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John Petersen is the executive vice president and chief financial officer of ePower Engine Systems, Inc., a Kentucky-based enterprise that has developed, built and demonstrated an engine-dominant diesel-electric hybrid drivetrain for long-haul heavy trucks that promises fuel savings of 25 to 35... More
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  • Axion Power, An Alternative View Of Dilution 28 comments
    Feb 2, 2012 12:59 AM | about stocks: AXPW
    Yesterday Axion Power International (OTCQB:AXPW) announced a direct registered offering of 28,571,429 common shares at a price of $0.35 per share. The price fell to a low of $0.38 before recovering to $0.47 by the close. Once again the dilution bogeyman raised his ugly head and once again the reaction was overblown.

    There are basically two ways people can account for dilution.

    New investors who pay more per share than the company's tangible book value per share suffer the classic dilution discussed in every prospectus. Axion's prospectus disclosed the dilution to new investors as follows:

    Offering price $0.35
    Book value at September 30th$0.155 
    Increase in book value from offering$0.040 
    Pro forma book value after offering $0.195
    Dilution in book value to new Investors $0.155

    Existing stockholders also argue that their proportional interest in the enterprise has been reduced so their shares are worth less. While I've always preferred the bartenders approach that one can't dilute a beer by adding a shot of whiskey, I'm going to take a look at the issue from the other side and show why the reaction was overblown.

    On Tuesday afternoon Axion's stock closed at $0.62, which gave the company a market capitalization of $53.0 million based on 85.5 million outstanding shares. The offering injected $9.25 million of hard net cash into the company and resulted in the issuance of 29.4 million shares, including about a million shares that will be issued to brokers as compensation. From the perspective of an existing stockholder the following calculation is a worst case presentation.

     SharesPriceMkt Cap
    Market capitalization before offering85.5$0.62$53.02
    New shares issued in offering29.4 $9.25
    Market capitalization after offering114.9$0.54$62.27

    I think the second calculation is overly simplistic because in corporate finance the whole is always worth more than the sum of its parts. But even that simplistic analysis says that if Tuesday's price of $0.62 was fair and reasonable, the price after the offering should not have fallen below $0.54.

    Disclosure: I am long OTCQB:AXPW.

    Themes: Dilution Stocks: AXPW
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  • 481086
    , contributor
    Comments (3450) | Send Message
     
    And remember everyone, without that notorious "dilution" of 2009, the company would no longer exist! It's all up to the battery. And it's still in the fight!
    2 Feb 2012, 01:39 AM Reply Like
  • bazooooka
    , contributor
    Comments (2893) | Send Message
     
    It looks like the market agreed that .35 was below fair value. The quick rebound today implied that. I'd be surprised if .40 doesn't become a floor.

     

    Heck, just a few weeks ago many here were happy with that level (and assumed it was support). If we start an ascent from here then there will be plenty of happy campers considering all the recent buys between .30 and .50 that I've seen announced on this board.
    2 Feb 2012, 02:40 AM Reply Like
  • 481086
    , contributor
    Comments (3450) | Send Message
     
    There may be some thrashing around this week and next. But we've pretty much got the full entirety of 2012 for good things to happen-- NS, powercubes, Viridity, Rosewater, something something automotive... And we should all remember, these are serious, high caliber people, who have put the better part of a decade, and a great part of their fortunes, into this enterprise. Nobody's quitting now. Time for the game faces. We're in the red zone here. And with plenty on the clock. Something is going to go through them uprights. And that will be just the start.
    2 Feb 2012, 03:08 AM Reply Like
  • Futurist
    , contributor
    Comments (2127) | Send Message
     
    A Bartenders viewpoint.

     

    I have always understood JP's reasoning that adding whiskey to a beer doesn't dilute the beer. However, I am not sure I agree with the analogy.
    When I buy a stock it is with the expectation that the company will be profitable. The value I place on that stock is not just the
    book value. I buy the book value as well as anticipated earnings ( losses). The value of the future profits to me is based on the number of shares outstanding. Axion had 85 million shares at one point. Now we have 114 Million. The future division of profits is diluted. This is the frustrating part of an equity capital raise. This is why shareholders feel dilution has occurred. In the sense of a future division of profits it is a real dilution.
    Now, that said, it is only part of the discussion. As an investor, I am responsible for calculating the future profits and the value of the stock. It is my responsibility to factor in the possibility of the company not having expansion funds and realize that a capital raise is coming. It is my responsibility to factor in the companies inability to ramp sales prior to running out of money. Once all those factors are taken into consideration I can only blame myself for purchasing stock at a price higher than the latest capital raise. I'm sure the insiders that have owned the stock for 8 years feel the same way.

