NewSat's cloudy Orbital funding

NewSat’s share price has come crashing back to earth with the stock taking its worst beating in eight months.

The aspiring satellite company issued an announcement to explain the issuance of 17 million new shares at an average price of 37.16 cents to Orbital Capital, but the explanation has left open more questions than answers.

The stock tumbled 12.5% to its lowest level since September 20 of 42 cents as shareholders elected to sell first and ask later.

NewSat said that it had to secure a bridging facility from Orbital because one of the co-underwriters of the debt financing agreement with Ex-Im Bank and COFACE had pulled out in late June this year, and this left a $US2.6 million shortfall.

Ex-Im is run by the United States government to provide soft loans to companies that would create jobs in that country and COFACE is the French equivalent of Ex-Im. The funds are to be used to build and launch a communications satellite.

This left NewSat scrambling to cover the shortfall with Orbital agreeing to lend the company $5 million for 180 days with a fixed interest component of $1.4 million. NewSat must have been desperate for the cash as this would essentially work out to an annualised interest that would turn any neighbourhood loan shark green with envy (the rate is 56%, in case you are wondering).

Management said they considered a capital raising but the loan from Orbital was the best option in the company’s opinion. That is probably true as news about the funding hole would have caused its stock to crash along with investor confidence, which the company has been working hard to build. Today’s revelation has surely done some damage on this front.

But Orbital has another reason to smile. The lender has elected to take the principal and interest repayment in shares and the agreement stipulates that NewSat shares will be issued at a 25% discount to NewSat’s 15-day volume weighted price, which works out to 37.16 cents.

This leaves a number of questions for shareholders. The first is why wasn’t the situation communicated to shareholders in a timely manner? It is obviously a significant event, but there is no mention of the withdrawal of one of the underwriters or the expensive funding arrangement with Orbital until today.

The lack of disclosure is troubling as it leaves shareholders wondering what else the company isn’t telling the market.

The other question is what will Orbital do with the 17.22 million shares it will end up owning? If it chooses to sell down the stock, its share price would be under significant pressure as it would take over a week for the stock to wash through based on the 30-day average volume of stock traded.

NewSat, an Uncapped 100 company, did not return calls at the time of publishing. Eureka Report featured the company on July 17 and will update shareholders if there is a change to our recommendation.