$PVCT Preferred Stock Offering ($PVCTP): An "IPO" In The Making?

Several thoughts about the PVCTP preferred stock offering vehicle have been bouncing around inside my head since it was first revealed through an SEC filing on September 4th. What was management's strategy for its utilization? Initial reactions by many were less than positive: fund raising, now?, more dilution?, how?, why?, when?, etc.

Provectus had established structural access to capital via the Lincoln Park equity line of credit and mixed securities shelf filing. Interest to invest by institutional and fund investors remained very strong. Fund raising at September prices would be painful of course, but there was no immediate need for capital.

Furthermore, management first spoke of a strategic investment strategy in its early-August 10Q filing, where strategic referred to Big Pharma companies.

The common stock could be used to facilitate a minority investment by Pfizer or J&J or another Big Pharma company, but the premium afforded PVCT.OB most likely would be limited on an absolute basis. Acquisitions tend to be viewed differently than investments by corporations. A 30%, 40% or 50% premium could work (typical of recent investment deals, suggesting a deal price of $0.90 to in excess of a $1.00 per share), but could a 1,000% premium be achieved (i.e., a $7 or thereabouts share price)? With time and news, the common stock could climb to the minimum $2 share price over 5 consecutive days and list on the NASDAQ as PVCT. But at current price levels, any fund raising would be more superficial than substantive (i.e., a "token" investment of several millions of dollars) rather than a signaling investment of of $20MM to do the pivotal MM Phase 3 trial. How long would the company have to wait for the common stock share price to rise to do a subsequent fund raising (assuming the initial one was a "superficial" one with Big Pharma) to sufficiently capitalize the trial?

I suppose a non-listed convertible preferred stock could be created out of the mixed security shelf specifically for a Big Pharma company. The preferred stock might garner a higher or much higher as converted common stock premium. The common stock might respond well as a result, with a Big Pharma company like Pfizer entering the capitalization table. But would that be enough to jolt Provectus' valuation?  With time and news, the common stock could climb to the minimum $2 share price over 5 consecutive days and list on the NASDAQ as PVCT. Similar follow-up comments apply here, too.

If the company was not going to dilute its capitalization unnecessarily, how was PVCTP going to work and why?

Provectus never enjoyed a true or real IPO. In order to carry-out post-September 11th fund raising, the formerly privately held company did a reverse merger into a public shell. As a result, one of the biggest hurdles Provectus historically has faced and continues to face is being an over-the-counter stock.

So what does PVCTP really achieve? A lot, I think, and at different levels, too, from:

• The more awareness and credibility that comes from a NASDAQ listing (relative to an over-the-counter listing), to
• The monies to signal the intention to move forward with the pivotal MM Phase 3 and other key and pivotal trials (e.g., HCC expanded Phase 1, HCC Phase 2/3, pivotal psoriasis Phase 3), to
• The significance of a lead corporate investor, who clearly could be an acquirer of Provectus, to
• The addition of life sciences and other name investors as shareholders, to
• A robust valuation [for PVCTP] out-of-the-gate, to
• Reasonable but nowhere excessive PVCTP deal parameters (e.g., per share price, conversion ratio or price, warrant coverage), to
• Facilitating greater mainstream media coverage by virtue of a NASDAQ-listed security together with a Phase 3 trial commenced, to
• Eventually pulling PVCT.OB onto the NASDAQ and turbo-charging its trajectory thereafter.

Whew! That is a mouthful! In many ways, PVCTP, should the company utilize the preferred stock offering vehicle, is an IPO (forgiving the usage of the phrase given that PVCT.OB already publicly trades).

How does this happen? Here are my thoughts:

• Lead investor: Pfizer, at a minimim.
• There could be a co-lead.
• For the round to be successful (to management and existing shareholders) a strategic investor like Pfizer, J&J or another Big Pharma company, who are much less sensitive to valuation and deal parameters (that also impact valuation) than financial investors, is required.

• Other investors: 299 or more other lot holders
• 300 lot holders are required for PVCTP to list on the NASDAQ. That number very likely will include new life sciences, name and other investors as well as existing shareholders.

• Offering amount (of PVCTP): ~$30MM
• $15MM is the minimum amount to list on the NASDAQ.
• An amount closer to $20MM at a minimum fully funds the pivotal MM Phase 3 trial. A higher number like $30MM provides more flexibility to fund other trials, like the HCC expanded Phase 1, the HCC Phase 2/3 trial, the Phase 1 pancreatic cancer trial and the pivotal psoriasis Phase 3 trial, and other pre-clinical and clinical work, etc.
• I doubt the figures rises much beyond $30MM.
• Demand for the offering also will play a role in the amount. If the offering is robustly oversubscribed, management may agree to a higher amount; however, oversubscription also plays a role in the determination of the valuation/per share price, conversion ratio and warrant coverage.

• Valuation: $1B pre-money
• A WAG, using actual and rumored historical datapoints. Maybe higher, or maybe lower.

• Per share price (PVCTP): $1B pre-money
• I think at least $5-6. $4 is the minimum price to list on the NASDAQ. Price obviously is influenced by supply (the amount of money management wants to raise for both operations, cosmetic and valuation reasons) and demand (over or undersubscription).

• Conversion ratio: ?
• I do not have a good handle on this yet, and therefore cannot really speculate.
• 1-to-1 would be nice; that is, each share of preferred stock would convert into one share or common stock. Maybe higher (i.e., each preferred share converts into more than one common share, which is less favorable to existing shareholders), but unlikely to be lower (i.e., more favorable to existing shareholders).

• Warrant coverage: ?
• 40-50% is a datapoint I have been told. That is not bad, but the final figure may be higher (less favorable) or lower (more favorable).

• Rights & Provisions: Customary
• Per the offering prospectus supplement. There may be certain revisions or refinements if the vehicle is used.

Potential dilution: ~6%. Ultimately a single digit figure, so the final figure maybe higher or lower than the above number. Dilution would be based on or influenced by (i) the fully diluted number of existing shares, options and warrants (assumed for purposes of potential dilution calculation as 150MM), (ii) the number of shares (6MM) in the PVCTP offering, as well as warrant coverage (50%), (iii) the price ($5) and size ($30MM) of the offering, (iv) the offering's conversion ratio (1-to-1), and (v) whether the valuation is pre- ($1B pre-) or post-money (at this valuation level and given the offering amount, there is not much difference). Changes to my placeholder assumptions changes dilution. Much more information about the offering is likely going to be available mid-week.

An "IPO" is made more effective (better terms for the company, better on-the-day and post-"IPO" share appreciation and buying) the more demand there is for PVCTP. Demand comes from pre- and post-"IPO," PVCTP share price-moving news. If the vehicle is used, the "IPO" could occur during or around the week of October 8th (U.S. equity markets are not closed on Columbus Day), perhaps earlier like the end of the week of October 1st or later like the week of October 15th. Early- to mid-October makes sense because of the news going into and throughout the fourth and last quarter of this calendar year:

• We await the SPA PR in Q3,
• ESMO occurs as September becomes October, and PRs should reflect what is revealed by the company at this conference,
• Craig speaks in early- and late-October about immunology and MOA,
• More Moffitt data will be revealed and released,
• Potentials in dermatology and/or mini-oncology should be consummated in Q4,
• High profile peer review publications are expected, and
• High profile mainstream media coverage is expected.

Management still may not utilize the PVCTP preferred stock offering vehicle. If they do use it, I think it will be in the manner I described above (or a derivation thereof) and will look forward to watching all of them ring the NASDAQ bell.