POTNETWORK HLDGS (OTCMKTS:POTN) a Toxic Debt Disaster

POTNETWORK HLDGS (OTCMKTS:POTN) a Toxic Debt Disaster

POTNETWORK HLDGS (OTCMKTS:POTN) a Toxic Debt Disaster

Here are the facts

From the filings (Original) POTNETWORK HLDGS (OTCMKTS:POTN)

Promissory Note in the principal amount of $1,850,000 pursuant to the terms of a security purchase agreement dated of even date therewith.

The security derives from an original promissory note dated June 2, 2014. The annual interest on this note was eight percent (8%). But the interest does not accrue since the addendum agreement in exchange for a fixed conversion rate of $0.003 per share.

After the conversion of $126,000 in the 2nd quarter, the balance of the note at June 30, 2017 is $1,836,186.

Let me do that Math for you, 42-M new shares a Quarter, I have no idea how the .003 is getting past the regulators as it is as toxic as debt can be, the fact is this will end in disaster.

The debt spiral will crush the shareholders considering there is over 600m more shares to be issued.

Death spiral financing is a process in which convertible financing used to fund primarily small cap companies can be used against it in the marketplace to cause the company’s stock to fall dramatically, which can lead to the company’s ultimate downfall.

The target here would be .003 the point at which the stock is being converted and dumped on market.

Death spiral financing is a process in which convertible financing used to fund primarily small cap companies can be used against it in the marketplace to cause the company’s stock to fall dramatically, which can lead to the company’s ultimate downfall.

Many small companies rely on selling convertible debt to large private investors (see private investment in public equity) to fund their operations and growth.

This convertible debt, often convertible preferred stock or convertible debentures, can be converted to the common stock of the issuing company often at steep discounts to the market value of the common stock. Under the typical “death spiral” scenario, the holder of the convertible debt initially shorts the issuer’s common stock, which often causes the stock price to decline, at which time the debt holder converts some of the convertible debt to common shares with which he then covers the debt holder’s short position.

The debt holder continues to sell short and cover with converted stock, which, along with selling by other shareholders alarmed by the falling price, continually weakens the share price, making the shares unattractive to new investors and possibly severely limiting the company’s ability to obtain new financing if necessary.

An important characteristic of this kind of convertible debt is that it often carries conditions like a quarterly or semiannual reset of the conversion price to keep the conversion price more or less close to the actual stock price.

However, a lower conversion price also increases the number of shares that a bond holder gets in exchange for one bond, which increases the dilution of existing shareholders.

A lower price reset can also force investors that have set up a long CB/short stock position to sell more stock (“adjust the delta”), creating a vicious circle, hence the nickname death spiral.

Companies willing to agree to financing on these terms are often desperate and could not obtain funding through any other means.

The terms, though viewed by some as onerous, give the lender a potential way to recover their debt regardless of what happens to the shares of the company.

The lender would have a potentially greater gain if the shares were to increase in value, but if they decrease in value, there is some protection.

Otherwise, they would probably not be willing to lend the money because of the poor risk profiles of the companies interested in this type of financing.

 

 

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S. Jack Heffernan Ph.D. Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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