The proliferation of toxic overhangs
Unfortunately, many small cap healthcare companies have over-exposure to warrants, options and preferred stock of past toxic financings … that are baggage still burdening their viability, stock pricing and needed future financings.
Valuing some capitalizations or “market caps” assumes a comparables or peer estimate of a company’s value versus – perceived – future prospects.
- Calculated as the number of shares outstanding (as opposed to authorized) times the price per share; however, market capitalization should NOT be confused with the – FAIR – market value of these companies since the pricing is unduly influenced by outstanding warrants, options and preferred financings plus issued shares equating a fully diluted number.
Warrants entitle the holder to buy stock of the company that issued it at a specified price, which is usually higher than the stock price at time of issue.
- Warrants are TOO frequently attached to PIPE and preferred financings as “sweeteners” incentives which are usually detachable and can be sold independently of the stock (which may help or hurt a company depending on share performance);
- While, preferred shares or preference shares, typically have a higher ranking than common stock (with or without voting rights); these usually can be converted into common stock, but – WHY – in this challenged economy;
- However, preferred(s) carry priority over common stock in the payment (sometimes stock) as preferred(s) can also be paid out in an asset sale before common stockholders and after debt holders in bankruptcy (the newest reality);
- While options are awarded to management, directors, employees and consultants in companies to “reward” performance; they often become a burden and a questionable obligation.
The Bottom Line: I do get tired of writing about negativity, but reality is financings continue to permit companies to survive create a death knell – for the future. Too many companies sought to be listed entities, often through reverse mergers. They held on to the OLD model of access to the public “trough” versus continued private and/or VC funding (who too often passed the risk forward). Companies also overlooked the true costs of being a public company i.e. Sarbanes-Oxley. One question is how many boards have acceded to these financing and listing formats because they were just without options … or were they? The past is unforgiving but, new realities bode many should merge to form stronger, intergated and viable platforms or liquidate. If management truly believe in their platform – invest in themselves (execute a mngt buyout returning – something – to depreciated shareholders) or the usual – retreat – to the pink sheets; hoping for a better day. Inevitability rules this market!
