Let the floods cross the distance in your eyes
Give me reason to fill this hole, connect the space between
Let it be enough to reach the truth that lies across this new divide
Transformers 2 is one of my favorite movies, together with and among others, in no particular order and that come to mid, Gladiator, Chronicles of Riddick, and Lord of the Rings: The Two Towers. Favorite simply means I can watch and likely have watched the movie at least 20 times or more, such as when I watched Transformers 2 20 times to and from China. But I digress…
There have been some questions regarding the Lincoln Park Capital (LPC) financing deal the company consummated in December 2010. As a refresher:
- LPC purchased 1MM shares of stock ($1MM purchase) at a 9.8% premium to the then share price, and were issued 500K warrants ($1.50 exercise price);
- Provectus could draw down on what amounted to an equity line of credit of $30MM*; and
- In consideration of the transaction, Provectus issued 300,000 shares to LPC (these amount to free but restricted shares)**.
LPC has done many such deals.
There was some initial concern about whether the LPC was a death spiral. From Wikipedia, “Death spiral financing is a process where convertible financing used to fund primarily small cap companies can be used against it in the marketplace to cause the company’s stock to fall dramatically and can lead to the company’s ultimate downfall.
Many small companies rely on selling convertible debt to large private investors (see Private investment in public equity) to fund their operations and growth. This convertible debt, often convertible preferred stock or convertible debentures, can be converted to the common stock of the issuing company often at steep discounts to the market value of the common stock.
Under the typical “death spiral” scenario the holder of the convertible debt initially shorts the issuer’s common stock which often causes the stock price to decline at which time the debt holder converts some of the convertible debt to common shares with which he then covers his short position. The debt holder continues to sell short and cover with converted stock which along with selling by other shareholders alarmed by the falling price continually weakens the share price making the shares unattractive to new investors and can severely limit the company’s ability to obtain new financing if the need arises.”
A cursory Web search may reveal information about the LPC principals’ history and the topic; however, the Provectus deal appears to be benign in that respect.
Obtaining financing is tough these days, particularly at less than onerous terms and dilution. The question in front of management, at the time, likely was: How can we obtain sufficient financing to demonstrate to big pharma that we can fully complete an MM Phase 3 trial if we wish, while mitigating dilution for shareholders and ourselves?
That’s a somewhat of a tall order. Get access to funding to pay for a Phase 3 trial if they need to do a trial, but try not to wait until needing the funding to raise it. Huh?
Management's current balance sheet's cash balance is suitably robust enough to provide a sufficiently long enough operating runway (i.e., through next year and into 2013) to enable what we all expect to be announce to be announced on several fronts: dermatology, immunology, melanoma and liver.
If and when the company might draw down LPC’s line, the activity on these strategic fronts of dermatology, immunology, melanoma and liver should raise the stock price by the time the line is required to be drawn, after the current cash on the balance sheet is depleted. It’s all about timing.
The LPC line likely will be used, cosmetically, to demonstrate funding access to conduct the MM P3 (SPA, or no SPA), as part of the negotiations with big pharma to get the right valuation. Right in this case means $4-5 billion, as opposed to $1-2 billion. I would be surprised, even shocked, if management actually draws down on the LPC line.
So, the dilution of 300,000 shares seems be a very inexpensive price to pay for access to funding (more, if you include the $1.50 warrants). Think of it as insurance.
* In addition to the foregoing investment, under the Purchase Agreement, the Company may, in the Company's sole discretion, direct Lincoln Park to purchase up to an additional $30,000,000 of the Company's common stock over the 30-month term of the Purchase Agreement. On each business day during the term of the Purchase Agreement, the Company may, in its sole discretion direct Lincoln Park to purchase up to 100,000 shares of the Company’s common stock at a per share purchase price equal to the lesser of (i) the lowest sale price of the Company's common stock reported on the OTCBB on the purchase date and (ii) the arithmetic average of the three lowest closing sale prices for the Company's common stock during the 12 consecutive business days prior preceding the purchase date. The Company may, under certain circumstances, at its discretion, increase the amount of common stock that it sells to Lincoln Park on each business day. There is no upper limit on the price per share that Lincoln Park must pay for the Company's common stock, and in no event may Lincoln Park purchase shares of the Company's common stock for less than $0.75 per share.
** In consideration of Lincoln Park entering into the Purchase Agreement and making the commitment to purchase up to $30,000,000 of the Company's common stock, the Company will issue 300,000 shares of the Company's common stock to Lincoln Park and may issue up to an additional 1,500,000 shares of the Company's common stock on a pro rata basis as and only to the extent that Lincoln Park funds the $30,000,000. The foregoing commitment shares may not be sold by Lincoln Park until the Purchase Agreement expires or is terminated.