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Anything is possible thorn. I'd expect the usual dynamics to kick in well before then and all those sitting on the side-lines waiting for the low are likely to pile in.
Your initial calcs were based on a stable or modestly increasing share price.
The share price was 50p last week, it's now heading for 40p and Heights shares will be issued at a discount to this prevailing share price.
If it was 50p last week and shares will be being sold onto the Market next week issued in the 30s only 2 weeks later why would you not think 20p possible in the near term?
This quarter's payment will be in the 40's. Why entertain such a scenario? 😂
Let's put it like this, if it gets to 10p then anyone with any dry powder left over is going to do very well indeed.
For the sake of completeness GJE could you run the calcs again with a share price of 20p and 10p.
Thanks.
Isn't the embedded derivative element just the conversion feature of the bond i.e. HC can issue a notice of conversion at any time to convert part of the principal into shares, but cannot go any lower than the conversion price.
Don't know why you bother, it's a death spiral, we're doomed ☠️
There is also the Derivative element whcih was showing as a credit at last valuation. It will be interesting to see how this pans out in the upcoming financials.
'The bond agreement contains embedded derivatives in conjunction with an ordinary host debt liability. As a result, the convertible bonds are shown in the Consolidated Statement of Financial Position in two separate components, being 'Convertible bond - debt' and 'Convertible bond - derivative'. The derivative element has been measured at fair value using a Monte-Carlo option pricing model, which estimates the fair value based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to the bondholders.
The derivative element, taking into account the amortisations and early redemption, was revalued as at 30 June 2023 at £28.90 million (30 June 2022: £nil; 31 December 2022: £39.10 million), which has resulted in a credit within the period of £5.86 million.
The debt element of the bond has reduced from £18.73 million at 31 December 2022 to £15.68 million at 30 June 2023 (30 June 2022: £nil), with an associated non-cash interest expense of £6.85 million.'
cje306...at this point I really don't know...just need to see the next payment amount/shares to see what the conversion price has been recalculated at. Like you I don't think the consequences of the Bond are as bad as some may think and the upcoming financials should give us a better idea of company cash burn, DX income v loss status etc etc...
This year is going to be really interesting within the EU with the upcoming elections and of coure UK elections.
If we receive any upfront payments just keep them in the kitty forget cash payments until we are over the line or of course someone gives avacta a serious upfront
What are your assumptions and calculations for B?
Gje306...we also have the ability to pay in cash not shares and DX might, if profits exceed expectations, be in a position to cough up the readies...
There is also the possibility of an upfront deal and/or milestone payments coming into TX before your 2 years are up which again could generate the cash for the bond payments.
The amount of cash Avacta now has there's also the bit of interest earned in intitally which will help cashflow too...every bit helps eh!
My calculations are:
As a result of the Offer Price being less than 95 per cent. of the VWAP in the five-day trading period prior to the announcement of the Placing, the Direct Subscription and the REX Offer, the conversion price (118.75 pence) and the reset floor price (95 pence) will be recalculated by the calculation agent using an adjustment factor calculation as follows:
1. the adjustment factor will be (A+B)/(A+C), where:
1. A = number of Shares in issue immediately before the date of first public announcement of the terms (the "Pricing Date") of the Bookbuild; ......... 288,215,722
2. B = aggregate gross proceeds of the Bookbuild divided by the Current Market Price ("CMP") on the Pricing Date of the Bookbuild, where CMP on the Pricing Date = arithmetic average of the five daily VWAPs immediately preceding the Pricing Date; and .............37,971,582 based on 0.8764 average
3. C = number of Shares comprised in the Bookbuild.........62,296,557
Gje306...what conversion price did you come up with for the recalculation as detailed in the Placing RNS? I get 0.93 but not sure that's correct...
