At the end of the quarter, Smart Wires had cUSD20m in cash with net cash of -cUSD20m. The Company's current burn rate is cUSD20m. Smart Wires announced it has received funding up to USD10m in preferred equity. With this funding, the Company believes it has a runway well through 2023. Clearly, given the current burn rate, this would only last them till mid-Q1'23. However, we believe management sees a pipeline of projects for 2023 and 2024 that will be awarded to Smart Wires before mid-Q1'23. As a reminder, Smart Wires earns a prepayment of 10%-20% of the awarded amount, which significantly improves the cash position.

Assuming Smart Wires is awarded contracts worth USD140m in 2024, the midpoint cash injection would be USD21m. Given the reduced order guidance of USD50m to USD60m for 2023, we believe this scenario is unlikely. Anyway, the USD21m together with a planned cost reduction of USD10m to USD12m, should allow Smart Wires to survive until early Q3'23. However, based on the terms of the preferred equity, where the preferred equity holders can redeem the preferred equity if the Company does not achieve equity funding by July 1, 2023, the preferred equity holders do not appear to agree.

Smart Wires announced a preferred equity issuance of USD10m will take place. We think Smart Wires is positioning itself to be sold and with the additional funding, the board can complete an orderly transaction rather than being distressed sellers. The announcement of delisting is clearly part of this process, where the Board indicated they do not think the market price reflects the value of the Company. We also believe the delisting would aid in the sales process as the market price is likely hurting negotiations.

We think the playbook right now is to 1) reduce the cost structure, and 2) build up a contracted order book. Once both of these are in order, the story to the buyers will be straightforward. If management can show it has contracted orders worth more than USD100m and a significantly lower cost profile, where potential buyers might only have to fund Smart Wires with less than USD20m until profitable, they could possibly fetch a price around one to two times the contracted orders. However, based on what we can tell, peer transactions have been completed on one to four times actual revenue, with more recent transactions closer to one time. Thus, we still find this far-fetched.

Still, we believe Smart Wires can be sold for significantly more than its current market cap of cSEK50m (cUSD5m), but the issue is the capital structure. According to what we currently know, the company has cUSD30m in debt (cUSD40m including lease liabilities), and preferred equity takes precedence over common equity. The preferred equity has a liquidity preference of three to five times what it invested.  In other words, before the common equity is worth anything, the preferred equity has a right to USD30m to USD50m. Thus a required sales price before common equity earns anything is USD60m to USD80m.

However, this excludes any interest in preferred equity, which is likely to be substantial (we estimate more than 15%) and paid in kind (PIK), implying that the USD10m invested becomes USD11.5m after a year, assuming a 15% interest rate. Similarly, the liquidity preference rises. In our example, cUSD35 to cUSD60 million versus cUSD30 to cUSD50 million without interest expenses. Furthermore, it is assumed that Smart Wires does not require any additional liquidity prior to a transaction. The Company is still authorized for an additional USD10m. Finally, the announced preferred equity is accompanied by warrants. For every USD1m in Preferred Shares purchased, investors, will receive warrants to purchase 2.56m Ordinary Shares, for a total of up to c51m Ordinary Shares. As a result, if all are exercised, the number of shares can increase by c50%, or c150m, resulting in a 34% dilution (in our initial take we wrote potential dilution of 50% which is incorrect). In other words, the preferred equity investors (3x5 Partners and FW Smart Wires Investors) are recovering what ever they can at the expense of the other shareholders.

Our Bull Case for the common stock is that Smart Wires is able to sell itself for USD120m. This yields a common share value of SEK0.34 in our "most likely" scenario for different liquidity preferences, warrant exercises, et Cetra (thus most likely of different Bull Case scenarios). This scenario entails a preferred equity of USD15, a five times liquidity preference, a debt of USD40m, and all the warrants are exercised. I.e., total share count of c151m. This does not factor in any time value.

Could the Company continue to operate instead of selling? Perhaps, but given the stated intention to sell and the incentives of the majority shareholders, it is unlikely. Furthermore, given the terms of the preferred equity, common shareholders would face significant dilution at best. As a result, with a Base Case of SEK0, our fair value range is SEK0—SEK0.34 per share. The Company said it intends to formally apply for delisting not earlier than three months from 2022-11-16. We expect the Company to be delisted before the end of Q1'23.