September 28, 2013

You Gotta Do What You Gotta Do

Management raised approximately $5.2 million to provide for operating expenses and presumably maintain Provectus’ accounting firm BDO USA’s going concern opinion. Placement agents for the raise were Maxim Group and Network 1 Financial. Using information from the Q2 10-Q, the raise created about 8% dilution on a fully diluted basis.

The raise itself comes as no surprise to me. And while I initially was surprised by the timing of the closing, given what likely was going on in the background, I probably shouldn’t be.

You may recall I wrote, on the left hand side of the blog, on August 5th under Fundraising?, before the Q2 10-Q came out on August 8th, about a potential raise: “It's possible, perhaps likely, a Network 1 Financial-like small financing (i.e., several million dollars) is in the offing.” Peter has effectuated these like clockwork for at least the last couple of years.

Cash at June 30, 2013 was $4.6 million. Monthly cash burn in Q2 was about $656K; however, it had been $992K in Q1 2013 and $1.1 million in Q4 2012. BDO’s minimum threshold seems to be about $5 million. There is both a current and future feature of the going concern issue: It isn’t just about having $5 million on the balance sheet, but also establishing from where the next $5 million would come.

I don’t think cash burn increased quarter-over-quarter (i.e., Q3-over-Q2), so let’s assume the same cash burn for Q3 and Q4 as in Q2. Provectus then should end the year with more than $5 million, sufficient to maintain BDO’s going concern opinion through year-end and for NASDAQ Capital Markets’ initial listing requirement (see page 9 of this link) related to a prospective listee's minimum stockholders’ equity. Stockholders’ equity is equal to total assets minus total liabilities. For example, as at June 30th, Total Stockholders’ Equity (“TSE”), which you can find at the bottom of page 2 in the 10-Q, was $6.4 million. I’d estimate (without the benefit of seeing Q3’s 10-Q) TSE should exceed $5 million.

With a $4.6 million June-end cash balance, and assuming a monthly cash burn of $700K (rounding up Q2’s monthly burn), July could have ended with a cash balance of $3.9 million. August could have ended with $3.2 million. Through July, Provectus already would have fallen below [my estimate of] BDO’s minimum cash threshold for the month (let alone falling below it for August).

At the end of July, the share price was 64 cents. Prior to the Moffitt’s August 22nd’s press release, the share price was 64 cents on the 21st (it closed at 63 cents the day after). Taking subscriptions for the private placement around this time would have been consistent with prior raises that were done (strictly on a common stock component of the placement basis alone): at a premium to the then reported share price. That is, the 75 cents at which the common stock was priced (as part of the placement unit; a unit equals one share of stock and 1.5 warrants) would have exceeded the then share price of, say, 64 cents. When you include the warrant coverage, however, not so much, but that’s been the way of this fund raising world, and I won’t quibble with it.

I’m guessing Peter raised a couple of million dollars, give or take, in or through August (say, August 20th, when the website presentation was updated). The company’s cash balance would have been around or back over $5 million.

Peter went to China the week of September 2nd. He didn't return with deal he wanted (even though I think there was a deal to be had). Even if progress were made towards the one he wanted, no such deal materialized over the next week either (the week of September 9th).

Maybe he went to New York the week of the 16th in hopes of securing a deal with Hisun-Pfizer. And again, it did not get done. Another month of cash burn, this time in September, and Provectus falls below BDO’s threshold again.

With no deal done, and perhaps with no evidence to demonstrate it would be done forthwith, Peter raised what he needed that week and this week (the website presentations were updated on September 17th and 24th), about $3 million plus or minus.

On the surface, it looked bad closing and/or announcing the closing of the round’s September 20th (Network 1's, which had been open since earlier in the year) and 26th (Maxim's, which seemed to be recent) tranches, on September 26th, on the heels of interviews by The Wall Street Transcript (16th) and The Life Sciences Report (19th). The interviews provided nice information and opinion, but having them appear prior to making an SEC filing about fund raising gives the perception of being, well, you know, even if one did not intend to be so.

Dig a little deeper, and perhaps we find that Hisun-Pfizer decided to hold off for want of regulatory clarity (and Provectus did not want to deal with the other interested Chinese suitor).

In terms of strategy, rationale, process and timing, however awkward or unfortunate, Peter’s fundraising announced this week was consistent with prior ones.

Provectus should not have to raise more money through at least the end of 2013, by which time I imagine the company thinks they’ll achieve regulatory clarity to catalyze the end game and generate non-dilutive financing by securing a regional deal or two, some or all of which I’m sure they hope would help them up-list the company onto the NASDAQ CM.

The timing of the publishing of my Seeking Alpha investment letter was coincidental. It might not seem that way to some people, but I can’t do anything about their perception of it or me.

As of this writing, I have not sold any of the shares we have bought.

No comments:

Post a Comment