As a result of the Offer Price being less than 95 per cent. of the VWAP in the five-day trading period prior to the announcement of the Placing, the Direct Subscription and the REX Offer, the conversion price (118.75 pence) and the reset floor price (95 pence) will be recalculated by the calculation agent using an adjustment factor calculation as follows:
1. the adjustment factor will be (A+B)/(A+C), where:
1. A = number of Shares in issue immediately before the date of first public announcement of the terms (the "Pricing Date") of the Bookbuild;
2. B = aggregate gross proceeds of the Bookbuild divided by the Current Market Price ("CMP") on the Pricing Date of the Bookbuild, where CMP on the Pricing Date = arithmetic average of the five daily VWAPs immediately preceding the Pricing Date; and
3. C = number of Shares comprised in the Bookbuild.
The principal remaining under the Bonds was reduced by a further £2.55 million to £38.25 million on 22 January 2024 following the fifth quarterly amortisation.
Here are the calculations for the next 2 years assuming a share price of 30p:
+--------+--------+--------+--------+--------+
| SP % | 4P S | 4P D | 8P S | 8P D |
|--------+--------+--------+--------+--------|
| 0 | 0.3 | 8.17 | 0.3 | 13.9 |
| 1 | 0.31 | 8.06 | 0.32 | 13.52 |
| 3 | 0.33 | 7.86 | 0.37 | 12.82 |
| 5 | 0.35 | 7.67 | 0.42 | 12.18 |
| 10 | 0.4 | 7.24 | 0.58 | 10.83 |
| 15 | 0.46 | 6.86 | 0.8 | 9.74 |
| 20 | 0.52 | 6.53 | 1.07 | 8.87 |
+--------+--------+--------+--------+--------+
That is less than 2% per quarter on average. If it drops to 30p and rises back up to 50p by 2025 then we're looking at 8.87% or just over 1% per quarter on average.
Amortization is on our side now. Any more than 2 years at 30p and none of us will be here 😂
I didn't see the calculation when the share price falls as a result of Height's loan Pedro.
Did you?
Because that's the problem with this sort of finance deal.
What a brainless post Thorn. Did you not even read his explanation and different scenarios in your haste to knock it back?
Gje, thanks for this, excellent work. I’ve always thought the quarterly HCI saga is completely overplayed, never mind the overall dilution levels. Undeniable now, as you’ve proven, even at these lowly levels. Great stuff. I’d hope it won’t be mentioned again given the insignificance…
In fact the important point I'm highlighting here is that there's very little difference in dilution between the share price remaining flat at 50p and the share price ending up at 143p. After 12 payments the dilution is 11.68% and 8.06% respectively. So over 3 years there is a difference of just 3.62%, between the share price remaining flat and a rise to 146p.
The reasons behind this are:
- there is a heavy weighting to that last payment
- the 20% dilution we have just experienced also applies to these payments, therefore reducing the dilution impact
- the principal and interest repayments reduce with time i.e. the affect of these payments is reducing as time passes. (We have already had the worst 5 when the conversion price was more than double this).
Thorn, I have included the scenario in there where the share price remains flat for the 3 years. The dilution after 12 payments in that scenario is still just 11.68%.
If you think it's going to go down when the trial is going well, then I would find a different stock to invest in.
I think stepping back and objectively assessing the likely dilution ignores a couple of things.
You're assuming a share price increase over time for a start.
There may well be an increase with positive news but how far away is that?
There's just been a shareholder update and clinical update and the rate of recruitment for 2W trial is unclear.
If a potential investor was looking to get in they might feel comfortable waiting on the sidelines.
Similarly Heights will be offloading ang and holders may simply run out of patience.
It's a buy/sell dynamic at the end of the day, it's called a stock market for a reason.
Now let's consider the scenarios where the share price increase per quarter is between 5-10% (rows 4 and 5). I would still classify this as highly conservative when you consider what could happen between now and then. After 12 payments, the share price range would still only be between 86-143p, which is perfectly within historical bounds, and the percentage dilution between 8.03-9.55%. I haven't adjusted for the new conversion rate at 103p, but frankly it doesn't make a lot of difference if we are considering this time frame.
Why have I just wanted to focus on this timeframe? For a few reasons:
- there is a fair weighting to that final repayment, but we don't have to worry about that until around 22-10-2027, around 3.5 years away.
- 3 years should give avacta plenty of time to commercialise, at which point the remaining payments, including the final payment, could be repaid in cash, not shares
- 3 years gives plenty of time for DX to become profitable and sold - giving options to repay in cash
So to summarise, even the most conservative increases in the share price over time don't result in any kind of doomsday scenario, and when the numbers are laid out in this way, it's clear that the convertible bond is not too big an issue even after the share price has taken this hit.
