How did this once great company drive the bus into the swamp so fast?
In this case it is the share price of Guelph-based Armtec infrastructure Inc. Its share price dropped from $13.48 Friday, June 3 to $4.35 Thursday, June 9.
The company announced after the market closed Wednesday night that it was suspending the dividend until further notice and stated the first quarter loss was higher than anticipated.
Let’s dig a little deeper into this debacle.
A week before the end of the first quarter, the company successfully sold a stock issue totaling 3.6 million shares for $16.20. For those unsuspecting purchasers the Thursday close of $4.35, represents a 73 per cent haircut of their new Armtec shares.
Ah, but the board of directors were busy March 10 approving a new executive compensation deal to be considered at the annual meeting June 23. Good luck with that.
At the end of March, Armtec stock closed at $16.54. Those new shareholders had to be happy as they had just paid $16.20 for Armtec’s new shares. The existing shareholders saw their investment in the company diluted by the issuance of new shares.
The company said proceeds from the $58 million share deal would be used to reduce debt.
The stripping of the share price started Monday morning June 6 when trading volume surged from the usual 40,000 to 60,000 shares a day to more than 300,000.
By Tuesday, volume increased again as the share price dropped by $2.98 at the close of trading. Volume increased by more than a million shares.
Anyone tracking the trading volume of Armtec and the sliding price of the stock prior to Chief Executive officer Charles Phillips announcing suspension of the dividend Wednesday night, had to ask: Was there a leak of the impending news?
The CEO said that the decision was made Wednesday, but it was a board of directors decision and many people had to know knew what was coming prior to Wednesday night’s decision.
Everyone it seems, except the unsuspecting shareholders.
The situation warrants an investigation by the Ontario Securities Commission (OSC) to include the volume of short sales of the stock and who was selling.
A short sale allows an investor to borrow stock from the broker and replace it when the price drops. An example is if you shorted 1,000 shares of Armtec Monday morning at roughly $13 you could close the transaction by replacing the borrowed shares Thursday at a price of $4.35.
Such an account would be credited with $8,650, the difference between $13 and $4.35 less commissions.
The OSC can obtain the trading records for the period March 31 to June 8. Of course this will take time and the OSC has the power to investigate the trading patterns and who was making them.
CEO Phillips denies there was any leak. It boils down to two issues: What did the company know and when did they know it? Was there any trading by insiders knowing what happened last March when the losses were greater than anticipated?
The new stock issue was launched the week before the end of the quarter, was it a case of bad timing or desperation?
The company failed to meet its obligation to shareholders by revealing the 1st quarter performance results and the decision to suspend the dividend just two weeks before the annual meeting.
The situation warrants an investigation by the OSC so that shareholders may be assured the management fulfilled its fiduciary responsibilities.
Gerry Barker is a Guelph resident and former Armtec shareholder. Reach him at firstname.lastname@example.org