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A Bitcoin Stock Play That's Scarier Than Bitcoin

NEW YORK ( TheStreet) -- Bitcoin may be speculative, but WPCS International (WPCS - Get Report), a tiny company near Philadelphia touted as " the first and only stock for investing in the Bitcoin sector," looks like an even riskier bet.

That's because the decision by WPCS to acquire a Bitcoin software startup called BTX Trader looks at best like a desperate move to save a struggling company that until last month was principally focused on businesses such as installing telecommunications cables in hospitals and municipal government offices.

At worst, it looks like a cynical ploy by a pair of hedge funds to take advantage of the Bitcoin frenzy to create some excitement around the stock so the funds could get out from under a troubled loan.

Iroquois and Hudson Bay Pull the Strings

The hedge funds, which according to WPCS interim CEO Sebastian Giordano were led by Iroquois Capital and Hudson Bay Capital, acquired $4 million in convertible bonds on Dec. 5, 2012. Convertible bonds start out their life as bonds, but can be converted to equity at a pre-determined price. The bonds were themselves an act of near-desperation, as WPCS saw revenues decline from a peak of $107 million in 2009 to $42 million in 2013. Costs on certain projects spiraled out of control and the company struggled under an increasing debt burden. Its core electrical contracting business was a "tired story," concedes one person close to the company who asked not to be identified.

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Convertible bonds are rarely the first option for companies seeking financing because they erode equity value. Understanding how these particular bonds work isn't an easy task. The initial agreement is difficult enough, containing language like this.

The Notes will be initially convertible into shares of Common Stock at a conversion price of $0.3768 per share (the "Conversion Price"). The Conversion Price will be adjusted to 85% of the average of the closing bid prices for the five consecutive trading dates immediately prior to the following adjustment dates: (1) the earlier of the effective date of a registration statement or six months after closing (the "First Adjustment"); (2) the later of the date that is three months after the First Adjustment or one year after closing (the "Second Adjustment"); and (3) on the Stockholder Approval Date.

But then the bonds have been amended a few times, making it even more difficult to figure out what actions holders of the notes are likely to take.

What is clear at the very least is that the bonds gave the note holders near total control over WPCS -- something I suspect wasn't so clear to some longtime investors in the company, and was probably even less apparent to new investors drawn in by the Bitcoin acquisition.

Giordano told me it was those note holders who "could have bankrupted the company," but instead came to him with the BTX Trader acquisition.

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