The RNS late this afternoon pulled the rug from under the bulls of Widecells shareholders and has the bulletin boards swinging from euphoria to despair. We rather suspect this pendulum is to swing back once again in future days and lay out the reasoning below behind this view:

1. The prospectus (see here in full) lays out the terms of the conversion, this being:

“The Conversion Price for the Notes on a Voluntary or Mandatory Conversion alike will be 90% of the lowest closing volume-weighted average price of Ordinary Shares (VWAP) in the 15 trading days prior to conversion, provided that the Conversion Price will not be less than the nominal value of the Ordinary Shares.”

2. As of today, there are 211.35m shares in existence, capping the company @ just £1.3m which is now largely backed by cash.

3. The £893,231 loan notes issued are at EHGOS’ discretion as to when they convert (subject to the 29.99% bid level restriction, see here:

“Limit on conversion of the Notes The holding of Notes by Note holders is deemed to be a covenant by such Note holders not to hold or acquire directly or indirectly (together with persons “acting in concert” with it within the meaning of the City Code) at any time an interest in Ordinary Shares (within the meaning of the City Code) that carry more than 29.9% of the votes exercisable on all or substantially all matters at a general meeting of the Company. The Financing Agreement states that when calculating this percentage, only Ordinary Shares already issued shall be taken into account, and potential Ordinary Shares resulting from the conversion of Notes or from the exercise of Warrants shall be excluded.”)

4. There is a further £265,000 to be drawn down on the 6 June with the balance of £200,000 forty days thereafter.

5. Recall that David Sefton through “Nuuco” holds an option over the balance of the loan notes – some £585,000 – see here from prospectus:

“Change of control and/or change of business – The Company is aware that the Investor has granted a third party, Nuuco Media Limited (Nuuco), a company controlled by Mr David Sefton, an option over £585,000 of Notes (Option). The Option grants Nuuco the ability to acquire the outstanding Notes. Should Nuuco exercise the Option, it would have a substantial but less than 30% shareholding in the Company. Should Nuuco (or persons acting in concert with it) acquire further shares or interests in shares (whether in the market or otherwise) taking their aggregate interests above 30%, Nuuco and any persons acting in concert with it would, absent of dispensation to do so being granted by the Panel on Takeover and Mergers and the passing of a whitewash resolution by independent shareholders, be required to make a mandatory cash offer for the Ordinary Shares in the Company not already owned by Nuuco and those acting in concert with it.”

6. There are also a further 21.625m warrants issued with a strike price of 2.46p

Net effect of all the above is that Nuuco & EHGOS are, from what we can see, a de facto concert party. Given that EHGOS as of today holds @ 28.4% of the company, any conversion of the current outstanding £893,231 tranche over and above a few thousand pounds is impossible without triggering a bid. On Nuuco’s part they are also in the same boat ref the conversion of their tranche of £585,000 ref the all important concert party issue. Of course, EHGOS can sell their “to be issued” 60m shares to leave room for a new conversion but, and here’s the real rub, if they convert at the lowest allowable level over the next 7 days (the remaining period while there is the 0.25p lowest price still available) then the max amount that they can convert looks to be around 91m shares (just £227,500 & taking them back up to the 29.99% stake barrier). From Nuuco’s part I am assuming that they want to go up to the 29.99% level too and, unlike EHGOS, actually hold this stock. But, as per the concert party issue, whilst EHGOS is a holder near this level then Nuuco effectively are restricted from converting their tranche under option into stock.

What does all this mean? It means that in order for EHGOS to be able to see value out of their loans and Nuuco (owned by David Sefton is now the Executive Chairman of Widecells) get to convert the loan option into a 29.99% stake to cement control of the company they need (a) a market in which EHGOS can sell their stock into and (b) in fact in order to convert on Nuuco’s part their option on the loan stock, they need, as it stands today, a rising share price. The plain maths are that their £585,000 loan option converted at 0.25p per share (the price available over the next 7 days) results in 234m new shares – way over the 29.99% enlarged equity level that is the bid barrier. If this was converted at say 0.5p however then 117m shares are issued – near the enlarged 29.99% count.

The next week will be key to see the conversion notices and volumes converted into stock by EHGOS (and their resultant stock holdings thereof). A drying up of liquidity and back to 0.25p is the last thing they or the new Executive Board want to see from what we can see. Once we get through the 15^th March the 0.25p conversion option (ref last 15 days lowest VWAP closing price) disappears and dilution (pending the share price over the next 7 days) levels diminish. We are buyers sub 0.5p.

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