RE: ADNWE discussion. Judicial, I've spent some time over the past day or so trying to figure out why the convertible preferred debt shares are not added to the fd share count. Options and warrants are converted based upon the treasury method, which I think we can all agree on. Some are in-the-money and some are not....but the biggest potentially dilutive factor are the converts.
First, here's an earlier summary of the various shares and share equivalents as of May 2004:
"As of May 20, 2004, we had 28,188,762 shares of common stock outstanding,
500,000 shares of Series A-1 Convertible Promissory Note, 1,605,900 shares of
Series A-2 Preferred Stock outstanding (a total of 2,105,900 shares of Series A
preferred stock) which are currently convertible into 4,211,800 shares of common
stock and 5,105,881 shares of Series B-1 Convertible Promissory Note, 272,526
shares of Series B-2 Convertible Promissory Note (a total of 5,378,407 shares of
Series B preferred stock) which are currently convertible into 10,756,814 shares
of common stock. We also have outstanding warrants which represent 1,172,920
common stock equivalents at an exercise price of $1.25 per share, 2,151,361
common stock equivalents at an exercise price of $2.50 per share and 1,068,085
common stock equivalents at an exercise price of $1.90 per share. Our preferred
stock securities also provide for anti-dilution protection upon the occurrence
of sales of our common stock below certain prices, stock splits, redemptions,
mergers and other similar transactions. If one or more of these events occurs
the number of shares of our common stock that may be acquired upon conversion or
exercise would increase. If converted or exercised, these securities will result
in a dilution to your percentage ownership of our common stock."
-from SB-2/A filing of June 2004
The current share count as of Q3 05 is shown as 28,403,000 although the basic share count appears to be around 29.9MM (from the balance sheet). Its difficult to tell how many of the options and warrants are included here (one of my pet peeves is that companies aren't forced to disclose exactly how they use the treasury method to arrive at total fd share count), but my guess is not much. That's mostly due to the bulk of the options/warrants being underwater at present, and another chunk just barely in the money. Let's ignore those for the moment and focus on the Series A, B, and D converts.
My understanding of the rules regarding convertible preferreds is that the trigger for counting them is based upon the forced conversion provisions contained in the deals. I went back through the original filings, looking for these trigger points:
Series A
(a) Right to Convert. Each share of Series A-1 Preferred Stock and Series A-2
Preferred Stock shall be convertible into a number of shares of Common Stock
equal to the applicable Liquidation Amount (as defined in Section 5 herein)
divided by the then applicable Conversion Price (as defined herein) upon the
earlier to occur of (i) the election of the holder to convert (an "Optional
Conversion"), in whole or in part, at any time, or from time to time, commencing
with date of the issuance of Series A-1 Preferred Stock or the Series A-2
Preferred Stock (the "A-1 Issuance Date" or the "A-2 Issuance Date", as
applicable; each one, an "Issuance Date") or (ii) the earliest to occur of the
following dates (an "Automatic Conversion"): (A) the date, at any time after the
one year anniversary of the applicable Issuance Date, upon which both (x) the
average of the Market Price (as defined herein) for a share of Common Stock for
thirty consecutive Trading Days (as defined herein) exceeds $8.00 (subject to
adjustment in the event of stock splits, reverse stock splits, stock dividends,
recapitalizations or similar events) and (y) the average of the trading volume
for the Common Stock during such period exceeds 200,000 shares per day (subject
to adjustment in the event of stock splits, reverse stock splits, stock
dividends, recapitalizations or similar events) shares per Trading Day; (B) with
respect to the Series A-1 Preferred Stock, upon the affirmative vote of the
holders of a majority of the then outstanding shares of Series A-1 Preferred
Stock; (C) with respect to the Series A-2 Preferred Stock, upon the affirmative
vote of a majority of the then outstanding shares of Series A-2 Preferred Stock;
or (D) immediately prior to the closing of an underwritten public offering of
the Company's Common Stock for aggregate gross proceeds of not less than Fifteen
Million Dollars ($15,000,000).
Series B
(a) Right to Convert. Each share of Series B Preferred Stock shall be
convertible into a number of shares of Common Stock equal to the applicable
Liquidation Amount (as defined in Section 5 herein) divided by the then
applicable Conversion Price (as defined herein) upon the earlier to occur of (i)
the election of the holder to convert (an "Optional Conversion"), in whole or in
part, at any time, or from time to time, commencing with date of the issuance of
Series B Preferred Stock (the "Issuance Date") or (ii) the earliest to occur of
the following dates (an "Automatic Conversion"): (A) the date, at any time after
the one year anniversary of the Issuance Date, upon which both (x) the average
of the Market Price (as defined herein) for a share of Common Stock for thirty
consecutive Trading Days (as defined herein) exceeds $10.00 (subject to
adjustment in the event of stock splits, reverse stock splits, stock dividends,
recapitalizations or similar events) and (y) the average of the trading volume
for the Common Stock during such period exceeds 150,000 shares per day (subject
to adjustment in the event of stock splits, reverse stock splits, stock
dividends, recapitalizations or similar events) shares per Trading Day; or (B)
upon the affirmative vote of the holders of a majority of the then outstanding
shares of Series B Preferred Stock.
Series D
(a) Right to Convert. Each share of Series D-1 Preferred Stock shall be
convertible into a number of shares of Common Stock equal to the applicable
Liquidation Amount (as defined in Section 5 herein) divided by the then
applicable Conversion Price (as defined herein) upon the earlier to occur of (i)
the election of the holder to convert (an "Optional Conversion"), in whole or in
part, at any time, or from time to time, commencing with date of the issuance of
Series D-1 Preferred Stock (the "Issuance Date") or (ii) the earliest to occur
of the following dates (an "Automatic Conversion"): (A) the date, at any time
after the one year anniversary of the Issuance Date, upon which both (x) the
average of the Market Price (as defined herein) for a share of Common Stock for
thirty consecutive Trading Days (as defined herein) exceeds $8.85818182 (subject
to adjustment in the event of stock splits, reverse stock splits, stock
dividends, recapitalizations or similar events) and (y) the average of the
trading volume for the Common Stock during such period exceeds 150,000 shares
per day (subject to adjustment in the event of stock splits, reverse stock
splits, stock dividends, recapitalizations or similar events) shares per Trading
Day; or (B) upon the affirmative vote of the holders of a majority of the then
outstanding shares of Series D-1 Preferred Stock.
================
So, absent a change in the trigger points or a vote by those preferred shareholders, it would appear that we are far BELOW the mandatory trigger points for all of the Series preferreds. Thus, perhaps the appropriate accounting is to continue subtracting the dividends after net income and not include the potential shares, even though the price at which the preferreds convert into common stock is currently slightly in the money. BTW - if we did want to count the additional shares, then the preferred dividends would have to be added back to net income before calculating fd eps....
I've never liked convertible preferreds, because they REALLY complicate an income statement and balance sheet, and they often hide the debt like nature of the arrangement. Are convert preferreds debt? Or are they equity? Its a difficult question to answer in ADNW's case, and I'm not even sure I've answered it correctly....but I'd appreciate any others' observations on the accounting of the converts here.
AI
