As promised, I’ve written up another SIRC article! This article gets into why I love the way SIRC is recapitalizing their company, most of which is driven by their newfound success. SIRC should really be the model for how a company protects the average retail shareholder as it starts to hit success, rather than further harming them.
But more on that below – let’s get started!
SIRC has found some great financial success over the last six months or so driven by savvy acquisitions and general business success. As with most penny stocks who hadn’t yet hit their stride, SIRC didn’t exactly have the cleanest balance sheet and capital structure at the beginning of this fiscal year.
However, the company quickly capitalized (pun intended) on their newfound success and immediately took action to clean up the “toxic-ness” that comes with most penny stocks. What do I mean by that?
As a company becomes more successful out of the OTC, they tend to want to do two key actions. First, they want to uplist to a better exchange in order to attract more sophisticated investors. In order to do so though, serious institutional investors (and stock exchanges depending on the circumstance) want to see a company not have a ridiculous capital structure.
This means that companies generally need to clear out toxic and highly dilutive instruments such as bad convertible debt, warrants, and bizarre convertible preferred shares. Think of it this way…look at any blue-chip stock’s 10k. Do you see droves of convertible debt, outstanding warrants, and highly dilutive preferred shares? They almost don’t exist.
Institutions generally want to see two types of investment taking place: straight stock sales to raise capital at or near the market price, but much more frequently they want to see straight debt issuances which won’t dilute their share in the company.
Now, bringing this back to SIRC…SIRC has already done, or will do, the following key actions which follow this general progression:
- Convertible Debt – non-toxic new convertible debt issuances and existing conversions are mostly complete
- Warrants – renegotiating old issuances
- Series B Repurchases/Cancellations
- Stock issuances limited to acquisitions and reinvestment in the company
- Arbiter deal
I’ll go through each of these steps below.
Everyone hates convertible debt, but it is one of the only ways a fledgling penny stock can raise money to fund their company. In SIRC’s case, they were no stranger to convertible debt and needed to issue it to keep the company moving. SIRC has had some generally favorable moves happen with convertible debt…let’s break this down into two categories, pre-2/28/2021 and post-2/28/2021
Before the year-ended 2/28/2021, the company still housed a good chunk of convertible debt that was fairly toxic to shareholders. This means that the conversion prices for debt was well below the current market price (at the time). This essentially means that the company was effectively forced to repay debt using heavily discounted shares.
Any debt that included a conversion price well below the current market price has pretty much all been converted by the bondholders and cleared out. This is good and bad. The good thing is that all of this is now off the books and not sticking out like a sore thumb. The bad news is, well, they had to issue a ton of shares over the last year or so to clear these off the books.
While it sucks, it’s over with now and the company can move on… which leads me to…
Now, you’ll notice that in the nine months covered in the 10Q released on 11/30/2021, SIRC issued a lot of convertible debt. About $13m in fact. But wait, I THOUGHT CONVERTIBLE DEBT WAS BAD OMG I’M GONNA GO COMPLAIN ON STOCKTWITS, FIRE MASSEY!!
Convertible debt isn’t always bad. In fact, it can be a very effective way to reduce the interest rate on debt you can likely service anyways, all while using a favorable conversion price. Let’s look at the convertible debt SIRC has outstanding as of 11/30/2021:
As you will see in the table above, they have about 22.2m in convertible debt outstanding. If we calculate the total number of shares that could be converted into, that comes out to about 11.5m potential new shares, out of a total share count of about 450m.
So three things there should have stood out to you. First, those interest rates are rock bottom low for a microcap like SIRC which is amazing. I would expect rates well above 10% on all of their debt if it was traditional, non-convertible, debt. This is because the noteholders are given a conversion option which is a benefit to the noteholder, thus lowering interest rates.
Second, only 11.5m new shares out of a 450m share count is absolutely negligible.
Third, and most importantly, the effective weighted average conversion price across all of that debt is about 1.94 per share. Last trading day, the share price closed at about 0.41 per share. So this debt is nowhere near being toxic. And even if it did ever exceed 1.94 per share, would you really care? That would be a MASSIVE gain.
All in all, the bad convertible debt has been converted out and settled. Furthermore, the new convertible debt issued is very protective of current shareholders and allowed the company to raise money cheaply.
I promise this will be quicker than convertible debt… many times a company issues warrants for cash, as part of an acquisition, or to lower debt terms. It’s essentially a call option that has some intrinsic value which can be sold to another party.
For current investors, the thought behind warrants is that some other person has the right to purchase more shares at some (presumably) discounted price one day, assuming an increasing share price. They’re considered somewhat dilutive depending on the exercise price.
