Orange 21 is giving each of its existing shareholders the right to buy one share of its common stock for $0.80 cents for each share they currently own or warrant they have. Before the offering, they had 8,199,314 shares outstanding. Assuming that everybody buys the shares, they would have 17,744,128 shares outstanding afterwards and would raise $7,635,851.20.
The price of $0.80 a share is a premium of 19% over the stock's closing price on January 21st. HERE’S THE LINK to the filing.
No shareholder is required to exercise the rights they get, and we can probably assume that not everybody will. If you don't exercise your rights, or if you exercise only part of them, your percentage ownership in the company will be diluted. That is, you'll own a smaller percentage. With more shares outstanding the value of each share will generally drop though the total value of the outstanding shares will be the same, everything else being equal.
So why are they doing this? For the money. As I've written, the company has taken a lot of the right steps to control expenses and improve their competitive positioning, but cleaning things up cost a bunch, and then the economy went south. The documents say that they don't have their financial statements for the last quarter of 2008 and the year finalized. But they expect to report sales of between $9 and $11 million for the final quarter "…with gross margins substantially below gross margins for the third quarter ended September 30, 2008partially due to an increased level of returns and discounts due to the current economic environment."
As I've also discussed, it is a public company with a small number of shareholders. If I were the CEO, I'd be trying to take it private again if only to eliminate the big expenses associated with being public. I suspect this deal is happening basically as if the company was private, but they had to tell us about it because they are public.
What I mean is that they went to their existing investors (just as if they were private) and said, "Hey, we need to raise some working capital and you guys are only choice right now given the condition of the capital markets." I imagine there was some whining and gnashing of teeth and then some of them said, "Well, it's either this or our whole investment might go away and we've made too much progress to let that happen now." In other words, a certain level of participation was agreed to before the deal was announced.
Actually, I know that because the documents say, "Certain members of our board of directors, including our Chief Executive Officer, have indicated that they intend to participate in the rights offering up to $800,000. In addition, Costa Brava Partnership III L.P., our 19.8% stockholder, has informed us that it intends to participate up to its maximum percentage, or 1,622,271 shares on a fully diluted basis. We may allocate unsubscribed shares to other potential investors at the rights offering subscription price, and we are in discussions with third parties who have expressed an interest in purchasing an aggregate of approximately $200,000 to $600,000 of any such unsubscribed shares, although there can be no guarantee that these sales will occur."
So it looks like the minimum they can expect to raise is $2.1 million. The offering is open until February 20, so I guess we'll know shortly after that how they did.
Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line. For more information, visit www.jeffharbaugh.com.