     

    Now to the analogy:
    When I buy a beer or beer and a shot,it is with the expectation that I will get a little profit (kick) from that, also. My beer is not diluted. But when the bartender charges less to the guy sitting next to me for the same drink, I feel dilution just hit me in the face. My drink is just as strong. But I ordered it one minute before happy hour started. My fault for not paying more attention.
    2 Feb 2012, 07:47 AM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » When you buy stock in a profitable company that has a stable earnings profile, your expectation of an identifiable future profits stream is entirely justified and financing transactions that do not proportionally increase anticipated future earnings are potentially dilutive.

     

    When you buy stock in a development stage company that has been very up front about saying "we will need to raise additional equity to continue in business," an expectation of a fixed percentage share of an uncertain future earnings stream is delusional.

     

    The total market value of Axion's assets and its anticipated future earnings stream was $53 million on Tuesday. When you add $9.2 million of fresh cash to Axion's assets without changing the future earnings stream, the market capitalization should increase by the amount of the cash infusion. In reality it should probably increase by more than the cash infusion because the financing uncertainties are gone.

     

    The number still works out to $0.54 per share.
    2 Feb 2012, 08:01 AM Reply Like
  • Futurist
    , contributor
    Comments (2127) | Send Message
     
    We aren't in disagreement. I'm simply explaining why it feels so bad.

     

    But your valuation of $.54 per share is based on the earnings stream with less shares prior to the offering. Assuming the market now values more shares as less revenue per share, the number could go down a few cents. On the other hand a sales announcement will move the needle considerably higher than a few cents.

     

    Again, I was simply writing about how it felt. Not the ramifications.
    2 Feb 2012, 08:33 AM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » Since my average cost is well over $1, I understand the feeling all too well. The problem is that sometimes feelings cloud the facts.

     

    Before the offering Axion had 85 million shares with a theoretical value of $0.62 per share. It's market capitalization of $54 million was the full theoretical fair value of all its assets and future earnings potential.

     

    I got to the $0.54 fair value after the offering by adding the net cash proceeds of $9.2 million to the pre-offering market capitalization, and dividing the $63.2 million sum by 115 million shares.

     

    The bottom line is that the bad feelings over-shot the bad impact by about $10 million.
    2 Feb 2012, 08:40 AM Reply Like
  • Futurist
    , contributor
    Comments (2127) | Send Message
     
    Appreciate the clarification. I missed something earlier in the simple math.
    I felt fortunate to be able to purchase some shares below the 2009 offering price. I was able to snag some below the new offering price. Although my cost basis is only just below $1, I always remember the old guard who invested money in a company that had no product, no factory, no battery plant, and a messy lawsuit to contend with. For this they paid more than $1 per share and they have millions of shares.
    And these people don't whine and complain about an equity raise that helps the company expand.
    OK. I'm done whining now. Thanks for the mental boost.
    2 Feb 2012, 08:47 AM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » Feelings frequently get in the way of smart investing and the markets frequently over-react to news that should have stockholders dancing in the aisles.

     

    I just wish it had occurred to me to run the numbers yesterday.

     

    A placed direct deal like this one is usually pretty good for the market because the buyers typically climb a monster wall of worry before writing a big check. While you invariably have a few flippers sneak in the back door, most buyers take a much more Axionista approach to timelines and expectations.

     

    I can't speak for the other old hands, but I'm not terribly upset by the two down rounds because each of them has been accompanied by other developments that increased my expectations of the future potential.

     

    When we started developing the PbC our hope was that it would be a more durable battery for wind and solar integration and might have some utility elsewhere. When we bit the bullet in 2009 we knew that BMW had been testing the battery for several months and it hadn't failed yet. That fact doubled or tripled my original expectations. This time around I wasn't asked to vote, but the work with NS indicated another massive market for the PbC and the PJM implementation as a frequency regulation resource did the same. Even with the additional share being issued, I don't see that my long-term price per share expectation has changed, and it's really rare for me to be able to say that.
    2 Feb 2012, 09:03 AM Reply Like
  • Stefan Moroney
    , contributor
    Comments (2656) | Send Message
     
    "Even with the additional share being issued, I don't see that my long-term price per share expectation has changed, and it's really rare for me to be able to say that."

     

    This is the closest post that I have seen to a response to my discussion concerning capital structure. As you have stated for a developmental company, something such as P/E analysis or any analysis based on profits makes no sense.