Continued...
+--------+---------+------------+---------+------------+----------+-------------+
| SP % | 4P SP | 4P Dil % | 8P SP | 8P Dil % | 12P SP | 12P Dil % |
|--------+---------+------------+---------+------------+----------+-------------|
| 0 | 0.5 | 5.07 | 0.5 | 8.83 | 0.5 | 11.68 |
| 1 | 0.52 | 5 | 0.54 | 8.58 | 0.56 | 11.19 |
| 3 | 0.55 | 4.87 | 0.61 | 8.11 | 0.69 | 10.32 |
| 5 | 0.58 | 4.75 | 0.7 | 7.68 | 0.86 | 9.55 |
| 10 | 0.67 | 4.47 | 0.97 | 6.79 | 1.43 | 8.03 |
| 15 | 0.76 | 4.23 | 1.33 | 6.08 | 2.33 | 6.92 |
| 20 | 0.86 | 4.02 | 1.79 | 5.52 | 3.72 | 6.09 |
+--------+---------+------------+---------+------------+----------+-------------+
+--------+----------+-------------+----------+-------------+
| SP % | 15P SP | 15P Dil % | 16P SP | 16P Dil % |
|--------+----------+-------------+----------+-------------|
| 0 | 0.5 | 13.38 | 0.5 | 20.32 |
| 1 | 0.57 | 12.7 | 0.58 | 18.84 |
| 3 | 0.76 | 11.52 | 0.78 | 16.3 |
| 5 | 0.99 | 10.51 | 1.04 | 14.22 |
| 10 | 1.9 | 8.58 | 2.09 | 10.54 |
| 15 | 3.54 | 7.24 | 4.07 | 8.29 |
| 20 | 6.42 | 6.28 | 7.7 | 6.85 |
+--------+----------+-------------+----------+-------------+
(copy and paste these into notepad to straighten out the formatting)
The 15P pair represent all the quarterly payments, and 16P also includes the final repayment when the bond matures. There is a fairly big remaining balance left over at maturity, so as you can see the dilution percentage jumps a fair bit at this point.
What does this tell us? Well the first table with the 12P columns takes us to 3 years from now, so that's 2027! Even if the share price remains at 50p, which it is unlikely to do, then even after 3 years the additional dilution is just 11.68%, which I'm sure you'll agree is in itself not the end of the world.
Ignore this one, it fired before formatting the table
Convertible bond repayments - not as bad as you might think
The convertible bond repayments get thrown around a lot, along with various doomsday scenarios, but without any backing up. It's difficult to counter these arguments, or indeed to allay ones own doubts, without cold hard numbers, so I had a crack at generating these - again with the help of co-pilot.
Here are the initial assumptions:
remaining payments: 15
final payment: there will be an outstanding balance at the end of the 15 payments, around Oct 2027, which can be settled in cash or shares using the same calculations as are used for quarterly repayments
current number of shares in circulation: 350m
Starting share price: 50p
The results can be summarised in the following couple of tables. Each row represents a scenario, where the share price increases each quarter by the percentage in "SP %". After this the columns come in pairs e.g. '4P SP' and '4P Dil %' show the share price and share dilution percentage after 4 payments have been made from this point in time.
As an example, the first row reads as: in a scenario where the share price increases by 0% each quarter (i.e. remains flat), after 4 payments the share price is 50p, the dilution is 5.07%, after 8 payments the share price is 50p and the dilution is 8.83% and so on...
SP % 4P S 4P D 8P S 8P D 12P S 12P D
0 0.5 5.07 0.5 8.83 0.5 11.68
1 0.52 5 0.54 8.58 0.56 11.19
3 0.55 4.87 0.61 8.11 0.69 10.32
5 0.58 4.75 0.7 7.68 0.86 9.55
10 0.67 4.47 0.97 6.79 1.43 8.03
15 0.76 4.23 1.33 6.08 2.33 6.92
20 0.86 4.02 1.79 5.52 3.72 6.09
The 15P pair represent all the quarterly payments, and 16P also includes the final repayment when the bond matu