PSIX warrants

Hi Saul,

In my digging, I found this from their recent earnings release:

Other expense for the third quarter included a non-cash charge of $12,605,000, or $1.21 per diluted common share, resulting from an
increase in the estimated fair value of the liability associated with the warrants issued in the Company’s April 2011 private placement. The
increase in the estimated fair value of this warrant liability was directly related to the increase in the Company’s stock price in the third quarter.

Can you shed some light on the PSIX warrants that were handed out I believe in April 2011? My understanding is that the warrants can be converted to shares at the redemption date, so effectively the warrant holder gets X shares on that date. Effectively, it is dilution. My (limited) understanding is that companies sell warrants to raise capital at lower interest rates etc. I also noticed that GAAP accounting deducted the value of these warrants from the current income …

Do you have any insights on these warrants?

Anirban

Anirban,

This is from my post #175 on this board:

PSIX revenue for the sat three years was as follows:

2010 — $101 million
2011 — $155 million
2012 — $202 million

That’s exactly a 100% increase in revenue in 2 years. They are predicting about $236 million for 2013, while they build out their new factory, and about $320 for 2014 (which is surely sandbagging).

Their adjusted earnings per share for those years was

2010 — 19 cents
2011 — 48 cents
2012 — 81 cents

That’s quadrupling in 2 years. They have 74 cents or so in the first three quarters of 2013.

… The company has warrants from their IPO. Now GAAP rules require the company to treat warrants as a (imaginary) liability. Since the stock price has been shooting up as a result of their extraordinary real results, GAAP rules require the company to take huge imaginary write downs of their earnings. (If the stock price goes way DOWN, then they will have similar huge imaginary INCREASES to their GAAP earnings. It’s nonsense! The adjusted earnings is the money they actually made and have put in the bank.)

The warrants of course will cause more shares, that’s what warrants do, but to my understanding, that is already figured into diluted shares.

I hope this clarifies it.

Saul

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It’s important that you realize just how insane that GAAP rule is. Let’s consider what would happen if some terrible news came out during the quarter. For example, if a big new engine had a bunch of defects, or a new competing product showed up which was taking lots of their customers, their revenue was dropping like a rock, and their price really crashed (for GOOD REASON!).

GAAP rules for repricing the warrants would mean that the company would show huge (imaginary) increases in GAAP earnings for the quarter!!! And this is from a system that is supposed to be giving the public a clearer idea about what is really happening at the company!

(For those who wonder what their rational is, it’s: stock price down = obligation from warrants reduced = more GAAP profit)

Saul

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Thanks Saul for the prompt reply. Agreed, the GAAP rules can be ridiculous. I wasn’t sure if the warrants are accounted for in the diluted share counted … but since they are the adjusted diluted eps is a meaningful measure.

I have been going through their 10K (annual report) from 2012. The finances of this company are a bit hard to follow, especially with the reverse merger etc they did around 2011 to form the current PSIX corporate structure. But, the 10K provides a very good description of what the company does for a living, which is great for understanding their business.

Anirban

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