I still believe Wave has a chance to succeed if it can find a way to fund itself through break even. Maybe I don’t understand it correctly and sometimes I get my math screwed up so feel free to correct me, but this is my logic for opposing a convert.
Let’s assume Wave issues a $10,000,000 convertible preferred with a stated coupon of 8%. Let’s make it convertible at a premium over the current $.50 market price at $1.00. The market reacts favorably as this easily provides sufficient funding to reach breakeven sometime next year. It appears all but certain break-even will be reached at long last, as enterprises will have finally recognized since they already have the necessary trusted computer infrastructure in place, they now need only to turn the technology on. Imagine, a quarter billion TPMs need to be turned on and managed at about $50 each. At last happy days have finally arrived. Or so it seems.
The price of the stock begins its long awaited ascent. The holders of the convertible are seen as long-term investors. After a few weeks the price rises to $1.50. Shareholders begin congratulating each other. This stock rises even further to $3.00 as rumors of an earning surprise abound. The stock begins to stall. It churns around for a while at $2.75 to $3.25 as volume increases. The stock begins fluctuate but a persistent downward trend is evident.
The quarterly earnings report shows good revenue growth but still $4 million short of break-even as upgrades were less than expected. But Wave still has $6 million in cash and the next quarter is more promising than ever as enterprises, while still adopting at a slower pace than expected, are finally starting to get it. After a brief sell off the stock again begins to rise to $3.25. Again the price stalls awaiting the quarterly results.
So while this transpired, the holders of the convert holders have lain in the weeds for a while collecting their measly 8% coupon. As the stock rose they began to hedge their investment. It doesn’t make sense to convert to the common and forfeit the 8% coupon so they simply short against their position. Eventually they have shorted 10 million shares at an average price of $3. They can convert 10 million shares at $1 and have now sold at $3 so they now have their $10 million back, $10 million profit, no risk and are getting 8% on $10 million to boot.
Now the convert holders are content to sit for a while to see if Wave reaches break even in the next quarter. The stock rises again, at around $3 the convert holders begin to conclude there will be yet another shortfall in revenue. They short another 5 million shares at $3. So now they are sitting with $25 million in cash above their initial investment. Their only risk is if the stock rises above $3 and stays there.
Wave does suffer another revenue shortage in the next quarter. Another round of dilutive financing appears necessary. With the disappointment the price steadily goes down to $1 with our benevolent convert holders joining in the fun and shorting more stock all the way down, say they short another 10 million shares at an average price of say $2. So now they are short 25 million shares but they have their $10 million original investment back, plus $45 million in profit if the stock was to go to 0.
Oh, they also get the 8% coupon on the original $10 million as long as the company is able to pay the coupon, but I don’t think they really care much at that point.
So exactly why do we want to see a convert issued?
News 
Market Data 
Discover 
AI
