The Elephant in the Room

Which would be the repayment of $10M to the Credit Facility by June 30th. There is also the elephant that demands $5M in equity be issued prior to Sep 30th.

I'm going to shoot both elephants with 1 bullet. IMO this is the least painful method for existing shareholders that addresses the requirements.

I expect to see SSN issue (mandatory?) callable cumulative convertible preferred stock. What a mouthful!

a. Has to be stock, else it wont count towards stockholders equity.
b. Has to be preferred stock as new investors would want to rank above the common stock in event of BK
c. Has to be cumulative as SSN doesn't have the cashflow at present to pay the "dividend" (interest)
d. Has to be convertible because SSN is selling the success case of its new low cost production and as such new investors will want to capture the upside in the value of the company.
e. Choosing Least dilutive option for existing shareholders in the short term.

Given that 1Lien BB is approx 6.5% and 2L promissory note is at 10%, I hate to say this but the dividend rate on the preferred stock would be at least 12.5%.

I'm going to use an example of issuing 400,000 preferred shares with $25 par value and coupon of 12.5%.
Equity raised = 400,000 x $25 = $10,000,000

That $10,000,000 goes straight to the balance sheet. It will be found in Stockholders Equity section as a separate line item called something like "12.5% Preferred Stock, $25 par, 400,000 authorized and issued .... $10,000,000".

That cash can then be used to pay down the MOB BB and will satisfy the equity requirements and will not impact the covenants.

Being cumulative I would not expect SSN to pay the interest as it becomes due Qtrly but to defer payment which will accumulate for the preferred holder until conversion

Then it gets tricky. How long before the preferred stock converts and what is the conversion rate? I foresee somewhere between 2 - 4 years and a conversion of 1 Preferred to 10 Common shares:

2 Year Term: Cumulative Dividends of $2.5M to be paid in preferred stock
Total Preferred Stock issued = 400K (initial) +100K (dividends) = 50oK
Conversion @ 10:1 results in 5M common issued (33% future dilution when called)

3 Year Term: Cumulative Dividends of $3.75M to be paid in preferred stock
Total Preferred Stock issued = 400K (initial) +150K (dividends) = 55oK
Conversion @ 10:1 results in 5.5M common issued (~37% future dilution when called)

4 Year Term: Cumulative Dividends of $5M to be paid in preferred stock
Total Preferred Stock issued = 400K (initial) +200K (dividends) = 60oK
Conversion @ 10:1 results in 6M common issued (~40% future dilution when called)

Using the 4 yr Term example, if you purchased 200 preferred shares, a $5,000 investment, in 4 years time you get converted to 3,000 shares, which would need to be trading at $1.67 to be breakeven, which is double from where they are now.

I think everyone here believes that in 4 years time SSN will have more than doubled - right? My model infers between $4.5 - $7.5, so taking midpoint of $6 means preferred shareholder gets 360% return over 4 years. Not to shabby.

The above was done assuming issuance on USA exchange. No idea if this is what will happen as it was a simplistic example but hopeful for something better than a private placement at a discount or a monthly convertible note .

GFTA.