Understanding and Recognizing Reverse Splits

Convertible Notes:

A startup company with no revenue,
often can't pay the interest,
or meet other terms of the note.

To protect themselves,
the lenders make the company agree,
to let them convert some, or all, of the loan principal,
into the company's common stock,
usually at a large discount to the current share price,
often 50%.

This is how the lenders protect themselves,
from losing all their money,
when a startup company they've loaned money to, fails,
or can't generate enough revenue,
defaulting on the loan.

When a company defaults,
the lender converts the principal,
into common stock,
and then sells it.

As the price of the stock falls,
the lenders are entitled to more common shares
per dollar owed,
and the company quickly runs out
of Authorized Unissued shares.