     

    However, as a long term holder with a horizon that I currently measure in years, I hope that analysis based on profits will one day be a normal calculation when considering Axion's progression. As such, I also hope that the capital structure does not get destroyed by the necessary decisions it will take to get there.
    2 Feb 2012, 09:59 AM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » With well over a million dollars of my personal cash invested in Axion I watch the company like a hawk and pay very careful attention to management decisions. After four years of watching as a complete outsider, they haven't made one decision that I would classify as a mistake or mis-step.

     

    Eight years ago I was very naive about just how difficult the process would be and how long it would take. I've been far less naive for the last four years. Mercifully I think we're at the end of the bleeding, or at least I hope we're at the end of the bleeding.

     

    Once Axion starts ramping revenue and building a sales history for the PbC, things should get fun.
    2 Feb 2012, 10:08 AM Reply Like
  • Advill
    , contributor
    Comments (2246) | Send Message
     
    The point John is that for one reason or the other the company is not selling, is not having a product ready for the market, question is WHEN they will be able to do that.

     

    The new VP appointment seems promising but still as days pass by i have a deja vu feeling with my previous investment in Valence where before biting the bullet I lost 75% of my investment, now my losses are around 40% and start to see the parade of new people into the company as a way of escape of a difficult commercial situation....or a non vendible product?

     

    My investment is 15% yours but I feel that risks are growing as time pass by because as far as I remember they had cash enough for a long period with a reasonable burning rate, still I´m not after details of the company, but thay are at the end of the rope (money), with few facts on hand, testings everywhere, railroads, cars, grids, no one as a firm client....still.

     

    Rgds,
    2 Feb 2012, 01:05 PM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » I'm abundantly aware of the marketing risk. At this point it's all up to the battery. The proof will be in the selling.
    2 Feb 2012, 01:08 PM Reply Like
  • Futurist
    , contributor
    Comments (2127) | Send Message
     
    The key to me is the management. Its interesting ( not bashing) that you don't find some fault with the decision to sell stock at this price. Management could have waited to get a better price, done a better job of selling the company at a better price, or used debt financing until a better price could be obtained.

     

    I am assuming from your comments that you trust the management and believe the following:
    1) If they had waited the investors could have been gone.
    2) Management did a good job of looking at investors and chose the best alternative, and
    3) Debt financing was to risky for a company in this stage of development.

     

    Your theory that Axion is in good hands with the present management has never changed. Since you know them and I don't I simply have to rely on your judgment in this matter. I really can't think of a scenario where they could have done better without a purchase order in hand that they could disclose.
    2 Feb 2012, 05:41 PM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » That pretty well summarizes my view.

     

    Financing transactions take months to pull together and are very fragile until a check is written. The price collapse in the last 45 days of 2011 had to introduce a huge amount of uncertainty and fear. The turnaround this year had to make things worse instead of better.

     

    The bottom line with new money that invests in OTC companies is last-in-first-out. New money couldn't care less whether the old stock stockholders are happy as long as the new investors can minimize their risk of loss. In the final analysis it's like fishing with lightweight tackle. If you're not careful the money will break the line and run and then you have to start the process all over again.

     

    Watching the Firefly bankruptcy a couple years back had a big impact on Axion. Firefly apparently had several term sheets in hand and rejected them because the terms were too harsh. It ended up in bankruptcy court which offered the harshest terms of all.

     

    I've been there more times than I can count and at the end of the day the guy that owns pays the fiddler calls the tune. I'll never criticize price if the other terms are clean enough - e.g. no warrants, no variable price staged investments and no debt.
    2 Feb 2012, 11:44 PM Reply Like
  • ARGE
    , contributor
    Comments (722) | Send Message
     
    Using the theoretical value of $0.62 just does not seem right to me, any more then using $0.29 of a month before would seem fare to me. Seems like an adverage of some time frame would be more accurate.
    But I get and agree otherwise.
    28 Feb 2012, 04:48 PM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » In reality the biggest reason for a significant discount is liquidity and market risk.

     

    When a retail investor buys 10,000 shares in an IRA he does so with a high level of confidence that he can sell it a week from Tuesday if the muse strikes or chart patterns indicate a reversal.

     

    When a small institution buys a million shares it knows full well that it will take a week or two to sell without disrupting the market, and that if another big holder (or several) wants to sell at the same time the holding period could get very long indeed.

     

    When you couple the certain knowledge that there will be no quick or easy exit with a high degree of volatility, big money gets very cautious.

     

    One of the most fascinating gatherings I ever attended was made up entirely of office managers for family fortunes in the $1 to $10 billion range. Their biggest headache is that they can buy investments all day every day, but they can't ever sell those investments because when names that big go looking for an exit it invariably starts a stampede.

