$SMLR Convert & the Capped Call Transaction

Details of the Convert:

SMLR's first Convertible bond. Eric Semler mentioned in an interview that they would begin such issuance once they had an options market (late December, 2025).

Initial Offering: $75MM, upsized to $85MM with the option for initial purchasers of an additional $15MM worth of notes (expected to close Jan 28, 2025).

Interest: 4.25% coupon paid semi-annually starting August 1, 2025

Maturity: August 1st, 2030.

Early Redemption Clause: August 4th, 2028, SMLR may not redeem. Following this date, the 130% clause for 20 days in a consecutive 30 day period (not necessarily at the end of a quarter) is in effect.

Proceeds: $6.6MM used for capped call transaction, the rest for corporate purposes and BTC purchasing.

Details of Capped Call:

SMLR has effectively created a debit spread, where they sell a call at a lower strike (the convertible note), and are purchasing a call at a higher strike (capped call) in order to protect against excessive dilution.

This is an important and exciting clause. SMLR has entered into a deal with a counterparty to whom they are paying a 6.6MM premium in order to construct an option such that the effective market price of the SMLR stock for the purpose of conversion will not exceed $107.01, or a 75% premium.

They are hedging the possibility that their equity increases substantially above $107/share in the next 5 years. In such an instance, the counterparty holding these notes will cover the discrepancy between the SMLR fair market share price upon conversion and $107.01 agreed open strike.

This is a new sort of transaction that we haven't seen yet for one of these convertible notes. Clearly SMLR is optimistic about the potential performance of their equity, and now there is one more hedging instrument out in the market for arbitragers to take advantage of.