Conversion of unlisted options

[Init]

I have shares in a company that has recently announced the conversion of unlisted options at ($0.006) where the share price was ($0.018) before the announcement. Following it, the price dropped to $0.014 as the outstanding shares were diluted.

1.) Is this ever good news for someone who already has shares in a company that has new shares issued?
2.) Should you aim to sell before shares are diluted then buy back when they are cheaper?
3.) Should you buy the dip created by dilution to reduce the average losses of the overall portfolio?

I understand that often companies will issue shares to get more money in order to fund growth potential (especially for small cap companies). How often do companies make good use of this money and reflect favourably in the share price?

Trying to wrap my head around if this, thanks for reading.

 

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Hi Init,
It's a good question, but doesn't have an easy answer, except to say "It depends".
I don't know which share you're talking about, but the price drop following the exercise of 0.6c could well have been caused by some of those new shares being sold. A profit of 100% or more could be sufficient reason in my book

If a company raises capital without having a credible development plan and/or a specific project, skepticism is my initial reaction. Red flags in the reasoning offered include terms like "general operating purposes". I also look over the last few quarterly reports - especially Cash Flow, and compare the ratio of item 16.2 vs cash burn, cash on hand, and specifics of estimated outgoings in coming quarters.
All too often company directors seem to treat investors as cash cows that owe them a living.

As far as outstanding options are concerned - doesn't matter whether listed or not - it's best to include them in the number of shares on issue. The options may not be exercised immediately, but if there is a reasonable chance of their getting "in the money" in time, counting them in will usually avoid surprises and dilution angst.

 

[Init]

Thanks for the reply. The company was ASX:EVE and referring to this announcement:

https://www.asx.com.au/asxpdf/20180131/pdf/43r5sht9ld42gf.pdf

I don't fully understand what they are saying here (still learning all the business lingo) but my impression is that:

• Looks like they wanted more money to "invest" as they are an investing company, suppose that makes sense, not sure to gauge how good they are doing at that.
• Not sure what the "large level of scale backs" refers to.
• They are oversubscribed (assume that means lots of people wanted in) so they are releasing/creating more shares so everyone can have some.
• I can get in some time in the near future if I have the $$

Not asking for financial advice here, but it seems like it would make sense to purchase some of these "cheap" shares on offer? Actually now that I notice, the current share price dropped to 1.3c (1.4c right now) which is the price of the issued shares. I thought dilution generally met more in the halfway between price before issue and after, perhaps the price just fell as well.

 

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As it happens, I hold a small parcel of EVE myself. I have to warn you though, to me it's a speculative trade, entered into because they took a position in Hemp Honey. I have a strong affinity to honey's health benefits and also hold a Long position in CZZ.
When EVE came out with the placement to "sophisticated" investors - meaning to very wealthy investors who can afford to "burn" a few $100 Grand - I had some misgivings myself. The cynic in me uttered a few words better left unrepeated.
However, I did expect a drop back to the price level at which the new shares had been pitched. That is usually the case. Given half a chance, those sophisticates are sophisticated enough to know how to make a quick buck, and retail traders are happy enough to accommodate them by buying the additional shares off them at a higher price.
If I had held a larger position to make it worthehile, I would definitely have sold mine in order to buy them back lower. The fact that the company pitched their top-up price at 1.3c suggests that that is a reasonable price for the (new, inflated) shares. On the other hand, investors paid 1.3c which ended up in EVE's Bank Account. So it's unreasonable to consider a share price that is much lower than that based on the cash on hand - always assuming the company finds something "useful" and profitable to do with the extra cash.

Let's leave it there. Whether I add, sell, or hold will depend on the way the Chart reports upcoming Market Behaviour. First and foremost, I am a Technical Analyst and trade accordingly.

 

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In contrast to EVE, check out EOS today.
They, too, placed a new tranche of shares, but priced without a discount to market consensus.
All were sold at $2.91, yet people queued for more.
Never mind today's black candle; that has more to do with the general market plunge and panic selling. Even if the shares were sold down to below $3, the volume is comparatively low and the trend remains strong - all in stark contrast to EVE trades.

 

[Init]

Thanks for providing a counter example as well, it was really insightful.

Yeah today hurt, a lot.

Looks like EVE released their prospectus today so will be interesting to see how the price moves with that news, given today.

Also curious, what are the yellow regions on your chart indicating? Can't seem to see what they correlate with.

 

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I certain situations when a company issues new shares, they must publish a prospectus to describe the purpose of the fund raising, where the money will go to, etc. In cases like EVE's where "Sophisticated individuals" and Institutions are involved, the condition can be waived and is supposed to be satisfied if a formal offer of just one share is made. Sounds stupid, but since when does Red Tape require logic?

The Pulse chart that I use calculates yellow boxes by an algorithm derived from Nicolas Darvas of "How I made $2 Million" fame (and lost it again in the following Bear Market ).
I use the boxes as a visual aid to identify support and resistance levels.

 

[Init]

OHHH I was wondering why it said 1 share, I thought it was more lingo I didn't understand. Thats actually pretty funny that something so ridiculous can be legitimate.