Hogger, here is another way of looking at dilution vs splits and why it concerns some people. Hypothetical 100 shares outstanding price $2/share
(Note: tabs don't seem to work here. Hopefully the folowing tables makes sense.)
Original
Company Shareholder(s) Total
Shares 50 50 100
Value $100 $100 $200
Post 2/1 split new price goes from $2.00 to $1.00
Company Shareholder(s) Total
Shares 100 100 200
Value $100 $100 $200
The split only affects the price and is used in theory to attract new investors as Arnold pointed out. The practice was more effective in the days of odd lot rules and price based commissions. In the days of fixed price trades, I doubt if there is a significant effect. Reverse splits have been become more common and are used to increase the share price in order for some stocks to stay listed on exchanges with price per share rules. cygx would actually do better with a reverse split at this time.
Post 2x issue of new shares new price goes from $2.00 to $1.00
Company Shareholder(s) Total
Shares 150 50 200
Value $150 $50 $200
Now you can see why cygx wants/needs the new issue. The total value of all outstanding shares stays the same but after the issue, the company now has additional funds to do with as they please. Of course those extra funds, or $50 of the shareholders original investment, have been effectively transferred. This is one of the reasons why this authority usually requires a shareholder vote – which cygx did not ask for the last time around by the way.
The actual amount of dilution depends on how many shares are issued. At this point there are roughly 100 million outstanding and the company already has the right to issue 50 million more. They are asking for the authority to issue up to 150 million more shares so that instead of cutting the shareholder value in half as the example above, it could be reduced even more. There are a couple camps on the effect of this action. If you think we are in dire straights and this is the only way to get money - the reasoning goes that as a sareholder, less of something is better than 100% of nothing. If you think that we can make it without this source of funding, then why should the shareholder have to foot the bill without any additional compensation? Compounding the matter for cygx is a past history of selling newly issued shares cheap. So not only do the current shareholders foot the bill, the new big dollar shareholders have gotten preferential treatment. I understand the reasons behind it but continuing to do that is like putting salt in the wounds.
Something to remember is that this is not just a one-time event. The affect of the dilution, or percentage shareholder value reduction, is there forever unlike a loan which gets repaid. With dilution the stock has to perform proportionally better over the stockholder’s length of holding to recoup the value. The infamous $50 target becomes a $100 target if you factor in a 2x dilution. (Note you still get the same amount at a given target but remember that the stock price would have be fundamentally higher if it had not been diluted.) Some people have said OK so what else can they do. Some have also said how nice it is to be debt free. There is nothing wrong with debt, especially at today’s rates, if the money is used to put the company into a more favorable position. For example borrowing to fund the human trials would not necessarily be a bad thing because if successful, the return/repayment should be significant and relatively forth coming. That can be done without a lasting affect to the long term shareholders. It’s true that debt will change the value of a stock – when it is trading on fundamentals, which cygx is not at present – but when the debt is paid down the shareholder has not lost any value. Many have pointed out that money is available. Biophan just received an effective $2 million SBIR line of credit to use at their discretion. There are several avenues open to start-ups. Funding should not be an issue. Using stock for finding is just one option and it is absolutely an option that the shareholders have the right to approve or disapprove irrespective of the shareholder's company sentiment.
Another side of this issue is the anti-takeover effect. Having the authority to issue shares can be a good thing to thwart a takeover but the proxy indicated that this was not the primary intention. In fact it clearly states that this is intended to be available to fund ongoing operations as needed. That’s one of the reasons some people are questioning this item with regards to fiscal responsibility. It can be considered a blank check for the company at the shareholder’s expense.
This whole thing boils down to a judgment call. Do you trust the current management to do the right thing with your money? Do you fully understand the consequences of their actions for your investing strategy? Do you understand the potential outcomes with or without this authority? We have been asked to provide our guidance in this matter and it is important that we exercise this privilege. As a shareholder for four years, I have seen significant scientific progress and improvement in the business direction in the last year and feel better about the company’s future than at any time in the past. That said, this company does not have the best business track record. I do not think there would be this discussion if they did.
On a related note, I agree with one of the earlier posts that our collective shares still do not add up to management’s and our choices may not determine the outcome. That said, I think that if the share authorization passes but is shown to be unpopular among the outside shareholders, cygx may apply some additional restraint for the eventual issue of those shares.
Tomorrow afternoon will be interesting.
Good luck to all.
downr
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