What is a Death Spiral?
Death spiral financing is the result of a badly structured convertible financing used to fund primarily small cap companies in the marketplace, causing the company's stock to fall dramatically, which can lead to the company's ultimate downfall.
Some small companies rely on selling convertible debt to large private investors (see private investment in public equity) to fund their operations and growth. This convertible debt, often convertible preferred stock or convertible debentures, can be converted to the common stock of the issuing company at a discount to the market value of the common stock at the time of each conversion.
Under a “death spiral” scenario, the holder of the convertible debt might short the issuer's common stock at which time the debt holder converts some of the convertible debt to common shares with which he then covers the debt holder's short position. The debt holder continues to sell short and cover with converted stock, which, along with selling by other shareholders alarmed by the falling price, continually weakens the share price, making the shares unattractive to new investors and possibly severely limiting the company's ability to obtain new financing if necessary.
Companies willing to agree to financing on these terms often could not obtain funding through any other means due to their early development stage or credit risk profile. The terms, though viewed by some as onerous, give the lender a potential way to recover their debt regardless of what happens to the shares of the company, and the company an easy access to dilutive but relatively cheap funding in terms of cash cost.
This would explain why Assure Holdings stock price jumped around from $2.00 to $7.00 about a week ago.... because it was in the downward Death Spiral trend already from a previous offering.
