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The Microcap Speculator submits: Last week, shares of Chinese aquaculture company HQ Sustainable Maritime (ticker: HQSM.ob) took a hit after the company announced a $5.225 million financing.

Like most HQSM investors, I was extremely disappointed by the dilution and expense involved. For months, the company had trumpeted a $75 million financial partnership with ALPS that was supposed to provide everything needed to take HQSM to the next level. In December, the company signed a term sheet for for a $40 million loan backed by the ALPS guarantee facility.

For reasons that I can't understand, the company has decided to turn its back on this facility and use alternative equity financing. CEO Norbert Sporns has been asked to explain the actions but to date has not responded to my invitatons for comment.

Here are the hard facts, according to the 8-K that HQSM filed with the SEC:

  • The financing consists of a $5.225M convertible note, payable January 2008 and bearing interest at the rate of 8%.
  • The note is convertible at $.30/share, roughly a 12% discount to where the stock was trading immediately before the announcement (17.41M shares).
  • The buyers also receive 17.41M 3-year warrants with a strike price of $.35 and 17.41M 5-year warrants with a strike price of $.40. Anyone care to do a black-scholes calculation to determine the value of these? My guess is that each warrant is worth at least $.30 given the duration and volatility in the underlying stock.
  • HQSM will receive just over $4.7M after deducting a whopping 10% commission and offering costs.
  • In addition to the commissions, HQSM is giving roughly 1.74M warrants to the placement agent as a "finders fee."
  • Bottom line: This is not a good deal for shareholders.

    DISCLOSURE: I am still long a bit of HQSM.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.

    HQSM 1-Yr Price Performance:

    Source: HQSM Financing Disappoints Shareholders (HQSM)