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(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

Around noon on Friday I published an article titled, "Axion Power: Out Of The Pipe And Into The Light," that presented a bottom-up analysis of a $10 million variable conversion price debt financing that Axion Power International (OTCQB:AXPW) closed in May 2013. The transaction class is commonly referred to as a death spiral PIPE and as frequently happens in PIPE deals, Axion's stock price slid from $0.26 before the offering to an all time low of $0.08 in mid-January. My basic conclusions were:

  • After giving effect to known stock issuances, the remaining principal balance of the PIPE debt is insignificant; and
  • The underlying contracts create a dynamic where there is no further incentive for the PIPE investors to pound stock into the market without regard to price.

After the market closed on Friday, Axion filed a registration statement for the final batch of PIPE conversion shares that provides a clean path to the same conclusions and permits a more granular top-down analysis. The selling stockholders section of registration statement includes a table that identifies each of the PIPE investors and provides the following information:

  • The number of shares held on January 28th;
  • The number of shares issuable upon exercise of warrants; and
  • The total number of shares beneficially owned under the PIPE contracts.

The following table summarizes the ownership information in the registration statement.

(click to enlarge)

I found some of this data confusing because 24.4 million shares at an assumed conversion price of $0.072 per share are worth approximately $1.75 million. That value suggests that the prior accelerated conversions were only $1.25 million instead of the $1.7 million I estimated in my original workbook. That sent me back to my workbook looking for an error and I found it. In the original workbook I used the 20-day average VWAP for all calculations when I should have used the lower of the 20-day average VWAP or the VWAP for the trading day before the calculation date. When I changed the worksheet to use the correct conversion prices, accelerated conversions of $800,000 before November 7th and $450,000 after November 7th resulted in a better fit with the known share counts. I've uploaded a copy of a Revised Excel Workbook to my Dropbox that includes my original calculations, my corrected calculations and a reconciliation of my estimates with Axion's registration statement.

After giving effect to the revised payment schedule Axion reported in its Form 8-K filing on January 3rd, the following table summarizes the number of shares that were issued or will be issuable to the PIPE Investors for the February pre-installment estimate, the February true-up, the March pre-installment estimate and the April pre-installment estimate. It should be noted, however, that if the price firms between now and the end of February, the number of shares issuable for the April pre-installment could decline to a minimum of roughly 730,000 shares. For reasons discussed below I don't believe true-up payments for March or April are likely.

(click to enlarge)

Since the underlying contracts provide that the conversion price for each monthly share issuance will be the average of the twenty lowest volume-weighted daily average prices during a forty trading day look-back period, the February true-up and the March pre-installment will be based on trading prices during December and January while the April pre-installment will be based on trading prices during January and February.

Over the last seven months it didn't matter if the PIPE investors drove the price down through aggressive selling tactics because the true-up requirements simply increased the number of shares issuable at the next payment date. That dynamic will not apply over the next two months because the potential true-up value on the 10.5 million shares issuable for the March and April pre-installments can't possibly offset the related cost of selling enough shares to depress the price further. Since it appears that the PIPE investors have already recovered their investment and fund managers usually receive a bonus equal to 20% or 25% of the profits generated by their funds, indiscriminate selling that reduces total proceeds from future stock sales will directly and negatively impact the managers' bonuses.

The bottom line is my core conclusions from Friday remain intact:

  • After giving effect to known stock issuances, the current principal balance of the PIPE debt is insignificant; and
  • The underlying contracts create a dynamic where there is no further incentive for the PIPE investors to pound stock into the market without regard to price.

Axion has successfully moved out of the PIPE and into the light and I expect the trend reversal we've seen over the last couple days to strengthen over time. Axion is still undercapitalized and it will need additional financing later this year. While I expect Axion to go back to the market this summer, the stock price will have several months to recover before the next financing round is needed. Since doing a variable conversion price PIPE is a lot like peeing on an electric fence and once is more than enough for any rational management team, I don't expect a sequel to last May's financing.

Source: Axion Power: Out Of The PIPE And Into The Light - Part II