I was flattered that one of my pitches related to MDTL was quoted by Tim Beyers in his article last week entitled "Who's Buying Now", but I didn't know about it until I got some hostile attention from one David Redstone. Redstone publishes a newsletter h2fc which, as best I can fathom, tracks developments in the fuel cell industry. He is a huge supporter of Medis and took great offense to the quote in Tim's article, as well as my characterization in the Medis score leader box (I am not the score leader any more since the stock went back up a bit) that the financing transaction was similar to "death spiral" financing.
Well, he was right about the death spiral comment - I was very careless with the way I used the term - nevertheless, I don't think I was wrong that the financing was not shareholder friendly and signaled very clearly that the stock was going to go down back in October.
The entire exchange is copied below - I am interested in feedback from my fellow fools.
MEDIS TECH LTD (MDTL)
bbmaven (99.97) 2/01/07 12:12 PM :
There are three drivers to my continuing to call underperform here, two of which were highlighted in my pitches attached to closed calls.
1. This company has NEVER had a product despite years and years of promises. I don’t trust the management.
2. I don't really see a huge market for the products they have been promising with great fanfare - a $20 powerpack to recharge handheld devices while on the move - sounds nice, but it looks like it is clunky and heavy and at most a niche - this may be my blindspot however - I am sometimes culturally challenged with respect to the use of technology.
3. “Death Spiral” financing – The $57M in financing they now have is a result of the secondary they issued in October - both preferred shares and matching common. They issued the matching common for the specific purpose of allowing the new investors to short the common, eliminating any risk to their investment and “cautioned” us existing shareholders that this “could” have a negative effect on the price of the common. LOL – no kidding. In effect, that $57M came from the pockets of the existing shareholders. This was a common method for troubled businesses to raise additional funding during the tech bubble - almost all of them met a sad outcome.
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DavidRedstone (< 20) 2/16/07 2:27 PM
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Your assertion that the recent Medis financing is a "death spiral" is factually false and irresponsible.
The price for conversion of the preferred stock to common is fixed at $28.80, a premium to the market price at the time the financing closed.
You either don't know what a "death spiral" is or you didn't bother to read the documentation of this financing that has been filed with the SEC.
bbmaven (99.97) 2/16/07 7:36 PM
You are right that this is not classic death spiral financing and I should have been more precise in how I headed the third paragraph and the comment in the score leader box. My original pitch on a pick that was ended read as follows:
"This morning, this management announces it is issuing 1.5M shares so that its Series A preferred holders can short the stock as a hedge to their investment in the Series A tickets. It also announces that this MAY have a negative effect on the price of its common shares - LOL. No kidding.
At best, this is questionable. At worst, this is reminiscent of death spiral financing of the late 90's."
I should have continued to use the final sentence rather than shorthand the entire transaction as "death spiral". The point is still valid though - existing shareholders financed the $57M - the stock price was over $27 when the transaction was announced - new investors put up about $1.50 a share for what is in effect a very cheap option. The use of the company's (current shareholders) own money to bring in additional investment was a big component of death spiral financing. You are right however, that the conversion rate doesn't accelerate as the price declines.
I will clarify the comment in the score leader box - thanks for your calling me on it.
DavidRedstone (< 20) 2/16/07 10:33 PM
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This financing is IN NO WAY reminiscent of a death spiral financing. The defining characteristic of a death spiral is a variable conversion price that goes down with the share price, giving the investors an incentive to drive the share price down by shorting the stock. The conversion rate in the Medis deal is FIXED. Neither the buyers of the preferred nor the buyers of the 1.5M common have ANY reason to want to see the price of the common go down. Quite the contrary: all incentives for both groups is to see Medis succeed and the price of the common go UP. The buyers of the preferred may have shorted the common knowing that they can use the shares they get when they convert to cover - this would be their hedge. The buyers of the common may be lending those shares to outside shorts in order to collect the interest. But none of that changes the fact that the best outcome for the buyers of both the common and the preferred is that Medis succeeds and the price of the common goes UP.
Medis LOANED the 1.5 million common shares to Citigroup (the investment banker for the deal). Citi SOLD the 1.5M shares (for $22.50 each) through a road show separate from but contemporaneous with the road show for the preferred shares. Citi must return the 1.5M shares to Medis when the preferred are converted to common, or in any event at the end of five years.The buyers of those 1.5M shares of common stock bought them because they were sold on the prospects of the company, and they are now common shareholders just like any other common shareholder.
Your statement that "new investors put up about $1.50 a share for what is in effect a very cheap option" is complete nonsense. Existing shareholders did NOT finance the $57M. The buyers of the preferred collectively cut a check for $57.5M. The buyers of the 1.5M common collectively cut a check for $33.75M.
This financing could not be better for existing shareholders. No debt, minimal dilution, a low dividend rate, no due date for repayment of the principal. The interests of the buyers of the preferred and the buyers of the common are perfectly aligned with the interests of the preexisting shareholders.
