Sunday, November 14, 2010

Microvision: $48 Million in Additional Funding

At the most recent 3rd Qtr earnings conference call, Mr. Jeff Wilson, Microvision CFO addressed the $48 million funding that is still available from Azimuth… but left some of us wondering how that may play-out in view of MVIS stock price that dropped sharply after the CC.

I know a few VCs and hedge fund managers who have participated in secondary financings… the kind Microvision has engaged most recently with Azimuth.

Let me explain, using a hypothetical example, how this additional $48 million funding may be in play already and running its course…

• Microvision wants to raise $48 million and the stock was trading at $2.00 on November 1, 2010.

• If the deal was done, without the average price over 20 day period, there would be 26.7 million shares offered at $1.80 [$2.00 at 10% discount]. However, that is not the case… the investor [fund] is going with the average over 20 days clause… for a reason of course.

• After the agreement, the hedge fund would short sell the stock starting at $2.00 and go as far down as the most recent support level at $1.45… to raise $20 million and be 10 million shares [more or less] short… thereby limiting the net invested capital outlay to only $28 million. The $28 million net being the comfortable level of investment the hedge fund may want to make in the current financial market.

• Let’s assume the average price over a 20 day period, as a direct result of this short selling, is now $1.50. However, the conversion price will be $1.35 considering the 10% discount. That gives the hedge fund 35.6 million shares in exchange for $28 million net invested [$48 million - $20 million] vs. the 26.7 million shares they would have gotten for $48 million invested without the manipulation.

• In time, the hedge fund would cover the 10 million short shares from the 35.6 million shares received from Microvision treasury.

• The net result, the hedge fund got 25.6 million shares [35.6 million – 10 million] for a net investment of only $28 million [$48 million – $20 million].

So, the hedge fund just improved their average cost to $1.10 per share… and invested a total of only $28 million in these cash constrained financial environment.

Is it illegal? No.

Is it immoral? No.

Is it the American way? Oh YES.

On a more important note; the dilution from raising the additional $48 million to stay as a going concern─ while Microvision waits for cheap diode green lasers─ is only about 35.6 million additional shares… possibly increasing the total to 130.6 million shares from the current 95 million before this funding.

That’s not all that bad considering the dilution is only about 37% from $2.05 trading range... and seems to be already baked-in the $1.45 price as of this day.

Unfortunately, life is not that simple. The terms of Azimuth funding are lot more complicated than that and there are limits to the progressively lower amounts that can be funded as the stock price goes down.

The terms of Azimuth funding are quite complicated to say the least. However, one thing seems clear that with MVIS stock trading at $1.25 or lower, there may not be any funding available from Azimuth?

Does that mean some other “knight in shining armor” coming to Microvision rescue?

It surely looks that way from what I hear.

Anant Goel