Sunday, November 14, 2010

Microvision: White Knight in Shining Armor

In my last post─ on the subject of “Microvision: $48 million in Additional Funding”─ I wrote…

“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.”

First, here’s what the terms of Azimuth funding say in the 8-K filing…

"“Threshold Price” is the lowest price at which the Company may sell Shares during the applicable Pricing Period as set forth in a Fixed Request Notice (not taking into account the applicable percentage discount during such Pricing Period determined in accordance with Section 3.2); provided, however, that at no time shall the Threshold Price be lower than $1.25 per share."

Yeah, that seems like it could be a problem…

Microvision's first draw was allowed to be up to 12.5 million, but the subsequent draws are not. Subsequent draw limits are tied to the price of the stock. Since MVIS is currently in the last price group─ $1.25 to $1.50, the maximum fixed amount they can request is $1 million dollars per draw every three weeks.

That's a problem, because they can only do one request every three weeks, and making them that often (followed by the short selling Azimuth would be doing) risks dropping the MVIS price below $1.25.

If the price drops below $1.25, then they can't raise anything, and that's obviously bad.

But even if the price stabilizes, they'll still likely run out of money and be out of business by fall of 2011.

When you have only $21 million in cash─ as of September 30, 2010, spend $3 to $4 million per month, but you can only raise a maximum of about $1 million per month─ with the stock price in $1.25 to $1.50 range, the math is simple to do. You would run out of cash by fall of 2011… even though there would theoretically still be cash left on the Azimuth funding deal.

Not that I think the BODs would let them get all the way down to zero before shutting things down.

I know that is disheartening and financially devastating to lots of us. But unless BODs can find a buyer for the company, or get a source of funding other than Azimuth, or get a $1+ run in the stock price over the next 30-60 days, there is not much hope for changing the course of events that usually follow when a company runs out of cash.

For a company like Microvision, with huge future potential but running out of cash while waiting for cheap diode lasers, the “knight in shining armor” could be the friendly enterprise that comes-on-board upon invitation of the management… and offers cash for the next 36 months in exchange for progressively increasing number of shares and warrants─ as the PPS would in all probability be flat or drop every Qtr on news of more and more dilution of unknown proportions.

If you were to assume that cheap diode lasers would be available in the next 24 months and then it takes another 12 months to generate enough profits to self- sustain as a going concern… there is ample time of 36 months for our “knight in shining armor” to accumulate enough shares and warrants to not only cause massive dilution but also become the majority owner.

Having said that…

Microvision’s current financial situation leaves them vulnerable to possible “hostile takeover” and the corporate management may be exploring every possible cost saving and additional funding strategy for the company in an effort to continue as an independent enterprise.

The only problem is; it may be too late to conserve available capital, including additional funds raised thru Azimuth─ if any, and make it last another 36 months as an independent “going concern”.

I’m sure the recent purchase of a patent portfolio from Motorola is a good deal; as it further strengthens Microvision’s patent portfolio. However, it’s not more patents and diversity of products that Microvision needs at this stage. What they need is fiscal responsibility to conserve capital for the next 24 to 36 months while they patiently wait for cheap diode green lasers… because without cheap diode green lasers, Microvision will not survive as a financially viable independent entity.

I’m sure Microvision’s technology and IP portfolio would be of interest to some seasoned business entity with few hundred million dollars to burn.

The only other source of funding, other than a secondary IPO offered thru major investment banks, would be the “rights offering”…

“Cash-strapped companies can turn to rights issue to raise money when they really need it. In these rights offerings, companies grant shareholders a chance to buy new shares at a discount to the current trading price.

Let's look at how rights issue work, and what they mean for all shareholders.

Defining a Rights Issue and Why It's Used
A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. More specifically, this type of issue gives existing shareholders securities called "rights", which, well, give the shareholders the right to purchase new shares at a discount to the market price on a stated future date. The company is giving shareholders a chance to increase their exposure to the stock at a discount price.

But until the date at which the new shares can be purchased, shareholders may trade the rights on the market the same way they would trade ordinary shares. The rights issued to a shareholder have a value, thus compensating current shareholders for the future dilution of their existing shares' value.

Troubled companies typically use rights issues to pay down debt, especially when they are unable to borrow more money. But not all companies that pursue rights offerings are shaky. Some with clean balance sheets use them to fund acquisitions and growth strategies. For reassurance that it will raise the finances, a company will usually, but not always, have its rights issue underwritten by an investment bank.

Be Warned
It is awfully easy for investors to get tempted by the prospect of buying discounted shares with a rights issue. But it is not always a certainty that you are getting a bargain. But besides knowing the ex-rights share price, you need to know the purpose of the additional funding before accepting or rejecting a rights issue. Be sure to look for a compelling explanation of why the rights issue and share dilution are needed as part of the recovery plan. Sure, a rights issue can offer a quick fix for a troubled balance sheet, but that doesn't necessarily mean management will address the underlying problems that weakened the balance sheet in the first place. Shareholders should be cautious.”

[Excerpt from…]

Something is cooking at Microvision; and considering the available options at this stage, and knowing how Microvision management operates, it could be the “knight in shining armor” knocking at the door shortly.

Anant Goel
[I must attribute part credit for this post to Paul Anderson from the Yahoo Message Board]