The hedging transactions associated with the financing were NOT a major cause of the recent decline in share price. (I can't find an email address for you. If you want the real story here, go to h2fc.com, email me through the contact page, and I will send you my detailed analysis of the causes of the recent decline in MDTL's share price.)
There is nothing at all "questionable" about this financing. "Complicated" is not the same thing as "questionable". GO READ THE DOCUMENTATION that has been filed with the SEC. Do the WORK and put in the TIME necessary to really understand this deal instead of just shooting from the hip. That way you can avoid making things up as you go along here and misleading your readers.
I don't know what you mean by a "pitch" or a "score leader box".
bbmaven (99.97) 2/17/07 12:44 PM
OK - I get it. You believe the financing was above board and in the best interests of the company. You might be right in the long run - but in the short term, it had exactly the effect I said it was going to have - exactly the effect the company itself said it was going to have. I also believe the transaction was deceptive and the end result was that the financing DID come out of the pockets of existing shareholders due to the subsequent decline in the share price.
Now I do recognize that correlation does not equal cause; however, I believe the burden of proof shifts to one claiming it is coincidence (you) when the other party (me) has 1) predicted before the event that an effect is going to occur because of a certain stimulus and 2) it does indeed happen.
Please share with us why you believe the hedging transactions were not the cause of the recent decline in share price - I am open to be enlightened as are most participants here in CAPS. However, please try to ditch the condescending and lecturing attitude and understand what that this forum is not a Yahoo message board.
I don't make things up as I go along, nor do I have READERS to mislead - that is your job with your newsletter. What we have here is a forum where we give short reasons why we are calling outperform or underperform on a stock and we bounce things off of each other. When we believe someone is wrong about something, we generally call them on it without questioning his or her good faith, diligence or character.
DavidRedstone (< 20) 2/17/07 3:09 PM
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"I don't make things up as I go along, nor do I have READERS to mislead - that is your job with your newsletter."
Talk about an attack on someone's character.
I have not questioned your character. But your total mischaracterization of the financing as a "death spiral", at the very least, goes directly to your diligence. And your continuing that mischaracterization even after I have shown you that it is incorrect and after you said that you would change it goes directly to your good faith.
Your statement, cited here:
that the hedging aspect of the the financing "eliminated all risk" for the investors is false. Period. Which again, at the very least, goes directly to your lack of diligence. You clearly ARE shooting from the hip. Or worse.
The primary reason for the decline in the share price since the end of October was the shift in institutional demand for Medis securities from the public market to the two private placements that together constituted the financing. I published a ten page analysis of this and other reasons for the decline in the share price on 1/26.
Show me your good faith. Provide me with an email address at which I can send you this analysis.
BTW, your "diligence" on Medis' product and the market for it is as poor as your diligence in understanding the financing.
bbmaven (99.97) 2/18/07 1:29 PM
Thank you for sending your analysis to me - it is well researched, well written and a very plausible explanation for what has been happening. I found it interesting that several times you refer to the impenetrable language in the prospectus, yet hold me to a higher standard of obligation to understand that impenetrable language than you seem to hold investing professionals. It appears that I wasn't alone in drawing the conclusion that this whole private placement transaction smelled.
Which brings us to the question of what you want from me. I am not on the staff of Motley Fool, nor do I write a newsletter in any investment field. I do not have any responsibility to any readers to do any due diligence or to be factually correct - my only obligation is to be honest about why I make an up or down call so that others can either use it to do more research or to agree or disagree.
I don't have the time or the inclination to become an expert in fuel cell technology nor the companies that are playing out there - and don't pretend to. If you did a little more probing around the CAPS site, you will find that I acknowledge that in several places. In the fall, I found what I thought was an obvious situation where the price of the stock was going to go down. The company announced it was entering into a private placement in which it was issuing additional shares of common so that investors in its preferred could short it, the company itself "cautioned" that this "could" have a negative effect on the price of its common. This smelled bad - so I opened a small short for 500 shares at 26.70 in a trading account and figured it was easy found money. At the same time, I was playing this rather interesting game at Motley Fool called CAPS, and I made the call there that the stock was going down. Part of the game is to enter a small "pitch" explaining why you have made the call you did.
Admittedly, my characterization of the financing as "death spiral" was careless - I have used the term to apply to a whole host of situations in which the company is desperate and makes shareholder unfriendly deals - in the future I will reserve it to the specific situation with which it was originally identified. I apologize to you for the cheap shot about the newsletter - however, I have not evolved to a place where I am above lashing back at gratuitous personal attacks from someone who has no idea who I am or what I do. You are a gifted writer and communicator and you could have gotten the message across that you thought my analysis was all wet without the disrespectful and arrogant tone.
You certainly believe Medis is a huge opportunity - nobody has made that case in CAPS with any credibility. Making that pick and making that case will have far greater influence on folks that just taking shots at me.