But again, most “big boy” companies don’t want to have excessive dilutive instruments out there as they move up the ladder. At bigger companies, they are usually very small and in the form of employee stock options. Technically they’re not warrants because you can’t sell your employee stock options to other investors 😊, but the concept is the same!
Anyways, SIRC mentioned that they are planning to purchase these warrants from current owners over the next few weeks/months using the Arbiter money (more below). So awesome news there, and the perfect move!
Series B Repurchases/Cancellations
For those of you that don’t know, the Series B Preferred shares are an instrument which allows the owner to convert each of their Series B shares into 10 common shares. So quite dilutive, but I’ve seen waaaay worse!
These are mostly owned by company management and some private investors, and as of 11/30/2021 there are 9m Series B outstanding. This means they can be converted into 90m shares, again out of a total share count of 450m. So not too bad, but not great. But again, we don’t want highly dilutive instruments on the books as we move up.
However, over the last 9 months, the company has been extremely proactive in cleaning out the Series B preferred shares. They repurchased 6m in preferred shares, convertible into 60m common shares, for a total of 12m in cash. That’s an effective common share of 12/60=0.20 per share which is an AWESOME price. Like I said before, the current share price is about 0.41 per share…great business!
Also, I don’t have the details yet (apologies if I’ve missed this), but the company also returned 2.5m B Series shares to the treasury. Someone can hopefully give more insight here, so feel free to DM me because I cannot find it for the life of me. But logic says that someone forfeited 2.5m in B Series and basically gave them back to the company. I assume the CEO, but not confirmed.
The company, however, can still re-issue these as compensation for an acquisition, etc. if they want because they weren’t canceled. The 6m from above were cancelled, meaning they can’t be re-issued.
All in all, awesome seeing these get cleared out from the books. There’s 9m outstanding so far, but I suspect these will continue to be bought back whenever the company is able.
Limited Common Stock Issuances
This is more of a general point, but SIRC has been very prudent with their issuances of new common stock. I think the days are pretty much over for the company to be issuing common stocks just to make payroll every week (exaggerating but you get the idea).
If we look at their reasonings for issuing common stock over the last three months, it’s pretty much limited to acquisitions (127m shares), forced conversions of debt (which are over), warrants (which are being cleared), and about 5.8m shares for about 2m in cash (0.34 per share approximately).
All of the above make perfect sense to me. There’s nothing they could do about warrants and convertible debt. But the acquisitions were clearly needed and obviously working given the amazing quarter they just had. The cash raising made sense given that they need to convert their receivables to cash.
But with the big arbiter deal (see below), cash is no longer an issue. I expect to see these issuances really start to slow down. But again, if we look at the above common stock issuances vs. the total share count of 450m, it’s a drop in the bucket anyways.
I’ve referenced this like 100 times, so here we go! SIRC entered into an absolutely amazing debt issuance with a company called Arbiter Bank whereby SIRC would borrow $42m (almost the exact amount of their accounts receivable), and pay 4.25% interest per year.
You heard that right, 4.25% interest…unbelievably good. And it’s over 10 years. That deal is unbelievably good for SIRC investors, they should be jumping up and down.
So we have cheap debt and a ton of cash injected into the company. The company has a ton of profit coming through the pipeline over the next several years and can easily pay this off. This has the potential to be the deal of the century and can be the foundation of another large growth spurt for SIRC.
SIRC can now redeploy this cash for acquisitions, hiring more personnel, expanding, whatever they want! And they’ve now demonstrated they have a profitable business which can pay off the debt in due time. Awesome.
As an outside observer without a position in SIRC, I believe they are taking absolutely incredible steps to not only clean up any toxic financial instruments bogging down the company, but also raise cheap capital. This can then be instantly redeployed for more growth, all while protecting current shareholders.
All in all then, I really like what I’m seeing, and the company is making all of the right moves. Very excited for what’s to come!
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DISCLAIMER – AT THE TIME OF WRITING THIS ARTICLE I DO NOT HAVE A POSITION IN $SIRC. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. AT THE TIME OF WRITING THIS ARTICLE, PERSONS AFFILIATED WITH THE COMPANY ANALYZED ABOVE MAY BE PROVIDING MONETARY COMPENSATION AS MONTHLY PATRONS THROUGH MY PATREON. THIS COMPENSATION IS NOT PROVIDED IN RETURN FOR ANY SERVICE, WRITING ABOUT A PARTICULAR TOPIC, AND/OR FAVORABLE OR UNFAVORABLE OPINIONS. MY PATREON SUPPORTERS HAVE NO INFLUENCE ON THE CONTENT OF MY ARTICLES.