: Warrants and common stock A company I have shares in recently announced underwritten public offerings of 10.6 million shares and warrants to purchase up to 10.6 million shares had priced. As a result, shares prices dropped

Vote Up Vote Down   0 Reactions

Login to give Reaction!

As I mentioned in my comments above, a call warrant is a long term option (the right to buy the stock at the strike price but with a further expiration). In common usage, warrants are assumed to be call warrants unless specified as put warrants (the right to sell the stock at the strike price).

PTE's secondary offering consists of a unit which is comprised of one share and one seven year warrant with a strike price of .80. Each unit costs .35. The warrants are American style, giving the owner the right to exercise them at any time. If PTE rises sharply, warrant holders will be able to buy shares at .80 (one share per warrant unless specified differently in the prospectus). With 10.6 million units offered, that will raise million for the company (before underwriter fees), excluding future proceeds from exercise of warrants. The units will be separable immediately and will trade on its own.

Because each unit costs .35, that means that they priced the share below .35 (.35 less the value of the warrant). I can't tell you what a 7 year warrant with a strike price of .80 should be worth but you'll know that as soon as it begins trading. My guess is that the pricing of the common share will effectively be less than . Whatever that number is, that's a sharp discount to .18 which is where PTE closed at yesterday. That's what I meant by "they threw investors under the bus". It's no wonder that the shares dropped like a rock today.

Vote Up Vote Down   0 Reactions

Login to give Reaction!

The warrants that are received along with secondary-stock-offerings are like free call-options. An investor that exercises a warrant has to pay a strike price but benefits from a gain in the stock price and that if the stock did gain beyond the strike price.

The secondary-stock-offerings can sell at a higher price than the current stock price because they are bought at a set-price rather than at a rising price that could be caused by stock-buying on the stock market. Now it's often short-sellers that want the stock at a set-price because they use the stock to close-out short positions and that without driving the price of the stock up as the short positions are closed out.

The company doesn't mind helping the short-sellers because the company receives the funding. The investors in the company often don't mind because the company that they are investing-in receives more funding. But if the funded company doesn't draw new investors then the greater number of shares on the stock market could cause the stock to drop. Often the stock price holds near the price of the secondary offering.

However, this PTE company sold 10.6 million shares when the short-interest is only 4.76 million shares. And the 10.6 million shares represents a 42% increase in shares-outstanding and an 80% increase in float.