Detective Sykes is on the Case
Dear Penny Stock Millionaire,
Yesterday, I brushed the complicated surface of warrants and ESOs, and the dangers and opportunities that they present to your portfolio.
Today, to drive the lesson home, I want to give you a case study on warrants and toxic financing.
Before I delve into the details, I want to be clear. This is a rough overview. Why only an overview? Because once you start digging, it’s like going down a rabbit hole. Once you enter the rabbit hole, it’s soon clear that every tunnel leads to more dark tunnels.
Alright, now that we have that squared away, let’s get into it!
VISL: A Case Study in Toxic Dilutive Financing
Formerly known as xG Technology, Vislink Technologies, Inc (NASDAQ: VISL) is like a poster child for toxic financing.
How xG Technology Became Vislink Technologies
Back in February 2017, xG Technology acquired Vislink from Pebble Beach Systems Group, plc. (Plc means public liability company — the British version of a publicly traded company.) The deal was worth $6.5 million in cash and $9.5 million in promissory notes.
The sale of Vislink to xG was a divestment. It meant Pebble Beach Systems Group could transition to a software-based strategy. To emphasize xG Technology’s awful track record, they didn’t actually pay the full agreed amount…
With $4.9 million still due to Pebble Beach, there was a settlement for $2 million in cash. xG Technology also paid off some of Pebble Beach’s creditors as part of the deal.
You can’t make this stuff up.
So, why did xG Technology adopt the Vislink name? I can only guess. But considering the dire state of xG Technology’s finances and,its history of dilutive financings and reverse stock splits…maybe they wanted to re-brand.
A fresh name and a fresh look for investors. (I‘m trying to give them the benefit of the doubt, but it’s sketchy as hell.) Even though Vislink was struggling, it sold real products with a history of profit. Plus, Vislink plc was a U.K.-based company. That means it wouldn’t be on the average U.S. investor’s radar.
Back to xG Technology…
Reverse Splits Can Signal Trouble
Trading under the ticker XGTI, the company had three reverse stock splits from 2015 to 2018.
Why does a company do a reverse split? So they can prop up the share price. For example, Nasdaq issues a notice of delisting when a company’s share price remains below $1 for more than 30 days.
They give the company time to get the share price up. The company can apply for a 180-day grace period. A second 180-day grace period is sometimes offered, as well.
If the company can’t get the price back up through positive earnings or other good news, they might resort to a reverse split.
What Happened With the XGTI Reverse Splits
I’ll put it in the simplest and kindest terms…
If you invested $10,000 in shares of XGTI at the company’s inception in 2012, you’d have lost 99.94% by the time of its ‘rebranding’ to VISL. Your $10K investment would’ve been worth $5.77.
If that’s not enough to tell you this company had questionable tactics, they went and did another reverse split. By means of a 1-for-10 reverse split that took effect on May 13, 2019, they managed to remain listed on the Nasdaq.
That’s just the tip of the iceberg. I’ve left out sooooo much because this could go on forever.
A Brief Lesson in Corporate Slime
Three members of the Vislink board of directors — including the current and former CEO — also served on the board of MB Technology Holdings, LLC (MBTH).
MBTH was a privately held company created to provide ‘certain management and financial services’ to Vislink. What did they get in return? Fees, of course. Big fat fees.
This from the Vislink Technologies 10K (annual statement). Emphasis is mine:
“The Company has agreed to award MBTH a 3% cash success fee if MBTH arranges financing, a merger, consolidation or sale by the Company of substantially all of its assets. On November 29, 2016, the Company and MBTH entered into an acquisition services agreement (the ‘M&A Services Agreement’) pursuant to which the Company engaged MBTH to provide services in connection with merger and acquisition searches, negotiating and structuring deal terms and other related services.”
That agreement was superseded by the current arrangement with MB Merchant Group, LLC. (MBMG) The current Vislink CEO and the other co-founder are the only officers of MBMG. The fee for arranging takeovers of other companies stands. How much? Their fee is a minimum of $250K and a maximum of $10.2 million plus 1.1% of the transaction. I’ll let that sink in…
As you can see, MBMG has the potential to clean up if another merger/acquisition completes. They already made a fair chunk from the Vislink acquisition.
But wait … it gets better…
“Additionally, MBMG will receive a monthly fee of $50,000, and the Company at its sole discretion will have the option to credit such fees against future acquisition fees due each year to the extent it deems that appropriate based on all services received from MBMG.”
All this for a company losing money hand over fist — to the tune of $14 million for the year ended December 31, 2018. Their last quarterly report put them on track to lose a similar amount in 2019.
Keep in mind, they paid the CEO a salary of $293,800 in 2018. Add the stock options, and he was compensated $491,288.
Sketchy, sketchy, sketchy…
Finally, the latest round of toxic financing…
VISL Completes Offering Raising $12 Million
We’re almost back to the present. Remember, on May 10, the company announced a 1-for-10 reverse stock split. When the market opened on May 13, the stock price was $2.44 after closing at $0.2435 on May 10.
Then, on June 3, Vislink put out this press release announcing $650,000 in orders for its airborne video downlink service. This news spiked the stock from $1.62 to a high of $3.74 before settling to close at $2.97. Unfortunately, the spike was a one-day event and the stock gapped down overnight.
On June 17, VISL spiked again. This time, they piggybacked a press release off of this article about the OGN Super Arena in Manhattan Beach, California. What is it? An Esports venue. Vislink got a mention because their transmitter is being used in the arena.
July 1 was notable because it signaled more share dilution. How? Vislink filed an S-1 with the SEC. That means more shares were on the way. Something big was coming…
Finally, we arrive at the big day … July 10, 2019.
- At 3 a.m., Vislink filed an S-1/A. The A means there’s an amendment to the S-1 filed on July 1. What was the amendment? The first filing didn’t fill in all the blanks. It wasn’t clear how many shares would be offered.
- Then, at 7:15 a.m., a press release announced Vislink was awarded a $2.8 million contract with the U.S. Army. It was a big news catalyst and led to a massive pre-market spike.
- After closing the previous day at $1.65, the stock opened at $6.58. Was it a pump? In my opinion, the pre-market frenzy combined with aggressive shorts created a bigger spike than the news warranted. The stock ran all the way to a high of $8 per share.
But Vislink once again proved itself incapable of holding the spike, dropping back to $4.10 per share at the close.
Check out the chart…
VISL chart: 3-month, 1-day candlesticks — notable events leading to toxic financing, courtesy of StocksToTrade.com
Now take a look at the chart from July 10 and 11:
VISL chart: July 10–11, 1-minute candlestick — courtesy of StocksToTrade.com
At last, we get to the offering…
At 6:18 p.m. on July 10, Vislink finalized the new share offering for 7.27 million shares and pre-funded warrants. It gets slightly complicated, but the end result was that the company raised approximately $12 million, which they used to pay off convertible debt.
Interesting note: 1,000,000 shares of common stock issuable upon exercise of pre-funded warrants were purchased by someone previously sued for a fraudulent takeover scheme. It was a big payday for that person.
Sketchy? I’ll let you decide.
Mind you, the company’s total loss since inception is roughly $240 million. They’re still losing money hand over fist. The CEO and his fellow directors are raking in the cash.
What of the investors? Those poor souls who buy the hype–the bagholders?
All I can do is shake my head, and hope that you learned something today that will keep you from being one of them in the future.
Editor, Penny Stock Millionaires