June 20, 2015

Upgrade Cycle

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Most people have an opinion about how to start, build, grow and/or monetize a company. I think one measure of rightness or wrongness is the delta between the annualized return of one's investment (in either a privately held or publicly traded company) and the annualized weighted average cost of capital (WACC) of the target firm (plus whatever additional premia to the WACC one deems necessary or appropriate)(the result a measure of risk-adjusted return).

May 2012, Board of Directors: Provectus began its upgrade cycle when it formed an independent board; I'm not speaking to the quality of the board's directors, but its structural independence; I believe, for example, that insider Tim Scott (Provectus' President) should have stepped down during that transition and not insider Eric Wachter (the company's Chief Technology Officer).

May 2014, Stock exchange: The company upgraded this status when it uplisted to the NYSE MKT from its over-the-counter presence since inception.

"Minor upgrades" in 2014 and 2015 comprised the website and investor presentation, which continue to be improved and enhanced.

June 2015, Media relations: Provectus upgraded this function when it retained Allison+Partners.

June 2015: Via Friday's pricing of Maxim's offering of stock and warrants (the latter should trade Monday as PVCTWS) that may close on or about June 24th, I believe the company upgraded:
  • "Investment banking:" While Maxim might be considered incrementally more white shoe than Network 1 Financial, it is notable that Peter used Maxim now; the retail brokerage side of the firm effectively slapped him around when Peter attempted the PVCTP "IPO" in the second-half of 2012. It was rumored he turned down readily available money (of an amount to satisfy accounting firm BDO's regular requirements) from Network 1's existing $15 million private placement (of which approximately $6.4 million remains; see The letter Q (May 7, 2015) on the blog's News page). Maxim is rumored to be repping the company in India in regards to a regional license transaction for PV-10. Past bookrunner and India deal making may be as far as the upgrade goes. I hope Peter uses a much more experienced and better branded firm (specifically, principals on the deal) for an M&A transaction, and
  • Shareholder base: Institutional share holdings as at March 31st were 2.28% of shares outstanding (not a fully diluted figure); see Downer (May 18, 2015) on the blog's News page. Assuming no increases or decreases to that figure as a result of second quarter transactions, and assuming yesterday's offering is completed (but not including the "greenshoe"), institutional share holdings should climb significantly higher (some Maxim retail brokerage clients were rumored to have been let into the deal). There also might have been and/or may be a cliched shaking of the retail investor tree (i.e., selling of their shares) on Friday and through next week as a result of their negative perceptions of the offering.
Peter typically raises money to meet BDO requirements several days to a couple of weeks before the end of a calendar quarter. He entered Q2 with $14.2 million in cash and cash equivalents. Using an estimated $1.3 million per month cash burn rate, Provectus' cash balance (not including the Maxim offering) could have been $10.3 million on June 30th. In the past, end-of-quarter cash balances have been $14.2 million as at March 31st, $17.4 million as at 12/31/14, $17.8 million as at 9/30/14, $18.1 million as at 6/30/14, and $16.7 million as at 3/31/14. The offering, net of fees, could bring the company's cash figure to $22.4 million entering Q3. This figure may grow higher if upfront and/or easily obtained milestone payments are obtained from regional license transactions. In the past, especially the recent past in regards to the drawdown on the $15 million private placement, this BDO-related action has been undertaken and completed using Network 1. It was expected he would raise money (to meet BDO's requirement) if no geographic license deal with upfront money materialized.

2H 2015: Further upgrades, circumstances allowing, might include investor relations, investment banking, and the board of directors (see Gotta Go (June 20, 2015) on the blog's News page). 

Peter's decision about and approach to the offering may be viewed as a positive because his probable thinking was that the monies raised could (i) meaningfully reduce or eliminate the financing cloud over the company, (ii) strengthen Provectus' negotiating positions with interested parties (e.g., geographic licenses, drug collaborations, etc.), (iii) significantly reduce or remove perceived or actual impediments to a prolonged and significant increase in the share price if and when news and news coverage materializes (e.g., preclinical and/or clinical data, geographic licenses, drug collaborations, etc.), and (iv) make-up for resulting dilution with a larger valuation outcome at the end-game. I cautiously agree with him. If he is successful, and the share price indeed runs high and well as a result of news and the groundwork he laid, I certainly would note his successful orchestration and choices above the input and participation of other company executives.

While "upgrading" or "upgrade" may be viewed by some as pejorative or disparaging words, a positive spin on their use in this post merely reflects the natural and expected change in people, functions and functionalities of companies as they are started, built, grown and/or monetized.

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