Ann: Corporate Update, page-52

Just been wondering if all the boiling frogs on HC can feel the heat as the convertibles are really turning it up. Make no mistake, this debt creates an issue that shareholders need to be aware of.

So here’s the problem with this last announcement (and I’ll spare my comments on the fluff re all the marketing they’ve done). Briefly, a recap for all the haters, my gripe with this company has not been with the tech but with funding and governance.

So the Convertibles. This issue highlights:
1) Sophisticated investors see CDX equity as too risky

2) The amount raised looks way too small relative to what they need to bridge to new equity

3) Being backed by management suggests no-one else was interested or management wanted the debt for themselves (see below - and remember they still haven’t contributed towards the last placement at 30c)

4) And the BIGGEST issue …. as a heavily cashflow negative and cash starved company, a coupon rather than a PIK is appalling and pushes CDX closer to the edge (more below)

So here’s a plausible scenario to ponder. Not saying it will happen but all the sycophants here on HC need to understand how these convertibles work and that they are an awesome deal for management and up the ante for other equity holders.

Now, just say that over the next 6 months:
- the US IPO doesn’t occur
- sufficient new equity funding can’t be raised, and
- CDX misses a convertible coupon payment (by design or otherwise) and therefore defaults

What then? Well the interests of management as convertible debt owners diverge from shareholders even more. Now consider this scenario:
- Chair and CEO then probably need to resign from the Board, recuse themselves at best
- Administrator or similar is appointed
- Administrator agrees to debt for equity swap at a share price that wipes out or massively dilutes the equity
- management increase their equity further after the swap (mostly through C2) resulting in the Chair and CEO reappearing as even bigger, perhaps majority owners. Voila!

Ask yourself, why does a heavily cashflow negative and under funded company raise default risk by issuing coupon paying debt rather than a PIK? The sensible thing to do here is to have the option whether to pay a coupon or a PIK so as to not risk default. Can anyone see the governance red flashing strobe light yet!

For those who want to understand a PIK
https://www.investopedia.com/terms/p/paymentinkind.asp

Not saying this risk is going to materialise but it’s not a risk I want to take as it’s my view the US IPO is a problem despite what they or others say.

It should be a massive red flag when senior staff (particularly a CFO!!!!) leave right before an allegedly money making Nasdaq IPO. Unless of course the insiders see it differently! I’m always suspicious of reasons given for staff departures. Saving face is always so important.

So if some big corporate deal is announced or an IPO is launched it’s a big win for management. Remember they’re asking for even more options, for a longer term on the Converting Notes and at a lower strike than the options issued earlier in the year. Or, if nothing happens and it all ends in a massive face plant, well management will mostly likely be dominant owners of the company through the debt. It’s a Win Win for them!

Directors duties are extremely important. They need to act in the interests of the company as a whole. I hope independent directors are heavily engaged and well advised, and that others are watching. Signals are rally bad here in my view. Better getting out of this stock. You can always get back in. All in my opinion.