RE: Next week should start to rise1 Apr 2023 11:25
Removing the short term financing facility is a big turning point for three reasons. Firstly, there’s a clear indication that the company now has enough cash to get through to profitability (and the addition of more deals that provide cash during that period since that facility was announced nails that out of sight). Secondly it’s stopped the guaranteed selling into any subsequent news and also massively changed sentiment. But don’t read that the wrong way, of course there will be selling in the future, people will take profits, need money, all sorts of things, but the key thing is that is back to normal share price mechanics, where everyone has a fair chance of assessing the risks and the rewards. The third reason is at the end of this post.
For anyone who doesn’t understand either his mezzanine finance operates or indeed the impact of mezzanine finance on sentiment of investors, have a look at genedrive GDR that announced a similar arrangement last night. A few days ago their share price was over 40p, now after announcing £2m (with the promise of another £3m)of MF they are at 28p. That arrangement has 6.5 million shares issued at 1.5p to seed how the facility works. (And I note that terrytitsoff isn’t over there claiming that they had a placing at 1.5p - although you can’t comment if your account is deleted ;-) ). Those seed shares are sold to generate the cash payment for the facility, and then are replaced by converting that equivalent cash sum into shares at a discount to the lowest VWAP price, thus ensuring that the financiers have more shares than they started with for the next conversion. That keeps going until the facility is paid. If the share price dosen’t rise in-between, then you end up with ever increasing numbers of shares converted, hence the term “death spiral finance” gets used to describe such facilities. Hence why investors don’t like those arrangements. But there’s nothing fundamentally wrong with them, and sometimes it’s far better than the alternative of a massively discounted equity placing, especially in current market conditions.
But here is the thing to really think about. The MF providers will generally require a company to show that there is positive news in the pipeline so that sufficient volume can be generated to service the facility. With the LVCG share price being pummelled by poor sentiment to the downside already, and all the good news (eg the Japan deal) not taken account of too, there’s likely to be a big swing back now the brakes are off.
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