Recently there has been a lot of activity surrounding Bonanza Oil and Gas. The shares have been trading quite actively after they announced some seemingly positive news and had a few research reports issued on them. The stock has declined over 80% since from it’s February highs. Our concern with Bonanza is the structure of their convertible notes. They have made some positive steps to correct this, but a toxic convertible is still a possibility even with the restructuring.
Here is a clause we dug out of a February 9th 8k Filing issued by Bonanza:
“The Restructured Notes were convertible into common stock, at Triumph’s option, at the lesser of (i) $0.0025 or (ii) a 50% discount to the average of the three lowest trading prices of the common stock during the 20 trading day period prior to conversion (the “Variable Conversion Price”). Triumph has agreed to restrict its ability to convert the Restructured Notes and receive shares of common stock such that the number of shares of common stock held by it in the aggregate and its affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. On January 29, 2010, the Company entered into a Letter Agreement with Triumph pursuant to which the Restructured Notes were amended removing Triumph’s ability to convert at the Variable Conversion Price.”
In Layman’s terms, the previous deal allowed Triumph to sell stock at .0025 per share or a 50% discount to the market over the last 20 days. In either event investors were buying for seven cents while Triumph can sell for a fraction of a penny. These types of convertibles are massively dilutive to shareholders. The restructuring caps it at 4.99% of outstanding shares but in our opinion still doesn’t fix the problem. As they can continue to issue more shares at huge discounts to the market and dilute shareholders.
