Tender Offer: Reader E-mails

Updated below.

Reference: Current News page item Cheers (January 1, 2016)

Thank you for your e-mails.

In the news item I wrote: "In other words, if you own a non-tradable warrant, you may exercise it for $0.75, and receive a tradable warrant." Implicit in my thinking was that the exercise of the non-tradable warrant would result in the receipt of the underlying common stock. So, the tender offer, if accepted, would appear to me to be: exercise your non-tradable warrant, irrespective of its original exercise price, for the new exercise price of $0.75 and receive (i) a share of common stock resulting from the exercise and (ii) a tradable warrant (with a $0.85 exercise price and an expiration of June 19, 2020).

The tender offer is a fundraising exercise, so to speak. Provectus requires funding at some point. The amount and timing relate to the reality and probability of operational (e.g., clinical trials, regulatory affairs, etc.) and non-operational (e.g., G&A, lawsuits, etc.) items. Regional license transactions and/or co-development deals may or may not materialize and their timings are uncertain (although some are expected and others are hoped for). This edition of Provectus fundraising is one that approaches existing shareholders who own non-tradable warrants with what is tantamount to a version of the June 2015 Maxim Group-led placement/public offering: a $0.75 unit price that entitles the "purchaser" to one share of common stock and one ~4.5-year tradable warrant (i.e., 100% warrant coverage). Management is electing to seek funds now from existing shareholders, rather than later from whomever.

At values around the current levels of stock (PVCT) and tradable warrant (PVCT.WS) prices, and assuming a positive share price outcome (i.e., a higher share price later), the option/door/scenario of (i) holding one's non-tradable warrant (that is, not tendering), (ii) buying one share of common stock and (iii) buying one tradable warrant presents a better return than either doing nothing (not tendering) or tendering for lower original exercise prices.

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At higher original exercise prices the math is different. Tendering is better than constructing the offering (the "unit") in the open market.

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With the bulk (91% as at 12/31/14) of the non-tradable warrants being at those with exercise prices of $1 (77%) and $1.25 (14%), the math would suggest a couple of million warrants should be tendered for a few million dollars or less of gross proceeds. That amount wouldn't move the needle on Provectus' cash balance given its current and potentially future burn rate (here, the idea of "future" is to spend more to advance current and other solid tumor cancer indications).

The tender becomes potentially compelling to varying degrees to the lower exercise price non-tradable warrant holders should the share price rise between now and February 15th.

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Provectus' CTO Dr. Eric Wachter, PhD and CFO/COO Peter Culpepper's intentions to tender a total of ~933K warrants for ~$700K, on top of their recent stock options exercises of a total of ~265K for $260K (cumulatively, ~1.2 million for $960K), make 1Q16 possibly very interesting.

Updated (1/1/16): As a non-tradable warrant holder, which I am not, I would not solely or even mostly approach a tender decision that included determining whether I could and would replicate the unit more cheaply in the open market, as one blog reader who e-mailed me has (and why I presented some analysis above in regards to his line of thinking), or necessarily involve Black-Scholes option pricing, etc. Maybe another way of writing this is the pursuit of accuracy over precision, in this case and in context.

How do I arrive at a decision of whether to tender my non-tradable warrant or just hold onto it? My decision-making process might include the following.

A. First, what do I believe are the prospects of Rose Bengal/PV-10, Provectus and, thus, the share price? Are they positive or negative from here on out? Binary outcomes help keep things simple, and past performance (or lack thereof) matters. There should be a common thread to how most if not all of us undertake an assessment of prospects, with some placing more or less weight on, among other things, say, management's exercising and amount of exercising of stock options and/or participation in the tender offer. There are, of course, other as or more important factors. Is the share price going to much higher (like $5) from here ($0.39 as at 12/31/15) or go to zero, in the extreme? If you felt the latter for whatever basket of lack of business fundamentals, there'd be no reason to tender.

