Spy to Raise Capital by End of August- But That’s All We Know

Spy filed an 8K on July 2 that announced they had increased the amount of the note due to Costa Brava from $6 million to $7 million, and that the full amount of $7 million was already outstanding. They also said they expected to raise some form of equity by August 31. As you may recall, Costa Brava owns 48.4% of Spy’s common stock (52.1% on an as converted basis). Mr. Seth Hamot is the Chairman of the Board of Spy, and “…sole member of the sole general partner of Costa Brava.”

You may also recall, or you may not, that interest on the loan to Costa Brava was being accrued as additional debt by Spy rather than paid in cash. That’s at least part of the reason why the loan amount had to be increased.

We also learn that, “SPY North America must prepay $1 million of the principal amount outstanding under the line of credit within five business days of our proposed sale of equity (preferred stock, common stock, warrants to purchase common stock, or any combination thereof) with proceeds to us of at least $4 million prior to payment of any transaction expenses. The amount so paid will reduce dollar-for-dollar Costa Brava’s commitment to make advances under the line of credit. We expect to sell such amount of equity by August 31, 2012.”
 
That Spy would want to raise equity is hardly a surprise. Their filings have noted the potential need for additional working capital, and Mr. Hamot, understandably, doesn’t want to continue to lend money to Spy.
 
But that suggests he expects the money to come from somewhere besides Costa Brava. We don’t, however, know what form the equity will take or how much it will be though the deal is supposed to be done by August 31. That makes me think the discussions are already ongoing if only because they felt obligated to mention it in this filing.
 
Spy’s stock closed on July 3 at $1.40 a share. But it doesn’t trade much volume and there’s a big bid/ask spread so that doesn’t mean all that much. It’s only averaged 2,457 shares a day over the last 90 trading days and some days there are no trades at all.
 
You will also note from the quote above that Spy has to pay back a chunk of any money it raises to Costs Brava to reduce the loan outstanding. While that improves the balance sheet by reducing debt and increasing equity (depending on the form of the capital raise), it doesn’t generate any working capital for Spy unless the amount raised is more than what’s paid back to Costa Brava.
 
Well, that’s not quite true. It reduces interest expense. But interest expense to Costa Brava hasn’t been paid in cash anyway.  It’s also made clear that the line of credit available from Costa Brava will be reduced by the amount of the repayment. That is, they can’t borrow it again.
 
So who exactly, is going to step in and invest money in Spy and at what price that goes right out the door to Costa Brava and Mr. Hamot? Other existing shareholders?
 
It should be interesting to watch. Hope you have a long and pleasant holiday weekend.

 

 

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