Soooo, I spent several verrryyyy exciting hours perusing the 10K, and I have a few observations that some of you might like to hear. As usual, studying the document at hand and writing out my conclusions is as much for my own clarification and edification as for anyone else's, so if most of this is obvious, I apologize in advance.
If you don't mind, golfer, I thought it might be useful to explain and clarify the share dilution calculations you have observed.
On April 12, 2007, the Board of Directors adopted a new plan for compensating the non-employee directors (pg. 20, 10-K). This plan included, as golfer said, the following:
Annual fee for outside Board membership and meeting attendance: restricted common stock valued at $25,000
Annual fee for audit committee chair: restricted common stock valued at $8,000
Annual fee for compensation, nominating and other chairs: restricted common stock valued at $6,500
Annual fee for committee membership: restricted common stock valued at $5,000
Options awarded in January valued at closing price on grant date: options for shares valued at $50,000
All restricted common stock is allocated at beginning of year based on January’s 30 day volume weighted average closing price and delivered to board members monthly as earned by attendance, either by phone or in person. (pg. 20 - 10-k).
So, what does this mean for share dilution this year and next? First, the number of non-employee directors is currently 5, but in 2007 it was 6 (until Rick Wynns resigned). Second, there are currently 4 committees - Compensation, Audit, Technology and Nominating - and each one of these committees currently has 3 members, one of whom is the respective chair. Please note the last line, where it indicates the share price that will be used to calculate these awards - in 2007, this was $0.13, and, from my calculations for January, 2008 the volume weighted average share price was $0.0155 (or thereabouts ... call it $015). From the 10-K, the awards to directors for service in 2007 are:
Director Stock to be Issued in 2008 Share Price
Martin Nielson 308,192 $.13
Gary McNear 219,508 $.13
Craig Conklin 235,338 $.13
Richard Wynns 185,562 $.13
Charles House 690,908 $.13
John Kroon 518,915 $.13
This brings the total awards for service in 2007 to 2,158,423 shares, which will be added to the outstanding share number. To be honest, when I do the calculations, it doesn't work out to those numbers, so I would like to see a break down of the numbers.
Okay, now let's look at 2008, and this is where the numbers really climb. Remember that compensation for 2008 is based on the share price in January; ie., no matter what happens to the share price (it could go to $5 dollars), the directors will be compensated at approximately $0.015.
So, for 2008 (to be paid out in 2009), we have the following:
5 directors X $25,000 = $125,000 @ $0.015 = 8,333,333 shares for board membership.
4 committees X 3 directors ea. X $5,000 @ $0.015 = 4,000,000 shares for committee membership
3 committee chairs X $6,500 @ $0.015 = 1,300,000 shares for committee chairs
1 audit committee chair X $8,000 @ $0.015 = 533,333 shares for audit committee chair.
This is a total of 14,166,666 shares, which will be added to the outstanding share number.
But wait, we are not done yet!! On April 12, 2007, the directors also awarded themselves 454,545 options each to buy stock for a total of 2,272,725 options. Eight months later, on December 31, 2007, the board of directors voted to convert these options into shares of common stock (pg. 21, 10K). Those "free" shares were reflected in the latest form 3 and 4 filings and were added to the outstanding share number.
But wait, we are not done yet!! Also in April of 2007, the four non-employee directors who served in 2006 (Wynns, Conklin, McNear, and Nielsen) were each awarded 500,000 options to buy shares at $0.11 for a total of 2,000,000 options (the options expired in 10 years and came due in equal amounts ever year for 3 years). Then, in February, 2008, the board voted once again to convert these options into shares (pg. 21, 10K). Again, these "free" shares were reflected in the latest form 3 and 4 filings and were added to the outstanding share volume.
But wait, we are not done yet!! In previous years (2004 and 2006), the board had awarded each director 500,000 options to buy shares for service (I can only assume for the years 2004 and 2005, but it is not stated exactly). Again, in February, 2008, the board voted to convert these options into shares for the three remaining directors from that period (Conklin, McNear, and Nielson) (pg. 21, 10K). That is 1,000,000 options converted each for a total of 3,000,000 shares. Again, these "free" shares were reflected in the latest form 3 and 4 filings and were added to the outstanding share volume.
