Mike Murphy, HOLD. Entire text. I plan to HOLD. Should be very limited down from this price and a big mistake to sell down here.
Why not sell right away? Because in the exact same situation with Corvis a couple of years ago, I did recommend selling right away. Management of Corvis found cash elsewhere, made the convertible payments in cash, and the stock doubled. The other terms on this restructuring are more onerous than in the Corvis case, but they primarily relate to redemption.
MobilePro might be able to make these payments out of cash flow. For example, this week they signed a deal with FSH Communications for local exchange services that should generate about $12 million in revenues a year. MOBL also has numerous operations and assets that could be sold to raise cash to make these payments, so I don’t want to cut and run at this point. But until we see the other shoe drop -- management’s plan to avoid making these payments in stock -- we can’t continue to buy it. Hold MOBL. I am also suspending the target price until we get more information on management’s plans.
MobilePro (MOBL) restructured their convertible debt with Cornell Capital Partners (see the Plug Power write-up above for more about an SEC investigation of Cornell) in what I think is a dangerous way, so I am moving the stock to a Hold.
This is a $15 million convertible with a 7.75% coupon, issued in May 2005. MobilePro now has the right to make payments in either cash or stock, which management positioned as a positive. However, beginning September 1, they agreed to make weekly principal payments of $250,000, plus interest. I estimate that at the end of June they had about $2 million in cash, so I would expect them to make many or most of these payments in stock.
The stock that is used for payment will be valued at 27.5 cents a share or the average of the two lowest volume-weighted average daily prices during the five days before the payment, whichever is less. That gives Cornell Capital an incentive to short the stock, drive it even lower, take more and more shares every week, which drives it lower yet, and eventually take the company away from the current shareholders. That’s very similar to what the SEC is investigating Cornell for already. I thought managements had gotten hip to these toxic convertibles, but apparently not. Cornell Capital now beneficially owns about 5% of MOBL stock and does not have a board seat, so it will be difficult to tag them with negotiating an insider, sweetheart deal that hurt the other shareholders. But maybe the SEC investigation will cause them to behave.
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