MicroVision's Financing Strategy: Understanding The Risks Of The Convertible Note

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MicroVision's financial update reveals $81M in cash, $153M in additional capital access, and a cash burn rate of $55-$60M, lasting until end of 2025.The convertible note deal, with an 8% discount and ...

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The company's financial situation was given as follows: After putting into effect to the net proceeds from the first $45.0 million tranche of the financing transaction, we expect to have approximately $81.0 million in cash and cash equivalents and access to $153 million of additional capital, including $123 million under our existing ATM, or at-the-market, facility and $30 million from the remaining commitment pursuant to the convertible note facility. In addition, the company reaffirmed its revenue forecast of $8 to $10M, which would leave $5 to $7M to be delivered in Q4. Finally, the cash burn run rate was established at $55 to $60M, which gives the end of 2025 for the existing cash of $81M. I focused on the second release and Key Terms of the Convertible Notes, which I am quoting below: \"The securities purchase agreement executed on October 14, 2024 provides for, upon closing, the sale from MicroVision to note holders of $45 million in senior secured convertible notes and provides for, at subsequent closings, the future sale, at the Company's option and subject to certain conditions, including that MicroVision has an effective resale registration statement on file for all shares underlying the Notes purchased at the initial closing and a requirement to seek stockholder approval, of up to an additional $30 million of senior secured convertible notes (collectively, the \"Notes\"). The Notes were issued with an original issue discount of 8%, generally convert to common stock at $1.596 per share, and will mature on October 1, 2026. Subject to certain conditions, the Company has the right to convert the Notes at any time if the closing sale price of the Company's common stock has been equal to at least 150% of the conversion price for the last 20 consecutive trading days. The Company has agreed to customary registration rights with respect to the resale of any shares of common stock issued upon conversion. If not converted, the Notes must be repaid at 110% of the face amount, with partial repayments beginning, at the option of the note holder, on January 1, 2025. The closing of the transaction remains subject to customary closing conditions.\" To summarize, the note cost MicroVision an 8% issued discount of $3.6M plus fees of $2.95M; the company declared to receive $38M. Using the SEC filings to obtain more information, I sought more details. Below is my analysis. Convertible Note Analysis The last reported sale price on the date of the Resale Registration Statement (yet to be filed in the coming weeks) is critical to determining the initial principal amounts considered for converting the notes. If the stock price is $1.33 or more, then $5.2M becomes convertible for payments from January to March 2025. If the price is below $1.33 on that date, the conversion amount becomes $12.5M and is pushed to July. The initial principal payments reduce the $45M, and the outstanding amount now converts at $1.5960 if that is the price or higher before a conversion date. Suppose the price of shares is below the conversion price; in that case, notes are payable back in cash to return the principal amount and 10% interest. The CFO confirmed this in the statement given in the update to shareholders on October 18th. The partial redemption payments fluctuate from up to $1.925M monthly from January to March 2025 to as much as $3.85M from April 2025 to October 2026. I am quoting the entire paragraph from the SEC filing here to determine the conversion rate. “ If the Holder elects to convert the Convertible Note with respect to the Initial Principal Amount underlying the Initial Partial Redemption Payments, the conversion price will be an amount equal to (i) one thousand dollars ($1,000) divided by (ii) the “first conversion rate,” which is an amount equal to one hundred ten percent (110%) of a fraction whose numerator is one thousand dollars ($1,000) and whose denominator is the lesser of (A) $1.5960, which is equal to one hundred twenty percent (120%) of the last reported sale price on October 14, 2024 and (B) ninety percent (90%) of the Nasdaq Minimum Price (as defined in Nasdaq Rule 5635(d)) as of the effective date of the Resale Registration Statement (as defined in the Securities Purchase Agreement) to be filed in connection with the Initial Purchased Notes subject to customary anti-dilution adjustments.” To help understand this detail is the Nasdaq minimum price definition: Listing Rule 5635(d) defines \"Minimum Price\" as the lower of (i) the closing price (as reflected on Nasdaq.com) or (ii) the average closing price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement. For example, if the five-day average is $1.20 before that date, this becomes the minimum price because it is lower than $1.34. Now, here is the formula for the conversion rate and price. For the illustration, let's assume the minimum price is $1.20. Since $1.20 is lower than $1.5960, 90% of $1.20 would be