So, is everyone keeping score? That is a total of 7,272,725 shares that have been given in the last few months to the current directors for service prior to April 2007.
Now. add 2,158,423 more for services in 2007 that still have to be granted for a total of 9,431,148 added to the outstanding share number. Finally, add the 14,166,666 for services in 2008 for a total of: 23,597814 added to the bottom line for director services.
But wait, there is more!! Each new director (I am assuming from April, 2007) who is appointed to the board is to be awarded shares worth $130,0000. These shares are paid out equally over 24 months, but it means that any new director will end up with potentially another 10 million to 30 million shares (price calculated at current trading range between $0.004 - $0.01).
All of this does not include the $50,000 in options that each director is to receive for service in 2007 and 2008. I would hope these will be prorated based on time served, but it doesn't actually specify that anywhere, so that is potentially $300,000 worth of options for 2007 and $250,000 worth of options for 2008. These options are supposed to be awarded some time in January and their price will based on the closing price on the grant date (pg 20, 10K). I don't see these accounted for anywhere in the form 3 and 4 filings or in the 10K, so I am pretty nervous about this. The 10K only has stock option accounting up to December of 2007, so these options might not be accounted for yet. This is pretty huge because their exercise price for the 2007 price will be as of this year. This means that they will be 0.01 - 0.017 or so. That means another potential 20 to 30 million shares added to the bottom line if the options are exercised.
But yes, there is even more!! Eugene Gartlan's estate is owed $79,000, which will be paid out in cash and/or stock, so that is another 8 million to 20 million shares. In addition, there will be 2,000,000 shares paid to the estate plus 1,000,000 in options at 0.01. Forgetting the options, that is 10 million to 22 million shares to be added to the bottom line.
And finally, Walter Weisel. Mr. Weisel is owed $110,000 in shares to be paid out in 11 installments this year. That is another 11 million to 27 million shares. In addition, he is to be paid another 2,800,000 over the next year (pg.21, form 10K).
But, this does not include the 200,000 in series B stock and either 35,000 or 60,000 in series C stock. These stocks are paying a 5% dividend paid out in common stock at 75% of a 20 day average stock price (yup, that means the dividend paid out in stock at between 0.003 and 0.075 on current prices (and I am being generous.
Soooooo, where does this leave 2007 and 2008?
Directors shares: 23,597,814
Gartan's shares: 10,000,000 - 22,000,000
Weisel's shares: 13,800,000 - 29,800,000
Total (not including new director payouts or dividend payouts (which are currently running in the millions):
47,397,814 - 75,397,814 added to outstanding shares.
As golfer noted, this does not even include additions from Cornell sales.
To be honest, this was probably not intended by the directors when they voted in the new compensation plan last April, but it is a reality now and it needs to be dealt with. On several occasions (for example, December 31, 2007), the board has voted to reduce the exercise price of existing options. For example, and recently, Lloyd Spencer had the exercise price of his options reduced from $0.04 to $0.01 (pg. 19, form 10K). If the board is willing to move this way to protect insiders from falling share prices, don't they have a moral obligation to move the other way in order to protect shareholders in general from the same falling prices. If they don't, then they are just using the current situation to transfer ownership of the company and generate shares for free. If I were Jerry Horne, I would be really mad: he currently owns 14.09% of the company, but if this keeps up, his ownership will have been cut in half. The guy agreed to renegotiate his loan in terms of share value that is being transferred to current directors and executives. If you knowingly made such a deal with the guy, is it any different than just taking money out of his pocket?
Final note: under current calculations, the share ownership of directors and officers will literally at least double in percentage value (from approximately 16% - 32%) in the next year or so because of the current situation.
I want this company to succeed, and I think I have developed a little faith in Lloyd Spencer, but this dilution / wealth transfer issue has to be settled. If it persists for even a few quarters, the results will be disastrous.
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