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November 16, 2006

Irvine Sensors Corp. is a MicroCap Rocket

posted by MR WAVETHEORY at 11/16/2006 11:53:00 PM
Everyday, there is speculative activity in the smallest companies on Nasdaq. Today, the winner of the most speculative stock award is Irving Sensors Corp. (Nasdaq IRSN) which gained 123% today, +$1.32 to close at $2.39.

Irvine Sensors designs, develops, manufactures and sells miniaturized electronic products for defense, security and commercial applications. The company generated just $27 million in revenues in the trailing twelve months and lost $5.4. Sounds boring, but then it announced it received $16.6 million in new orders during the first six weeks of its 2007 fiscal year. Like any speculative stock, Irving proceeded to do what speculative stocks do best. It jumped as high as $3.30.

To its credit, Irvine Sensors has been growing revenues quite impressively for the last couple of years. Revenues were $23 million in 2005, $13 million in 2004, and $12 million in 2003. It has also managed to lose less and less money each year. It lost "just" $1.7 million in 2005, $4.1 million in 2004, and $7.3 million in 2003.

Nonetheless, there is some hair on this company. It has received a default notice from Pequot Capital. It doesn't sound too good.

Pequot’s event notice invokes a provision in the Notes that would require the Company to repurchase, not later than the third trading day following the date of delivery of the event notice, (i) the outstanding $10.0 million principal amount of the Notes at a repurchase price equal to the greater of (A) 125% of such outstanding principal amount, plus all accrued but unpaid interest thereon through the date of payment, or (B) 125% of the average of the closing prices of the Company’s common stock for the five trading days preceding the date of delivery of the event notice (the “Event Equity Value”) multiplied by the number of shares of common stock issuable upon conversion of such principal amount and all such accrued but unpaid interest thereon, and (ii) the Event Equity Value of any shares issued upon any conversion of Notes and then owned by Pequot. Pursuant to the Notes, if the Company fails to make such payment when due or, in the event the Company disputes in good faith the occurrence of the event stated in the event notice, fails to instead deposit such payment in escrow with an independent third-party escrow agent within five trading days of the date such payment is due, then the Event Equity Value becomes 125% of the greater of (a) the average of the closing prices of the Company’s common stock for the five trading days preceding the date of delivery of the event notice and (b) the average of the closing prices of the Company’s common stock for the five trading days preceding the date on which such required payment (together with such other payments, expenses and liquidated damages) is paid in full. Pursuant to the Notes, if the Company fails to pay such amounts, interest accrues on such amounts for the period from and including the due date of such payment to but excluding the date the same is paid in full, at a rate of 18% per annum (but in no event in excess of the maximum rate permitted under applicable law).

It probably means Pequot is trying to sell shares. According to this filing, Pequot has warrants that are struck at $2.60 and $3.10 per share.

In connection with the transactions contemplated by the Purchase Agreement, the Issuer issued the Series 1 Warrants to the Funds on December 30, 2005. The Series 1 Warrants are exercisable at any time on or prior to December 30, 2009 at an initial exercise price of $3.10 per share to purchase an aggregate of up to 1,002,278 shares of Common Stock. The Issuer issued the Series 2 Warrants to the Funds on December 30, 2005. The Series 2 Warrants are exercisable at any time on or prior to December 30, 2009 at an initial exercise price of $3.10 per share to purchase an aggregate of up to 343,876 shares of Common Stock. The exercise price of the Warrants is subject to adjustment for stock splits, stock dividends and certain other distributions and equity sales. Cashless exercise is permitted.

That would explain the wild price swings today.

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