... agreed to sell 6.3 million shares of the Company's common stock ("Common Stock") to one existing and one new accredited investor in a registered offering. The Company will issue 3.6 million shares of Common Stock and pre-funded Series B warrants to purchase an additional 2.7 million shares of Common Stock to the purchasers, one of whose purchase of Common Stock in the offering otherwise would result in the purchaser beneficially owning more than 9.99% of the Company's outstanding Common Stock following the completion of the offering ("Series B Warrants"). Each share of Common Stock will be sold at a price of $1.20. Each Series B Warrant will have an exercise price of $1.20 per share of Common Stock, $1.19 of which will be pre-funded at closing and $0.01 of which will be payable upon exercise of the warrant.
Concurrently with the registered offering of Common Stock and Series B Warrants, the Company is conducting a private placement of Series A warrants to purchase up to 6.3 million shares of Common Stock to the purchasers of Common Stock and Series B Warrants in the registered offering ("Series A Warrants"). Each Series A Warrant will have an exercise price of $1.34 per share of Common Stock.
Capstone shares had recently been trading above $1.40, and the fact that they were priced at $1.20 should have been enough to signal investors that the September quarter was going to be disappointing. However, like a similar placement back in 2014, Capstone chose to bury preliminary results in an 8-K rather than the press release. The 8-K revealed the following information about revenue, orders, cash balance, etc.:
- Estimated revenue for the quarter ended Sept. 30, 2016, was ~$15 million vs. $17.9 million for the quarter ended Sept. 30, 2015
- New product orders for the quarter were $8 million (a 1:1 book-to-bill ratio), vs. $8.4 million a year ago (a 0.7:1 book-to-bill ratio)
- Cash and cash equivalents, including restricted at Sept. 30 was ~$16 million vs. $16.7 million as of the fiscal year ending March 31, 2016
- Borrowings under its revolving credit facility as of Sept. 30, 2016, were ~$6 million vs. $9.5 million as of March 31, 2016
Once again, Capstone has done a disservice to its investors by neglecting to include the information in the press release. The last time, they issued preliminary results a few days later, and only after readers on Seeking Alpha had already had a chance to read about it.
Is it any wonder that shares immediately plunged to $1.20 and have since declined to as low as $1.09? Less than a year ago Capstone had to do a 1:20 reverse split to prevent delisting on the Nasdaq and the shares immediately lost half their value.
The company has taken steps to cut expenses, but it obviously wasn't nearly enough. If it were, there would have been no need for another equity raise and another dilution of current investors. And, if current performance is any indication, the equity raises aren't done. This time, though, the investors that put money into the company received an anti-dilution clause for their warrants:
Each Series A Warrant will have an initial exercise price of $1.34 per share of Common Stock, and the exercise price (but not the number of underlying shares of Common Stock) will be subject to a "full ratchet" anti-dilution adjustment if the Company issues or is deemed to have issued securities during the two and one-half year period following the issuance of the Series A Warrants at a price lower than the then-applicable exercise price.
Whether the so-called smart money gets burned again remains to be seen, but at least they were smart enough to require some protection.
Disclosure: I am/we are long CPST.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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