used as $1.08 in the conversion rate calculation. The calculation is as follows: 1.10 x 1000/1.08 =1.10 x 925.2=1018.52 The conversion price would be $1000/1018.52 = $0.98 The maximum conversion price is $1.45 per share. The 90% of the minimum price of $1.78 is $1.60, and $1.5960 becomes the denominator, which has $1.45 in that outcome. So, the conversion is capped at the top but opened at the bottom. The max conversion of $1.45 at a share price of $1.77 still results in a 22% gain. In that case, $5.2M would only be converted if the last record sale exceeds $1.33, and the rest would convert by $1.5960. Worst Case Scenario The situation gets muddier when prices are below $1.5690. If $1.12 is the minimum price using the Nasdaq rule, the conversion price becomes $0.916, and the amount to be converted is now $12.5M. MicroVision sells 13.6M shares, resulting in a 22% profit for the convertible note holder. The holder could have sold the same number of shares above $1.12 short, but assuming they all sold at the same price, this would have resulted in a $2.7M profit. At that point, $32.5M of the convertible note requires over $1.5960 for conversion, or the holder can redeem the capital and 10% interest as a return in cash. 10% is $3.25M, which adds to a total of $35.75M. Given the risk of price fluctuation, MicroVision must maintain this cash if the price is lower and there is an apparent set of covenants covering this requirement for minimum cash. In the worst-case scenario, $35.75M would be returned, including the interest, a deduction from the initial $38M received. As a result, the company handed 13.6M shares for a balance of $2.2M. The deal for the note holder is essentially risk-free. They make 10% on payment if the conversion price is unmet and 22% on the initial amount at a minimum of $5.2M to $12.5M value converted into shares. They have got an 8% discount on $45M. Covenants protect the holder, as MicroVision needs to keep its cash account ready for cash payments when the price is below the conversion level. The $38M may appear as a quick boost to a balance sheet when seen in Q4, but it is so dependent on the share price, in my opinion, that the risk outweighs the effect it creates on it.  Optimists may argue that the company is confident in the share price's potential for growth due to future yet undefined deals. Still, I cannot think of a financial transaction built on a share price higher than the current one, resulting in dilution. The effect is the opposite; the share price loses value upon dilution. The conclusion is that while the first leg of the deal is very dilutive, confirming that this is a regular sale of the equity at a discount to the buyer, the second part of the deal requires stock to perform, or the money needs to be returned. And that part is entirely out of the company's control and, frankly, weird to be seen in the transaction.  MicroVision has a $123M ATM; selling the equity would have been much more effective and sustainable, which is what MicroVision has done for most of its history to keep its operation going. The note holder cannot lose; what does MicroVision win? The noted update to shareholders has highlighted that the company's key focus is shifting toward entering the industrial segment. At the same time, consumer auto ADAS wins are anticipated for as late as 2028 or 2029. Over the next five years, this effort will likely require a $150M reserve already described in the news, funded by a combination of an ATM facility and a second $30M tranche of a convertible note. What struck me as odd was the mention of revenue from these industrial wins being treated as cash, with no associated production costs, seemingly flowing straight to the bottom line. I consider this a result of casual discussion, considering MicroVision's gross margin for 2024 to date is just 1%, or $25K on $2.8M revenue—clearly, revenue is not cash. While the company's efforts to pitch MOVIA sensors to 15 customers seem promising, the revenue outcome or the cost of those sales remains undefined.  Conclusion Management may have been caught off guard by the market's reaction. The stock has dropped 16% since the announcement, and as a result, I believe the update was put together to reassure investors. It did not have the desired effect. If deals are announced, the stock will go up, but the timeline of the deals has aged for over a year now, and so is the narrative.   I remain skeptical. In my last article, published in May, I maintained a 'sell' rating on MicroVision, citing my doubts about the product line and my concerns about the company's inability to secure deals. Five months later, nothing has changed, except that the expected deal timeline has now been pushed to 2029. While I highlighted the need for financing, I believe the convertible note in its current form is counterproductive. It introduces debt to the company's balance sheet and imposes covenants that limit financial flexibility. The conversion price poses a significant challenge, potentially costing the company cash to pay back the principal and 10% interest if unmet. If deals are indeed on the horizon, the ATM alone could sustain the company. My \"sell\" rating remains with the added financial risk from the convertible note.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2476694762"}