Tag Archives: Toxic Convertibles

SNPK Follow-up on Toxic “Death Spiral Convert” Convertible

It is a fraud to borrow what we are unable to pay.–Publilius Syrus

SNPK Discussion

Yesterday I posted the case study and quiz question here: http://wp.me/p1PgpH-z5 and financial information was posted here: SNPK’s Financials: http://www.scribd.com/doc/85185922/SNPK-Financials

Readers are too astute to be asked whether a company like SNPK is worthy of their time as a potential investment. The company is an obvious promotion.

However, while taking 30 seconds–not a second more–to scan the financials, I saw a debt instrument that I thought had been banned back in the 1990s–a toxic convertible on pages 6 and 7 of the 100+ pages PDF on SNPK. There it was lurking quietly.

If you see a company like SNPK that is cash flow negative, you know to focus on the sources of financing because, without outside funding, this “firm” is defunct.  The amount of debt and the terms are what you immediately focus on.  Several readers pointed out all the other horrors like insider control, other debt, Panamanian shareholder, Nevada corporation, and who might the CEO be since this is a one-man show (a former broker at FBR). The company has no competitive advantages and about $95,000 in assets (not including liabilities).  The convertible note and other debt is what is funding this “company.”

Prize Awarded to all contestants

Anyone who answered will receive an email prize from me this afternoon. Good effort.

Since the wording of my test question may have been poor, I have taken on a new job in penance:http://www.youtube.com/watch?v=jF-CkMpQtlY&feature=related as a Village Idiot.

….OK, back to SNPK

The firm was created as a reverse merger into a shell company:

Through a Share Exchange Agreement


On February 13, 2012, Sunpeaks Ventures, Inc., a Nevada corporation  entered into that certain Share Exchange Agreement (the “Share Exchange Agreement”) with Healthcare Distribution Specialists LLC, a Delaware limited liability company, (“HDS”), Mackie Barch, the managing member of HDS, who presently owns 100% of the issued and outstanding membership interests in HDS, and Scott Beaudette, the majority shareholder of the Company. Pursuant to the terms and conditions of the Share Exchange Agreement, HDS shall exchange 100% of the outstanding membership interests in HDS in exchange for: (i) two hundred million (200,000,000) newly-issued restricted shares of the Company’s common stock, par value $0.001 per share and (ii) three million (3,000,000) newly-issued restricted shares of the Company’s Class A Preferred Stock, par value $0.001 per share. The exchange will result in HDS becoming a wholly-owned subsidiary of the Company.

Paid-off and Private Market Value

Additionally, pursuant to the Share Exchange Agreement, Mr. Beaudette shall cancel two hundred million (200,000,000) shares of the Company’s common stock that he currently owns (He was paid on his $5,000 loan to the company–so we have a private market transaction giving a $5,000 worth to the 200 million shares). Perhaps current market value of $100 million plus might be unsustainable?

As you scanned for notes to all the debt outstanding you found: Toxic Convertible on pages 6 and 7.


On March 1, 2012, Sunpeaks Ventures, Inc. (“we” or the “Company”) issued a 10% convertible note in with an original principal amount of $200,000 (the “Note”) to an investor. The Note provides for an interest rate of ten percent (10%) and matures on March 1, 2014. The Note is convertible into shares of our common stock, par value $0.001, based on a conversion price that is equal to a twenty percent (20%) discount to the average market price over a ten (10) day period immediately prior to the conversion date.

The issuance of the Note was offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

The convertible note is being “secured” by the stock market fantasy currently being perpetuated on gullible “investors” and/or stock traders. Who is buying during those 100 million share trading days? If you are unclear why the above is so toxic, then read the document provided in the link below.

Toxic Convertible (“death Spiral Converts”)

Used by companies that are in such bad shape, that there is no other way to get financing. This instrument is similar to a convertible bond, but convertible at a discount to the share price at issuance and for a fixed dollar amount rather than a specific number of shares. The further the stock falls, the more shares you get. Popular in the mid to late 1990s. Also known as death spiral convertibles or floorless convertibles.

Death Spiral

A loan that investors give to a publicly-traded company in exchange for convertible bonds. The convertible bonds give the investor a right to buy shares in the company at a low, agreed-upon price. However, issuing these bonds creates more shares outstanding when they are converted, which results in a drop in the share price. The low share price encourages more bondholders to convert their bonds to equity, which causes a further drop in price and the process continues. Because of this disadvantage, companies only engage in death spirals if they badly need cash.

Below is a definitive report on the horror of Toxic Convertibles (34 pages)http://www.law.emory.edu/fileadmin/journals/elj/54/54.1/Nayini.pdf

Of course, you would have noticed another loan, an unsecured promissory note. But the $200,000 (more than twice the reported assets of the “firm”) was all you needed to know. The shareholders will be left holding the bag. This is a $0 in a year or two.

Let’s clean off the slime and grime and return to work.