     

    Some years ago Bill Gates bought 10% of Canadian National Railways. The stockholders were delighted that an uber-rich and uber-smart investor had taken a big stake in their company. Can you imagine the mayhem that would ensue if Gates ever wanted to sell?
    28 Feb 2012, 04:56 PM Reply Like
  • Tickerman
    , contributor
    Comments (93) | Send Message
     
    While the market as a pricing mechanism may not be perfect, it nonetheless appears to agree that current value of AXPW should be closer to .50 than .35. When current hiccups cease, the value of this cash infusion and what it adds to business momentum will lift stock prices nicely.
    2 Feb 2012, 08:27 AM Reply Like
  • Al Marshall
    , contributor
    Comments (531) | Send Message
     
    JP: I am comforted by your math that shows the $.54 valuation. One subjective, but legitimate factor in my opinion, is what this deal reveals about Mr. Granville’s expectations. Rickinplano was the first to bring this up. The deal, and its pricing, shows that we’re not days or even a few weeks away from additional sales, or as I referred, to some positive event that would raise the stock price. If BMW was going to place an order next week, obviously, Mr. Granville would have waited. That knowledge, that dashing of expectations if you will, clearly would impact the stock price.

     

    This factor would certainly shake out a lot of short-term traders, which I presume is what happened yesterday. Today’s relatively low volume would indicate that the Axionista types are taking this (relatively speaking) in stride.

     

    On a slightly different front, I do differ with you on the beer/whiskey analogy. We all understand that book value is just one lens that can be used to value a company. I think it is an important way to value a mature, low margin enterprise, or an enterprise on the verge of liquidation. However, I think it is absolutely the wrong way to value a development company, or even more so, a company in transition from development to revenue stage. After all, Axion’s physical plant for building lead acid batteries should only be a small part of how we value the company. It’s Blue Sky, as I believe you refer to it, it is the patents and the know-how the company has gained while developing this very important technology that should determine the valuation. Book Value really doesn’t capture this.

     

    In my opinion, the current valuation of Axion, has virtually zero blue-sky element. Axion’s management seems to have let the market paint it as a Book Value story. It seems like Axion is working with the wrong kind of institutions that are purely focused in the accounting. Now, is this due to the fact that the company is a bulletin board stock and as a result, first, or even second-tier institutions won’t have anything to do with Axion?
    2 Feb 2012, 05:41 PM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » The timing of an investment transaction is never controlled by the issuer. You spend months going through the due diligence process and holding investor meetings and finally arrive at a structure. You then spend weeks if not months while the placement agents round up their herd of cats for a closing. When the herd of cats is corralled you either close the deal or walk away. There is no option where you get to tell the investors "wait a few weeks so that I can charge you 50% more per share." When the money is ready to close, your two choices are take it or leave it, but decide by the close of business.

     

    I agree wholeheartedly with your view of intangible values, but when you're sitting down to negotiate with a guy that's thinking about writing a check that's close to or more than your entire financial statement net worth, he discounts the heck out of the intangibles and the promise because his primary goal is to avoid losses. Return of capital is far more important to him than return on capital.

     

    The market hasn't painted Axion as anything. Twenty months of persistent selling by big holders have beaten the price down to a point where expectations are not high, but as the supply and demand dynamic changes so will the expectations. Growing a company to a point where institutions begin to take notice is always a painful process. Axion isn't there yet. With a couple solid sales to the right customers it will be. For now, it's all up to the battery.
    2 Feb 2012, 11:59 PM Reply Like
  • 481086
    , contributor
    Comments (3450) | Send Message
     
    APM, I think to make valid conclusions about TG's outlook and expectations, we would have to know the operative timelines of the deal. How far in advance were the terms and dates set? Perhaps as far back as November? Perhaps TG *had* been expecting (and still does) a significant sales deal to hit the press any day now. Maybe delays beyond his or the customer's control (NS EPA paperwork snafus, anyone?) caused him to misjudge the target. Maybe the ridiculous cratering selloff that was December arose after the fact of the deal and its trigger dates being set. There have been a lot of moving parts in motion over these past two months, with the behaviors of SS and Quercus being a big two of them. And once the major pieces were hand-released months or weeks ago to be set in motion, the resulting train wreck of a price, 35 cents (which is really the thing we're all sad about) could have occurred substantially beyond TG's control.. In other words (and I could have this wrong) TG inked a deal to sell 28 million shares at the trailing 40 day volume weighted average price minus 10% to execute on 03 Feb. When did he ink that deal? Was the 03 Feb date determined and fixed at that time, or were the buyers able to adjust and fix it later to their advantage? Were one or both parties locked in, or could the buyers walk at any time if things soured? I know these may be ignorant questions, but until we have more info on all the parameters and sequence of events, it's dangerous to attempt to draw firm conclusions about what that price means... all my very humble opinion of course...
    2 Feb 2012, 06:19 PM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » It's important to remember that until mid-November the price was stabilizing in the $.50s and Tom knew he had the Viridity PJM announcement coming in a couple of weeks and the Navy Yard sale coming after that. On November 15th, it was perfectly reasonable for Tom to expect the price to firm and begin moving upward.

