BIMI International Medical, Inc. Is in a Death Spiral
The Chinese healthcare company has a toxic dependency on convertible debt
A stock priced at $1.73 per share doesn’t often make an attractive short sale. When it does, the price is usually headed toward zero. Such is the case, in our opinion, with shares of BIMI International Medical, Inc. (NASDAQ:BIMI). We believe the company has entered a classic death spiral.
Make no mistake: BIMI’s stock price may rise at least once more before it falls below $1.73 per share, which was the stock’s closing price yesterday. Therefore, short sellers may find more attractive entry points than $1.73 in coming weeks. Nevertheless, we’re confident that zero will be the stock’s final resting place.
BIMI’s shareholders will vote today whether to approve an issuance of shares valued at $7,800,000 in aggregate. BIMI would issue the shares upon conversion of senior secured notes the company sold last November to hedge funds CVI Investments, Inc. and Hudson Bay Master Fund Ltd. The shareholders will also vote on whether CVI and Hudson Bay may exercise warrants BIMI issued in the private placement.
What’s more, the shareholders will decide whether BIMI can issue additional shares valued at up to $3,900,000 in aggregate. BIMI would issue the additional shares upon conversion of a second pair of notes, which CVI and Hudson Bay have an option to buy until Dec. 1, 2022 per the agreement they struck with BIMI last November.
The new share issuances are being put to a vote pursuant to a NASDAQ rule that requires an issuer to obtain shareholders’ approval before issuing discounted shares that will increase total shares outstanding by 20% or more.
Death by a thousand conversions
Once BIMI’s shareholders approve the issuances, a registration rights agreement requires BIMI to file a registration statement with the SEC for the shares underlying the notes and warrants. CVI and Hudson Bay can resell the shares after the SEC declares the registration effective. The deadline for BIMI to file the registration statement is 15 days after it sells a second pair of notes to the hedge funds or by Dec. 1, 2022 at the latest.
But the SEC has already blessed the registration of up to 6,770,000 shares underlying notes and warrants that BIMI sold to CVI and Hudson Bay in 2020 and 2021. As of Sep. 30, 2021, BIMI had issued 3,938,318 of the registered shares to the hedge funds. As of Dec. 31, 2021, Hudson Bay owned 1,950,000 shares of BIMI, or 5.33% of the company’s total shares outstanding.
BIMI’s share purchase agreements with CVI and Hudson Bay contain customary prohibitions against converting notes in amounts that would cause either hedge fund to own more than 10% of BIMI’s total shares outstanding. In addition to preventing takeovers, such prohibitions prevent large, sudden liquidations of newly issued shares, which can sink a stock’s market price. But even a slow, steady increase in the supply of shares for sale can drag down a stock’s price over time.
For example, look no further than BIMI’s stock price over the past two years. Since 2019, the company has been selling convertible notes and warrants while issuing a flood of shares to finance an acquisition spree. From Jan. 1 through Nov. 15, 2021, BIMI’s total shares outstanding grew from 13,254,587 to 36,566,651. During the same 46-week period, the closing price of the company’s stock dropped from a high of $12.25 per share in Feb. 2021 to a low of $2.75 per share in Oct. 2021 (on a split-adjusted basis).
On Feb. 3, 2022, BIMI effected a one-for-five reverse stock split to satisfy the $1.00 minimum bid price requirement for continued listing on the NASDAQ. Afterward, the company had approximately 8,502,221 total shares outstanding. By Feb. 10, 2022, total shares outstanding had increased to 15,346,554.
If CVI and Hudson Bay converted all the notes and exercised all the warrants they acquired last November–and the placement agent that sold the notes exercised warrants it received as payment–BIMI’s total shares outstanding would increase by approximately 19% to 18,298,554 shares on a split-adjusted basis. The issuances would be immediately dilutive to existing shareholders.
Heads they win, tails you lose
Because of BIMI’s one-for-five reverse stock split, the conversion price of the Nov. 2021 notes will adjust on Feb. 28, 2022. The new conversion price will be the average of the stock’s five lowest volume-weighted average prices (VWAP) during the 15 trading days after the date of the reverse split. If the new conversion price is lower than the market price on Feb. 28, CVI and Harbor Bay will be able to convert notes and sell shares for a profit.
For example, if the new conversion price is $1.70 per share, and CVI converts a $975,000 note, it will receive $975,000 ÷ $1.70 = 573,529 common shares. If it sells those shares at a market price of $1.80 per share, it will earn a gross profit of $1,032,352 – $975,000 = $57,352. The larger the spread between the conversion price and the market price, the more incentive CVI has to convert and sell.
However, BIMI’s agreement with CVI and Hudson Bay does not prohibit the hedge funds from shorting BIMI’s stock at any time. Therefore, if the conversion price is lower than the market price, the hedge funds could, for example, sell BIMI’s stock short at $1.80 per share, convert notes at $1.70 per share, and cover their shorts with shares from the conversion for a gross profit of $0.10 per share.
In other words, the hedge funds can liquidate their convertible notes for a profit regardless of whether BIMI’s stock price rises or falls. Either scenario will increase the supply of BIMI shares on the market, dilute existing shareholders, and put downward pressure on BIMI’s stock price. As a result, BIMI will have limited options for raising additional capital.
Circling the drain
BIMI is a long way from producing sufficient cash flow to fund its operations. The company is in the third year of a turnaround after abandoning its former energy business to focus on healthcare in 2019. Based in Chongqing, China, BIMI has rapidly acquired Chinese pharmaceutical manufacturers, pharmaceutical distributors, medical device manufacturers, IT service providers, and hospitals but has yet to integrate them into a cash-generating whole.
As of Sep. 30, 2021, BIMI had $209,803 in cash after having used $2,547,926 to fund its operations in the first nine months of the year. During the same nine months, the company incurred a net loss of $5,276,241 after having earned net income of $611,090 in the first nine months of 2020. BIMI’s auditors and management have expressed doubt about the company’s ability to continue as a going concern through the end of 2022.
To defy the odds, BIMI will have to obtain financing. But in its current condition, the company will have little choice than to sell more convertible notes on unfavorable terms–a classic death spiral.
This report was originally published on The Activist.