G Medical Innovations Holdings Ltd. (NASDAQ:GMVD)
Impending dilution will put pressure on this stock
Shares of G Medical Innovations Holdings Ltd. (GMVD 0.00%↑) rocketed up 280% in the past month, rising from a record low close of $1.61 on Dec. 29, 2021 to a record high close of $6.12 on Jan. 19, 2022. Although the price has since dropped to as low as $4.18, we believe it has further to fall.
Founded in 2014, G Medical makes a smartphone case that enables iPhone and Android devices to measure vital signs such as electrocardiogram, temperature, and oxygen saturation. In addition, the company operates a diagnostic testing facility in the U.S. Although G Medical is incorporated in the Cayman Islands, most of its officers and directors are located in Israel. CEO Yacov Geva owns about 33% of the company’s ordinary shares.
G Medical went public on the Australian Securities Exchange (ASX) in May 2017 at AUD 0.20 per share. The company tried and failed to list ADRs on the Nasdaq in 2019 and then filed for an IPO on the Nasdaq in 2020. But by Sep. 2020, its stock price on the ASX had dropped to AUD 0.04. The company delisted from the ASX on Oct. 23, 2020 and withdrew the U.S. offering on Nov. 24, 2020.
After two subsequent reverse stock splits, G Medical finally went public on the Nasdaq at $5.00 per share on Jun. 24, 2021, selling 3,000,000 ordinary shares with 100% warrant coverage in a bought offering led by EF Hutton. The stock plummeted 31% on the first day of trading to close at $3.45.
GMVD spikes in Jan. 2022
The 3,000,000 warrants issued in the IPO were immediately exercisable at $6.25 per ordinary share. But as of Jan. 7, 2022, the stock’s price had not budged above $4.63. From Jan. 10 through Jan. 14, 2022, the company published a rapid-fire series of positive press releases, culminating in news that Geva and the CEO of McDade Products, LLC had acquired an undisclosed number of shares of G Medical in the open market.
On Jan. 18, 2022, the company clarified that the two CEOs intended to, but had not yet, purchased the shares. The next day, the stock’s price jumped 60% above the previous day’s close to an intraday high of $6.74 on record daily volume of 35,727,300 shares, or 14 times the trailing 20-day average. Two days later, the stock closed at $4.33.
The stock is likely to fall further because of an impending registration statement G Medical must file soon. On Dec. 15, 2021, the company agreed to issue a $5,800,000, zero-interest convertible note and a warrant to purchase 1,136,363 ordinary shares to Lind Global Partners II, LP for $5,000,000 in proceeds.
The terms of G Medical’s agreement with Lind require the issuer to file a registration statement for the ordinary shares underlying the note and the warrant within 45 days of closing the financing. That means G Medical could file the statement as soon as Jan. 29, 2022 and no later than Feb. 8, 2022. The SEC must review the statement and declare it effective before Lind can sell the newly registered shares.
G Medical must repay the principal on the note to Lind in 20 monthly payments of $290,000 each. The first payment is due 120 days after the closing–that is, as early as Apr. 15, 2022 and no later than Apr. 25, 2022. G Medical can make the payments in cash, ordinary shares, or both.
New shares issued for repayment will be priced at 90% of the average of the five lowest daily volume-weighted average prices (VWAPs) during the 20 trading days prior to the payment date. Such shares will be immediately eligible for resale under Rule 144. The discounted price may create incentive for Lind to sell dilutive shares into the open market for a profit upon receiving a payment in shares.
Lind will have the option of converting all or part of the note to ordinary shares at the earlier of (1) six months from the date the note was issued or (2) the date that the SEC declares the registration statement for the underlying shares effective. The conversion price is $3.50 per share, subject to adjustments.
Similarly, Lind may exercise all or part of the warrant from the date it was issued until sixty months afterward at an exercise price of $3.50 per share, subject to adjustments. Therefore, a market price above $3.50 per share could create incentive for Lind to convert the note or exercise the warrant and sell dilutive shares into the open market for a profit.
Another investor that is potentially capable of selling dilutive shares is Alpha Capital Anstalt. In Dec. 2020 and Feb. 2021, G Medical issued 10% convertible debentures to Alpha for $350,000 and $150,000, respectively. The debentures came with warrants to purchase 398,332 and 170,713 ordinary shares, respectively.
Each debenture matured six months from issuance, after which they were convertible to ordinary shares issued in G Medical’s Jun. 2021 IPO at 80% of the IPO price, or $4.00 per share. The warrants have an exercise price equal to the price of G Medical’s ordinary shares in the company’s next equity financing of at least $5,000,000 for five years from the issuance dates of the warrants.
We believe Alpha likely converted the debentures in the Jun. 2021 IPO and sold all or part of the resulting shares when G Medical’s stock price rose above $4.00 per share during the first six months of trading. The warrants, however, pose a dilution risk in any equity financing of $5,000,000 or more that G Medical executes for the next four to five years.
The near-term event that could depress G Medical’s stock price is registration of the shares underlying Lind’s convertible note and warrant. All told, the shares equal 21% of G Medical’s total ordinary shares outstanding as of Jun. 30, 2021–an amount that portends significant future dilution. Lind will likely liquidate its position gradually since it must sell at prices above $3.50 per share to earn a profit. Sudden run-ups in G Medical’s stock price like the one that occurred in mid-Jan. 2022 may foreshadow sudden reversals once the market price exceeds the exercise prices of Lind’s warrants or the IPO warrants.