     

    We were all shocked when the selling pressure increased after November 15th and continued after the Viridity PJM announcement. I'm sure Tom was too because it put his carefully orchestrated financing transaction in jeopardy. The last few months have been wretched from the perspective of a company that's trying to close a financing. The insane market activity wasn't management's fault but it was mangement's problem.
    3 Feb 2012, 12:08 AM Reply Like
  • Al Marshall
    , contributor
    Comments (531) | Send Message
     
    Thanks JP. I think this is very helpful and I can appreciate your discussion above about the process of "herding the cats" over a period of months and how the cats would have been dismayed by the $.25 low in late December.

     

    I'm still very frustrated by Axion's "neighborhood". It's "playing" in this bulletin board slum by a rough set of rules with no allowance for the blue sky. I think it's time that the company hires a former investment banker with a fancy Wall Street firm background or silicon valley VC type who has access to the "high class" folks and firms who are elephant hunters specifically looking for blue sky stories. I find it hard to believe that someone like Vinod Khosla wouldn't be fascinated by the Axion presentation.

     

    Maybe, given what you've been doing in recent years, you're that guy. That's not any of my business, but I do think that Mr. Granville should have had such a person in place for the Viridity announcement.

     

    Maybe it's too late now for Axion's financing, but I think there are a lot of other benefits to be gained by raising Axion's profile in Silicon Valley and on Wall Street.

     

    3 Feb 2012, 10:47 AM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » The last place Axion needs to go is Silicon Valley. Those pirates are really tough when it comes to financing terms. Axion has been quietly developing solid relationships for a couple years now and should be able to move upmarket to a higher tier of investment bankers as soon as it can point to contracts that aren't subject to iron clad confidentiality. In the meantime they're making the right moves to position Axion as a credible company with a game changing technology. Unfortunately the process moves at its own pace and if you try to rush it the outcome is rarely satisfactory.
    3 Feb 2012, 10:56 AM Reply Like
  • 481086
    , contributor
    Comments (3450) | Send Message
     
    John, that's the very idea I was struggling to both grasp and to express. "Wretched" is utterly the perfect word there. "Wrenching" would have to be a close second... Now, to put my tarnished tinfoil hat on for a moment, is it possible in any way that the terms and timing of the deal could somehow have leaked? Could some holders of the old shares at 57 cents decide then to sell them for a steep loss in Dec 2011, thereby driving down that 40 day VWMA, in order (for them or their friends) to be able to buy even more of them back in Feb 2012 for 35 cents? Is that too fantastic? I do wish to tread carefully and not get off base, but gosh, it does seem a few things here to make one go "huh"...
    3 Feb 2012, 01:23 AM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » Anything is possible, but it's pretty clear that the bulk of the selling pressure came from Special Situations and I have a hard time imagining that any fund would sell at a loss so that somebody else could get a sweetheart price. That kind of market manipulation can earn you a couple years in an orange jumpsuit while you retrain for a new career as a computer repair technician. I've never met anyone that was willing to take that kind of risk for a couple million dollars.
    3 Feb 2012, 03:20 AM Reply Like
  • greengirl64
    , contributor
    Comments (225) | Send Message
     
    Wrenching? Shock therapy is more like it. But after a relatively short slog upward before the latest crash, the stock is still above its .25 lows of late 2011. It's quite a contrast with 2009, when I opened my laptop and found that my Axion shares had shot over the dollar mark. Now the gains seem hard fought but more real. Let's hope BMW, Norfolk Southern and the mini power cube in the D.C. naval yard all pan out! (But even if they do, the market can be quite contrary, indeed.)
    3 Feb 2012, 04:40 AM Reply Like
  • Advill
    , contributor
    Comments (2246) | Send Message
     
    A good contract erases most of the problems mentioned above, sales is the only medicine for this "malaise"...Meantime everything is possible.
    3 Feb 2012, 05:21 AM Reply Like
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