The other day OBJ released their AGM Notice which contains some points which I believe are worth discussing. Some time ago OBJ did a capital raising which provided each participating shareholder with additional options that were exercisable at 1 cent per share.
Given the current share price is 2.2cents they have been “in the money” for a considerable amount of time. It is also important to note that the options are tightly held and a number of Top 20 Shareholders are also Top 20 Option Holders. Any way at last year’s AGM these options were effectively extended to the end of this year by re-issuing new options to all excising holders for minimal consideration. This was done to “reward long term shareholders”. At the time many people commented how this extension was to ensure that people who had backed OBJ would be able to benefit in any upside in the share price following the signing of a commercial agreement. Given they were extended for one year, many holders felt that news would therefore be forthcoming within that period.
If we jump forward to today, the company is again proposing that these options effectively be extended for another 18 months until 30 June 2013. All existing option holders will be granted new options at 0.0001 cents, which are exercisable at 1 cent (i.e. in the money). Now this has generated some heated discussion on Hotcopper, however my view comes down to the definition of an option, which is:
“The right but not the obligation to purchase a share at a set price by a pre-determined date”
As a result of this definition options are affected by the price of the underlying security and time to expiry (time decay). However, because OBJ keeps extending their options, OBJ option holders are only at risk from the first part of the equation, the move in the underlying share price. Furthermore option holders do not have any voting rights over the company, nor own any percentage in the company (from those options). Given the board must act in the best interest of shareholders (i.e. those who hold the heads) I don’t see why they should continually extend the options. If option holders want to benefit in the potential upside in OBJ then they can exercise at 1 cent (instant profit of >100%) and be part of the company like normal shareholders.
Finally extending the options provides option holders with “artificial finance” at the detriment to shareholders as they only pay a fraction of the total cost of the shares for the time being and are therefore leveraged to the underlying move in the share price. Meanwhile the company misses out on having the cash from exercised options which could at the very least be earning interest in the bank.
The second aspect which I wanted to mention was Resolutions 3, 4 and 5 which approve the issue of Performance Rights to Glyn Denison, Dr Chris Quick and Jeffrey Edwards. I am all in favour of this resolution as it is associated with three key criteria. The notice states “The Performance Rights may be exercised by the Directors or their nominees upon the satisfaction of the performance condition which is:
(a) 6 million performance rights to vest subject to the execution of an agreement to design and develop commercial product(s) utilising the Company’s technologies (Milestone 1);
(b) 6 million performance rights to vest subject to the satisfaction of the regulatory requirements necessary for the Company to offer a product of its own design and development to the market either directly or through partners (Milestone 2); and
(c) 6 million performance rights to vest subject to the commercial release of a product utilising the Company’s technology (Milestone 3),
The Performance Rights shall expire three years after their issue date at 5:00pm (WST).”
Those conditions seem perfectly reasonable in my opinion. As each of those milestones are reached you would expect an increase in the share price and naturally the management team deserved to be rewarded if and when these conditions are met.
On final note: I don’t expect the option extension resolution to be defeated by I will be voting no to ensure that the company’s is aware that some shareholders are against such a program.
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