYS be.
Now the question is, will we see something like this replicated in the case of DNAPrint Pharmaceuticals? If not, it won't be because they don't know how it should be done...
All of this is JMHO and should be taken as such. As always, do your own DD and make your own investment decisions.
Later,
W2P
AI
