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Food for thought - Bad and Good

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Corundum Member Level  Monday, 05/03/21 12:42:11 AM
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Food for thought - Bad and Good

This company is not in my wheelhouse, but I spent a few hours looking at it for fun and for a friend.

First, The Bad News:
The shell company Metro One Telecommunications (WOWI) essentially went out of business in 2008. In March of 2009 it deregistered its stock, and suspended normal SEC reporting. It was allowed to because it had less than 300 shareholders (actually only 202). They moved to the Pink Sheets, where it remains. I don't know what happens if it goes over 300 shareholders. It has not operated or filed SEC reports since then. The 6.2 million shares of common reported is from 2008, but was accurate then, and also apparently now (per phone call reported by others here).

Missing from that, however, is 1,000 shares of convertible preferred Series A shares originally purchased at $10,000 each and convertible into common stock at $1.78 a share. That would result in an additional 5.6 million shares.They can't be sold without being converted.

Also, the preferred shares were to receive dividends of $400 per year (times 1,000 preferred shares). Any accrued and unpaid dividends are convertible into common shares at $1.78. If dividends have not been paid over the years, it could result in a balance due of $5.2 million or so, convertible into 2.9 million shares. This balance due could be used to "fund" the warrants (see below) in a restructuring, which would need $3.5 million, leaving a net due of $1.7 million, convertible into 955,056 more shares beyond the warrant-related shares.

Also, the 1,000 shares received warrants to purchase another 350 shares (at $10,000 each) also convertible into common at $1.78 each. This represents an additional 2 million shares -- potentially. The existing preferred stock does not require any more funding, so it is likely it will be converted (the company says this is the immediate plan in its PR) into common stock so that it could be sold at the discretion of the holders. The warrant-related preferred shares might get cancelled out in the forthcoming recapitalization, or maybe not. They could be funded by the dividend payments that might be in arrears (see above).

Then there are the new investors, who hold "SAFE" investments that are convertible to common for their $3.5 million. My guess is that they will get at least 15 million shares, so that they will have voting control over the prior holders. That would be at 23.3 cents a share, which is still well above recent share prices.

Then there are the debt holders of Royal App, who will get 8% of the overall new common (2.4 million shares?) and Everest Corporate Finance (probably related to the Chairman -- see below) will get 2% of the new common (600,000 shares?)for engineering the deal, plus certain employees will get some common stock (undefined -- perhaps 500,000 shares, but could be a lot more (2.5 million? considering how low the stock price is). But now the new investors might want 4 million more shares to stay at over 50% for a controlling interest. That would imply a buy-in price of 20 cents a share or so, still not unreasonable.

So I estimate there may be as many as 32 to 34 million shares of common outstanding after the recapitalization process (with a risk as high as 38 million shares). The fact that investors may be lured in with the 6 million common stock figure from 2008 is one reason the SEC might put a halt on trading this stock (i.e., not enough disclosure about the Preferred and SAFE holders' positions). Yes, my assumptions are wild-ass guesses, but they are more likely and closer to the actual figures than using the 2008 common shares, reconfirmed in this forum by a phone call that did not ask the right questions.

As to the value of the assets of the company, you can be wildly optimistic, or you can be realistic. Wildly optimistic says that you use an asset value based on a price level some idiot private investors used when they put money into the company in a late financing round with a "$48 Million Valuation" -- before the company went bankrupt!

Realistic is the fact that the bankruptcy court had an auction, and the winning bidder spent only $2.4 million plus 8% of the common stock of the new company to acquire it. Assuming the new company at best might be worth $20 million (the amount already invested to create and market the software before Royal APP went bankrupt), the 8% could be worth $1.6 million at most in the minds of the creditors. So only a $4 million payment for the assets of the company in its current state. And that was the best offer at the bankruptcy auction. Add the additional $1 million the investors put in for working capital. That totals $5 million maximum "value" in the assets.

A $5 million value spread over 32 to 34 million shares would imply a share price of about 15 cents. But that's before the good news below.

The Good News:

Metro One may have cash in the bank. The company never filed for bankruptcy, because they closed down operations before they ran out. We don't know if they pissed it away in the last 12 years, or at least kept it in an interest bearing account, or used it to pay the preferred dividends of $400,000 per year. In the last financial statement for June 2008, they had net "cash" of $8 million, with some modest expected further closing costs and maybe $2 million of IRS disputes. This is primarily because of the buy-in by the two largest investors of $10 million for the 1,000 preferred shares (originally 220, then 780 shares upon conversion of a convertible debt loan) near the end of the business. They also sold their patent portfolio for $8 million after things were closed down.

If they do have cash, the business may be able to get back on its feet without another near-term raise with corresponding dilution. Even more important, it may have allowed the existing shareholders in Metro One to demand a bigger share of the combined company, resulting in fewer shares being allocated to the new investors. That might knock the existing total common shares back into the 25 million range, which would be helpful.

Metro One had tax-loss carry forwards of over $100 million (federal) and almost $150 million state. The state ones may have mostly expired over time, but the federal one may still be there. If so, it may have value. Metro One also had tax credits of $3.6 million that were due to expire in 2008 through 2027 (incl some with no expiration). These, too, may have a value.

Most importantly, the buyout of the bankrupt Royal App and the merger into the shell non-operating company(Metro One)is being orchestrated by Elchanon (Nani) Maoz, the founder of Everest Special Situations Fund, a preferred stock holder of Metro One, who is also the Chairman of the new combined company. He had previously been involved with Metro One when its business died -- as a director on the board and as the second largest investor, so he knew it was an available shell.

He is also a self-promoting distressed situation specialist. You can buy his book here: https://www.amazon.com/Special-Situations-Nani-Maoz/dp/B08BVWTF8Y/ref=sr_1_14?dchild=1&keywords=special+situations&qid=1619980936&s=books&sr=1-14

The key point is Nani Maoz has investors involved that he does not want to disappoint, and he has a reputation to uphold. He is an Israeli fundraiser for what is now essentially an Israeli company, even if domiciled technically in the USA. The software company did have some big customers. (It would be interesting to check to see if these customers are still using the software.) Maoz's funds may also have invested in Royal App, so he may be more informed as to what he is getting into.

Bottom line, he is probably not a pumper and dumper. He really wants to build the new company he just created. It has been put together like a SPAC (a SPAC that took 12 years to come to fruition!).

I will not be investing in this company -- it's outside my wheelhouse, but it could be an interesting speculation.

Key numbers to keep in mind:

2008/2021 Common Stock 6,233,326
2008/2021 Preferred Stock 1,000
Preferred convert to common 5,617,978
Warrants convert to common 1,966,292
Unfunded dividends (net of wts) 955,056
Subtotal Pre-Deal Common 14,772,652

New Common -- new investors 15,000,000 (guess @ $0.233 valuation)
New Common -- Royal creditors 2,500,000
New Common -- Everest/Maoz 600,000
New Common -- Employees--Low 500,000
More New Common for Employees 2,000,000

Total Common After Deal(Low) 32,272,652
Total Common After Deal(High)34,272,652

Adjust to no warrants converted
and for reduced shares for new
investors 25,000,000

In all of these scenarios, the stock will be closely held after the fact. Out of the 6.2 million base common shares, the top two investors (who own the preferred shares and the warrants) also owned 1.275 million shares as of June 5, 2007, and were buying up more shares during 2007-2008 (at least 600,000 more shares). If they continued to buy during the past 12 years, they may have nearly all the shares by now! GLTA

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