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A company I have shares in recently announced underwritten public offerings of 10.6 million shares and warrants to purchase up to 10.6 million shares had priced. As a result, shares prices dropped dramatically. The offering is expected to close on Feb 14th. Since announcing, the current share value ($1.65) has dropped below what the company announced their set share/warrant price will be ($2.35). The company is polarity.

Can someone explain a warrant? How can you sell a share/warrant for higher than a current value of a share? And how does this effect my previously purchased shares in the company?

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  • You expect us to tell you if share price will recover without knowing the name of the company? And even if you provide the company's name, no one here can predict the future. Decide whether you can tolerate more losses or whether you want to accept Buy & Hope. – Bob Baerker Feb 12 '20 at 20:33
  • Let me rephrase my question. What are public offerings of shares when used in combination of warrants? I believe the statement means that they are creating new shares to generate revenue, but I don't understand warrants. The company is polarityTM. I apologize that it seems like I was asking you to predict the future. I see how my question is confusing, I will edit it. – Morgan Feb 12 '20 at 20:53
  • Call warrants are equivalent to options (usually a much longer expiration), giving the owner the right to buy the security at a specific price. They are often included in an offering to entice investors into buying the security (IPO or secondary) From a quick look at the PTE news, the offering was priced at a deep discount and that's the reason for the sharp sell off. Seems like they threw investors under the bus. – Bob Baerker Feb 12 '20 at 21:11
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As I mentioned in my comments above, a call warrant is a long term option (the right to buy the stock at the strike price but with a further expiration). In common usage, warrants are assumed to be call warrants unless specified as put warrants (the right to sell the stock at the strike price).

PTE's secondary offering consists of a unit which is comprised of one share and one seven year warrant with a strike price of $2.80. Each unit costs $2.35. The warrants are American style, giving the owner the right to exercise them at any time. If PTE rises sharply, warrant holders will be able to buy shares at $2.80 (one share per warrant unless specified differently in the prospectus). With 10.6 million units offered, that will raise $25 million for the company (before underwriter fees), excluding future proceeds from exercise of warrants. The units will be separable immediately and will trade on its own.

Because each unit costs $2.35, that means that they priced the share below $2.35 ($2.35 less the value of the warrant). I can't tell you what a 7 year warrant with a strike price of $2.80 should be worth but you'll know that as soon as it begins trading. My guess is that the pricing of the common share will effectively be less than $2. Whatever that number is, that's a sharp discount to $3.18 which is where PTE closed at yesterday. That's what I meant by "they threw investors under the bus". It's no wonder that the shares dropped like a rock today.

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The warrants that are received along with secondary-stock-offerings are like free call-options. An investor that exercises a warrant has to pay a strike price but benefits from a gain in the stock price and that if the stock did gain beyond the strike price.

The secondary-stock-offerings can sell at a higher price than the current stock price because they are bought at a set-price rather than at a rising price that could be caused by stock-buying on the stock market. Now it's often short-sellers that want the stock at a set-price because they use the stock to close-out short positions and that without driving the price of the stock up as the short positions are closed out.

The company doesn't mind helping the short-sellers because the company receives the funding. The investors in the company often don't mind because the company that they are investing-in receives more funding. But if the funded company doesn't draw new investors then the greater number of shares on the stock market could cause the stock to drop. Often the stock price holds near the price of the secondary offering.

However, this PTE company sold 10.6 million shares when the short-interest is only 4.76 million shares. And the 10.6 million shares represents a 42% increase in shares-outstanding and an 80% increase in float.

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  • Is a 42% increase in float historically considered really bad? – Morgan Feb 12 '20 at 21:35
  • It's sufficient to say that the stock price of PTE didn't hold. To gauge the future, then research the company. Well, liquid assets are $45948000 while accounts payable are $10233000. So look for mention of future capital needs in the earnings reports. Well, they say that they are spending $3.95 million per month. – S Spring Feb 12 '20 at 22:20
  • "The company doesn't mind helping the short-sellers because the company receives the funding. The investors in the company often don't mind because the company that they are investing-in receives more funding." ... The company priced this secondary at a very deep discount and share price dropped nearly 50%. I really doubt that this is going over well with investors. – Bob Baerker Feb 12 '20 at 22:29
  • The OP's actual question-marks were general questions. But the last paragraph of the response moves to the specific case. The word "However" is famously used. – S Spring Feb 12 '20 at 23:41
  • Let's continue with the specific case. PTE priced the secondary offering at $2.35 just before the market open of Feb 12. The Feb 11 market close was $3.18. Give the investment bank a profit of 20% and they are looking to place the stock at $2.82. Now if short-sellers were to begin closing positions with open-market buying that might drive the stock price above $2.82 and so they might still be interested in the fixed-price. Also, I suspect that the 4.76 million short-shares is a month-old number. – S Spring Feb 13 '20 at 0:21

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