As readers, you know one of the things that I do is blog about the local tech companies quarterly earnings. Given the announcement from Cyan yesterday, I think I need to give folks perspective on this complex proposed transaction. You can find a copy of the announcement HERE. Since I think these kind of transactions are hard to understand, I will write about it.
This is an offering that dramatically lowered the common stock price and I will explain why. But first, I think I need to put some information around the transaction itself. As a baseline, the company is trying to sell $50M in debt. These are the “Notes” listed in the press release. These Notes will have an interest rate attached to them. This interest rate is unstated but I expect these to have an interest rate above 5% based on current interest rates in the market. Secondarily, there is a “Warrant” attached to the purchase of the Note. The Warrant is the right to buy a stock at a fixed price much like a Stock Option. The reason that the stock took a hit is that it would be expected to have a Shareholder vote to increase the number of outstanding shares. The reason is that if you convert the Warrant, the company will want to issue stock (from its point of view free) instead of paying cash. Since making new Stock does not change the value of the company, the value of the Stock has to change to compensate.
The value to existing investors is that there will be an extra $50M for the company to spend. The goal of that money needs to be to get the company to cash flow positive. Assuming that happens, then this funding will create a lifeline for the firm. The value to purchasers of the Notes is to be determined. Given that the company is losing money, there is no assurance that the interest on the debt can be paid. On the other hand, if the company succeeds the holders of Notes will have an option to buy Cyan Stock at a relatively cheap price (relative to the market at the time). Debt does not actually change the value of a company directly. You get money and owe money back. It is a market cap neutral transaction. The Stock Price change is all about the Warrants.
I won’t comment on the existing investors expressing interest in $15M of the $50M. There is no commitment so it is hard to say what will actually happen. The one thing I can say is that if the company does not succeed it will be owned by the Note holders. In that kind of event, the Senior Debt (“The notes will be secured by a first-priority lien on substantially all of the Company’s assets, subject to permitted liens and certain excluded assets.”) control what happens not the Shareholders.
Most of you are not going to be able to buy into the Notes. If you can, you certainly have more dedicated advisors than me. So, I want to be clear for the existing Shareholders what this means. This announcement lowers the value of your stock in both the short and long term. Given that you likely bought it at a much higher level than you did now, you need to ask yourself what you should do. My suggestion is to remove the emotion and look at things analytically. You can’t change the past, so don’t bother trying. So, try to look forward and play out some scenarios. Set sell prices above and below the current value. If the Stock hits those numbers sell. If it doesn’t wait until it does. This should be true for every stock in your portfolio.
Have a great day and I was glad to see so many of you at Santa Rosa Connections last night!
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