gbsn stock dilutionDocuments filed by Great Basin Scientific (GBSN) offer insight on potential stock dilution that is on the way.  On April 20 and 22, 2015 the company filed a series of 424(B)(3) prospectuses detailing the circumstances that would allow 32 million shares of the company’s fully diluted 40 million to become freely traded, arising from convertible preferred stock and warrants associated with the company’s secondary offering on March 2nd, 2015.

Impending Potential GBSN Stock Dilution

Here are the exercise terms that will potentially lead to massive GBSN stock dilution:

The securities underlying the Series E Convertible Preferred Stock

  • 10,896,000 shares of common stock issuable upon conversion of the Series E Convertible Preferred.
  • 21,792,000 shares of common stock issuable upon the exercise of the Series C Warrants (exercisable at $2.55) associated with the preferred stock:

Exercised terms :

(i) six months after the date of this prospectus, or

(ii) 15 days after the Separation Trigger Date in the event of Early Separation.

Separation Terms:

  • The shares of Series E Convertible Preferred Stock and the Series C Warrants will automatically separate on October 25, 2015.
  • However, the shares of Series E Convertible Preferred Stock and the Series C Warrants will separate prior to October 25, 2015 if at any time after 30 days from February 25, 2015 the closing price of our common stock is greater than $4.00 per share for 20 consecutive trading days (the “Separation Trigger Date”).

The shares of Series E Convertible Preferred Stock and the Series C Warrants will become separable 15 days after the Separation Trigger Date.

The company also has outstanding series A and B warrants :

  • Series A warrants are exercisable into 1,322,500 common shares at a price of $2.20
  • Series B warrants are exercisable into 1,322,500 common shares at a price of $8.75

It is also worth noting that the exercise price of the series A warrants was recently lowered from $7.00 to $2.55.

Incentive for Third Party Promotional Campaigns

We believe there is a huge incentive for “third party” promotional campaigns and/or for the company to try and potentially maintain trading above $4.00. The big question we ask: will possible promotional activities be enough to keep the astute long investor from selling shares and/or short sellers from taking action? Regardless, we believe the company’s float is likely to see a seven fold increase, possibly sooner rather than later, followed by what we believe could be an implosion in share price.

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GeoInvesting started tracking Great Basin Scientific (GBSN) on March 30, 2015. Since then, we have laid out our case for shorting GBSN, including a note issued just days ago regarding the company’s $500k convertible notes and our April 13, 2015 note in which we updated premium members about why we thought the company’s stock price was unwarranted. We have been tracking GBSN since March 30, 2015 and have found:

  • the underwriter (Dawson James) of the company’s IPO in 2014 and secondary offering earlier this year has been associated numerous past pump and dumps that have imploded
  • Dawson has encountered serious FINRA violations in the past
  • promotional campaigns by “third party” newsletters
  • massive stock dilution of around 40 million shares could be right around the corner

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