Contributor Michael posted the following as a comment, but I think it deserves its own thread, so here it is...
Michael said...
I researched cashless exercise of stock warrants. The holder of the warrant has two options to exercise the warrant. In the most logical case, the holder pays the exercise price to the company to obtain the warrants which is based upon the price set when they were distributed. We had two dilutions with different prices. I believe $5.23 and around $10.
In the cashless case, the holder can immediately sell the stock on the open market and pocket the difference between excise price and stock price but it is my understanding that the company would still receive the excise price in return. The other option is to receive the equivalent shares of stock represented by the difference between the stock price and the warrant exercise price thereby reducing the amount of stock issued by the company not receiving any money for the stock issued.
Therefore, it is difficult to state how many warrants were issued cashless vs. bought outright via exercise of stock. I assume all warrants have been exercised now (not 100% sure of this). In any case, stock outstanding increased from 54.7 million in 12/2008 to 66.9 Million in 12/2009 to 70.3 million shares on 11/1/2010 or approximately 15.6 million share increase which equates to 28.5% dilution. They may not all be from warrants since stock options have been exercised in this time frame also.
November 8, 2010 9:24 AM
Thanks for your contribution, Michael.
ReplyDeleteYour explanation of the "cashless exercise" is the same as the conclusion that I came to after I did a bit of Google-enabled due-dilly.
What confuses me, though, is the SVNT press release. In the press release, they give the number of shares that were issued and the amount of cash that was received. These amounts do not make sense in view of the understanding of the cashless exercise described in Michael's post/comment.
Perhaps there is part I/we do not understand.
Jay Hains/alexalekhine
I was also trying to figure that out. The only thing I came up with is that all/most of the warrants exercised after Sept 30 were exercised while the stock was still trading in the 20s which would produce a $10+ intrinsic value per warrant. So if the intrinsic value of the 4.6 million warrants was $40-50 mm then that could explain the 2.6 million shares issued and only getting a few million in cash if most of the warrants were cashless.
ReplyDeleteI too am confused a bit. But given that 4.6 million were exercised after 9/30 and that they added only $3.4 million dollars and the total number of shares outstanding is up from 67.7 million (Q3 end) to 70.3 million as of the call it seems like SVNT got the short end of the stick in some capacity. Roughly 4% dilution (more shares) and about $1.30/share (net for the additional 2.6 million shares) to show for it.
ReplyDeleteThe 10Q clarifies this-
ReplyDelete325,047 warrants were exercised for cash at $10.46 a share to yield $3.4 million in cash.
That leaves 4,225,620 as cashless shares. Assuming a $10.46 exercise price the warrant holders "owed" $44,199,985 to get their shares. 1,997,657 shares were subtracted from the newly issued shares in lieu of cash of $44,199,985. That would come out to a then current share price of $22.13 (44,199,985/1,997,657). $22.13-$10.46 equals $11.67 as the intrinsic value of each warrant. So the 4,225,620 warrants were worth $49,312,985. The company issued 2,227,963 new shares to the warrant holders, which equaled the intrinsic value of their warrants.(49,312,985/22.13=2,228,331 a little off due to rounding).
Warrant holders did quite nicely. SVNT not so much. Insisting on cash exercise would have been an easy way to raise the capital they need for the roll out. Not sure how common it is to allow cashless or whether it was necessary to sell the issue at the time.
iceking,
ReplyDeleteThanks for the analysis. Agree with you that if all the warrants had been a cash exercise the cash position would be much stronger and another offering would likely not even be a consideration. Seems like most things these guys do turns into some kind of disappointment.
Thanks for looking at the 10Q. Your math works out. We were saved some dilution by the cashless exercise that equals about 3%. The way to look at this if we need to raise cash is what price will new shares be issued, if necessary, vs. the warrants which were at $10.46. My hope is that we would raise monies at a higher share price than that but nothing is guaranteed. Good through analysis. Thanks
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