Microvision Raises Cash Through Last Resort Financier Azimuth Opportunity Fund

Sep.29.10 | About: Microvision, Inc. (MVIS)

Microvision (NASDAQ:MVIS) issued 6,277,275 new shares of its common stock to Azimuth for an aggregate purchase price of $12,500,000. Microvision received proceeds from the sale of these shares of approximately $12,375,000 after deducting a placement agent fee of $125,000 paid to Reedland Capital Partners, in connection with this issuance. Microvision intends to use the net proceeds of the offering for general corporate purposes, including, but not limited to, working capital and capital expenditures.

On August 17, 2010, Microvision had announced that it had secured a committed equity financing facility under which it may sell up to $60 million worth of its shares of common stock to Azimuth over a 24-month period. MVIS is a young company on the cutting edge of display technology such as miniature projectors, vehicle displays, and wearable eyeglass or eye-patch type displays. Think the displays a fighter pilot sees on the inside glass of his goggles. However, MVIS has yet to turn profit and is not expected to, at least until fiscal year 2013. Naturally, all this 21st century tech research requires a lot of cash, but I for one was surprised that a company like MVIS which has some great products and patents, needs to resort to financing through Azimuth Opportunity Fund.

Azimuth has bought minority stakes in numerous development stage biotechs in the past. These registered stock deals are similar to PIPEs, or private investment in public equity, and allow the companies to avoid the time consuming and sometimes pricier route of secondary public offering. However, the fund is known as the equivalent of a pawn-shop in the investment community, as their strategy is not to invest for any period of time in the financed companies, but to dump the shares immediately in the market for any profit they can get.

It's usually that only very cash-desperate companies will use Azimuth to raise funds. Often these are start-up biotechs, whose only drug in development has just received a major setback by the FDA, and all other sources of financing have dropped out. In a typical situation in 2009, on November 23, Poniard (OTCPK:PARD) announced it will raise $7.4 mln through the sale of 3.5 million shares at the discount price of $2.15 to Azimuth Opportunity. PARD had just announced a few days earlier that the Phase 3 trial of its lead drug-in-development Picoplatin, has failed to accomplish the tests goals, and the books showed the young bitoech only had the cash to continue operations for 1 or 2 quarters at most. The situation really seemed dire, so when the financing was announced it sounded like good news for PARD. The stock was trading at $2.45 at the time of the announcement. Azimuth started selling its new shares of PARD right away, and the flood of shares offered pushed PARD to a low of $1.92 just 3 days later.

The current sale of new shares by MVIS will not only dilute the shareholders' equity, it will lead to a quick decline of the stock price to the discount price of $1.99 (Divide gross proceeds over number of shares sold) or below, as Azimuth has 6.3 mil shares to sell in a stock that trades just 600K shares a day. But for me, the mere fact that MVIS had to use such a fire-sale financing method is very, very negative. Either the management are very inexperienced and unaware how this will reflect on their company, or MVIS is really perceived as a bad risk by creditors. We all remember clearly that in the case of Lehman, the creditors' reluctance to lend was what actually lead to the firm's collapse, while other firms were saved.

So the play here is to short some stock (or options) right away and to short some more at any attempt at a bounce. It is a very low risk short as Azimuth will be dumping tons of stock at any rally. Look to cover 80-90% of you position at the $1.99-$2.00 level, and keep 5-10% just in case the stocks slips even lower.

Disclosure: Short MVIS at $2.14