Studio One Media, Inc. (OTCMKTS:SOMD) Feeling the Heat

On April 29, Studio One Media, Inc. (OTCMKTS:SOMD) announced that they, along with their partners from ON Semiconductor Corp (NASDAQ:ON), are launching a brand new audio chip called the BelaSigna 300 AM. Suddenly, SOMD‘s stock started moving.

Investors forgot that Larry Ryckman, the company co-founder, has a somewhat sketchy past and they forgot about the fact that Preston J. Shea, SOMD‘s President and CEO, seems to be on the list of the prohibited attorneys at the OTC Markets. They jumped in and on the very day of the announcement, they pushed the ticker above the $0.60 per share mark. SOMD then made a few more substantial strides in the right direction and it soon found itself above $0.90.

Sadly, over the last three sessions, it’s been a bit reluctant to move up. It must be said that the drop isn’t that horrifying. In a matter of three trading days, SOMD only lost about 7%, but even the $177 thousand in dollar volume from yesterday wasn’t enough to stop it from wiping out another 3% and finishing the first session of the week with a price of $0.85 per share.

Some of you might be a bit worried by the hesitation displayed by SOMD, but others will probably say that a few dips shouldn’t be enough to scare you away, especially in light of the company’s potential. Time will tell if they’re right, but it must be said that the shareholders have one or two reasons to be hopeful.

The income statement in the latest 10-Q, for example, does provide us with some encouraging figures. Here’s a summary of all the financials recorded on March 31:

  • cash: $402 thousand
  • current assets: $476 thousand
  • current liabilities: $6.6 million
  • quarterly revenues: $223 thousand
  • quarterly net loss: $1 million

The highlight of the statement is, without a doubt, the revenue figure. It’s actually bigger than the one recorded during the twelve months ended June 30, 2014. SOMD said in the 10-Q that the revenues were achieved mostly through licensing fees, but they also said that they expect sales to grow once products like the BelaSigna 300 hit the shelves.

Hopefully, they will be right. More importantly, however, the new audio chips need to improve the profit margins because at the moment, SOMD is losing quite a lot of money. And this leads to another problem.

The management team had to find a way of financing their operations and they decided to do it mostly through convertible debt. The older notes can be turned into common stock at a rate of $0.10 per share and by the looks of things, some of the note holders have already taken advantage of the favorable terms. During the nine months ended March 31, SOMD issued nearly 5.2 million shares as a conversion of debt. They also sold about 7.2 million shares at a price of $0.25 a pop.

The notes issued during the third and fourth calendar quarters of 2014 have a slightly higher conversion rates – between $0.20 and $0.35 – but even they present a rather tasty discount to the current share price. And this means that while you’re hoping for impressive sales and profit figures in the future, other people might be making money by flooding the open market with their cheap shares.

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