While we wait for the news about the shareholder vote to reach us, I thought it would be wise to answer some of the questions you have asked me about exercising your warrants and how the math works. So, let’s get through the disclaimer and go through some math:
Full disclosure:I currently own 24000 shares of RSVAU. It comprises a substantial part of my investment portfolio. These newsletters contain my market moves and interests. I am not anyone’s financial advisor. You make all of your own choices regarding your portfolio. My actions may be wrong and, if taken, may subject you to financial loss. Proceed at your own risk.
Exercising:
There are two ways that warrants can be exercised – Cashless and Cash. If you try to exercise your warrants yourself, you can only choose to do a cash exercise. The company can decide to force warrants to be exercised on a cash or cashless basis, depending on whether they need additional capital or not.
Warrants can only be exercised within 1 year after the business combination. You can choose to do the cash exercise at any time. The company can call warrants to be exercised any time in which the last 20/30 trading days the shares have traded at $18/share. Again, this is their choice. They can choose not to call warrants.
Your warrants may expire worthless if they call for warrants to be exercised and you choose not to exercise them. Definitely read the fine print.
Now that we understand a bit about calling warrants, let’s talk about the two different ways warrants can be exercised.
TOO LONG, DIDN’T READ:
If you don’t have the time to go through the math here, at least understand these concepts:- Exercising warrants is a slightly bearish move on the stock.
– Cashless and cash exercise will net you the same number of shares as long as the share price is the same between them. So if the cashless exercise happens at $30, it will be the same net result if you do the cash exercise at $30.
– When a warrant is exercised, the company creates a brand new share and gives it to you. Thus, warrants dilute other shares and will cause the stock price to decrease.
Cashless exercise:
ENOVIX: Hey everyone, it’s time to redeem your shares. We will offer a cash or cashless exercise.
YOU: Hey, Enovix. I want to trade my 100 warrants for shares.
ENOVIX: Exercising them will cost you $11.50/share. You have 100 warrants, so you’ll need $1150.
YOU: I don’t have $1150.
ENOVIX: Okay, so the fair market value of the shares is $30, so the total value of what those warrants would be is $3000 (100 * $30). You owe us $1150. So the difference between those is $1850. If we do $1850 divided by the current share price of $30, that will be 61 shares and $20. So, give me your 100 warrants and I’ll give you 61 shares and $20 and we’ll call it even.
YOU: Great! I just exercised my warrants and I didn’t have to bring any cash.
ENOVIX: Great! I just redeemed these warrants and I didn’t have to dilute myself by the full 100 shares!
So a cashless exercise can be a win for both parties. Also, notice that the company must state that they’re offering a cashless exercise. You can’t just ask for that.
Cash exercise:
YOU: Hmmm, the share price is $30, I should exercise. Hey, Enovix, I want to exercise my 100 warrants.
ENOVIX: Ok, that’ll be $1150.
YOU: Here’s your cash.
ENOVIX: Here’s your stock.
YOU: Great! I just got 100 more shares.
ENOVIX: Great! I just redeemed 100 warrants and I got $1150 I can add to my balance sheet.
A cash exercise can be a win for both parties as well, but you’ll need to bring some cash. But what if you want to do a cash exercise and you don’t have the cash on hand? Well, that’s where it gets a bit complicated, but it’s possible to do.
Cash exercise, but you don’t have the cash on hand:
YOU: Hmmm, the share price is $30, I should exercise. Hey, Enovix, I want to exercise my 100 warrants. (You have 200 RSVAU)
ENOVIX: Okay, that’ll be $1150.
YOU: I don’t have $1150.
ENOVIX: Well, we’re not doing cashless redemption. We kinda need that $1150.
YOU: Hmmm, well, I have 200 RSVAU. I’ll be right back, ok?
ENOVIX: Ok.
YOU: Hey, stock broker.
STOCK BROKER: Wassup.
YOU: I’d like to split my 200 RSVAU to get 200 RSVA and 100 RSVAW. (You now have 0 RSVAU, 200 RSVA, and 100 RSVAW)
STOCK BROKER: Ok, here you go.
YOU:I need $1150, so I’ll need to sell some shares. Hey, stock broker, can you sell 39 shares? (You now have 161 RSVA, 100 RSVAW, and $1170)
STOCK BROKER: Sure, here’s $1170.
YOU: Thanks! Hey, Enovix. I have your money now.
ENOVIX: Great. I’ll give you 100 RSVA in exchange for the $1150 and 100 RSVAWYOU: Here you go. (You now have 261 RSVA, 0 RSVAW, and $20)
ENOVIX: Great! I just got some additional cash to add to my balance sheet.YOU: Great, I just gained shares.
Okay, it’s extremely important to notice what happened here. You had to sell shares in order to come up with the money to exercise your warrants. You had to sell 39 shares to get $1170 so you could redeem your warrants. After redeeming your warrants, you’ll end up with 100 shares MINUS the 39 shares you sold. You will end up with 61 shares and $20, exactly the same as if you’d done a cashless exercise. The only difference is that the company has diluted itself by the full 100 warrants, not just 61 as in the cashless example.
So why would you want to do a cash exercise where you have to sell shares? You get to choose when you exercise. If the company calls for warrants to be exercised, it will cause the warrant and share price to fall because people will want to make a little profit if you’re forced to sell RSVAW. If you wait for the company to call for warrants, then others may be forced to sell RSVA (just like you) causing the share price to fall further. A company calling for warrant exercise is not great for current stockholders because of share dilution and people needing to sell shares to exercise.
Of course, there is one other option. If you don’t want to go through this trouble, you can just sell the warrants instead of exercising them and let someone else do it. But of course, you’ll have to pay a small premium to not deal with the hassle. You’d be better off in the long run doing it yourself.
As long as the stock price is the same between a cash exercise (where you have to sell shares for the RSVAW strike price) and a cashless exercise, the net result will be the same.
Also notice that you found a reason to split RSVAU into shares and warrants. This is one reason to split RSVAU. Here are some other reasons you’d want to split RSVAU:– You have set up fully paid securities lending on your account for RSVA. So you choose to split so you can lend your RSVA shares and make money.- You want to exit most of your position, so you split RSVAU so you can sell RSVA which is much more liquid.- You want to sell RSVA so you have enough cash to do a cash exercise on your warrants.
Now that we’ve gone over several different ways of exercising your stock, it should be easier to understand that exercising warrants is a slightly bearish decision:– You may have to sell shares to come up with the cash to exercise- Exercising warrants creates dilution because new shares are created just for you.
Math of exercising:
Since I’ve just proven that cash and cashless exercise leads to the same results if the share price is the same, this means we can create a table that will show you what percentage of shares you will receive depending on the share price.
This table assumes that you are either doing a cashless exercise or a cash exercise with RSVA shares sold.
| Share Price | Warrant redemption percentage |
| $18 | 36% |
| $20 | 42% |
| $25 | 54% |
| $30 | 61% |
| $35 | 67% |
| $40 | 71% |
| $45 | 74% |
| $50 | 77% |
| $55 | 79% |
| $60 | 80% |
A parting gift:
Check out this youtube video where you can watch Enovix and meet some of the upper management!