B. Second, what's my non-tradable warrant's original exercise price and time to expiration? I believe the parameter differences influence the decision. On one side there are the $1.00 warrants (~49 million as at 12/31/14) with a current weighted average remaining contractual life of roughly 2.3 years. On the other there are the $3.00 warrants (2 million) with 3.33 years remaining.

• Time: Maybe there's too much difference between approximately an extra year of expiration. The $1.00 warrants extend from 2.3 years to 4.53 years (2.23); the $3.00 warrants extend 1.20 (4.53 - 3.33).

• Exercise price: The $1.00 warrants reduce by $0.15 ($1.00 - $0.85); the $3.00 reduce $2.15.

If I answered from A. that the business fundamentals from here on out were likely to be attractive, is $0.75 worth a $0.15 exercise price reduction and an extra two years or so in expiration? Is it worth it for $2.15 and about a year? My sense (subject to Black-Scholes option pricing) is that $0.75 is more than the worth of either set of increments; that is, you wouldn't tender -- although you'd be more inclined to tender if you held the $3.00 warrant than the $1.00 one because exercise price reduction probably trumps longer expiration.

C. Third, will there be additional information that would encourage or discourage my decision by or before the tender date of February 15th? Given what we know, today, and I agree with a reader/e-mailer, there's probably no good reason to tender. Certain officers and directors' intention to tender, however, can be construed as a positive signal. Both the do nothing/don't tender option and the tender one currently would be out-of-the-money (OTM) -- OTM $1.00 and $3.00 warrants, and underwater $0.75 stock and OTM $0.85 warrant.

Unless a non-tradable warrant holder saw the tender construct turn from OTM to in-the-money by or before February 15th, which should only happen on the basis of additional information, the decision to tender only would be based on an assessment of the business fundamentals from here on out. Wouldn't there have to be news in the next 45 days or so to change this assessment from what it is today? No additional information would mean assessment_January1st = assessment_February15th. Additional information, depending on quantity and quality, might allow for assessment_January1st > assessment_February15th, which should translate into a higher share price, which would make the math of tendering more attractive than the math of doing nothing.

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 5^th under Fundraising?, before the Q2 10-Q came out on August 8^th, 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 30^th, 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 22^nd’s press release, the share price was 64 cents on the 21^st (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 20^th, 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 2^nd. 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 9^th).

Maybe he went to New York the week of the 16^th 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 24^th), about $3 million plus or minus.

On the surface, it looked bad closing and/or announcing the closing of the round’s September 20^th (Network 1's, which had been open since earlier in the year) and 26^th (Maxim's, which seemed to be recent) tranches, on September 26^th, on the heels of interviews by The Wall Street Transcript (16^th) and The Life Sciences Report (19^th). 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.

$PVCT's Regulatory Clarity And Commercial Validation Pathways

Provectus has reached the point where it can and must gain regulatory clarity and achieve commercial validation, and it seems to be on the cusp of doing both.

Regulatory clarity means (a) agreeing to a special protocol assessment (SPA) with the FDA to conduct the pivotal MM Phase 3 trial and, potentially, (b) achieving the FDA's breakthrough therapy designation whereby Provectus might (b1) secure accelerated approval and run a Phase 4 trial or post-marketing study or (b2) just run a truncated Phase 3 trial designed around the aforementioned SPA. This is the "exit," or path to approval, that both Big Pharma and life sciences investors require to know.  "What is Provectus' exit before I enter." Investors should begin to buy after regulatory clarity is transparent, although some still may wait for commercial validation. Big Pharma should seek a global license for PV-10 or to acquire Provectus after an interim analysis of the Phase 3 trial is available, whether the trial is a truncated (BTD) or fuller (SPA) study.

Commercial validation means licensing PV-10 in (x1) China, (x2) India and/or (x3) Japan, (y) entering into a global license for PH-10 and/or (z) entering into a global license for PV-10. Assuming regulatory clarity finally is transparent, and it's hard not to think prospective partners also are waiting for transparency too, there would be no reason(s) left for life sciences investors to remain on the sidelines.

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It will be interesting to see how the month of June plays out. Should the SPA be announced, the bottom branch of the tree in the illustration above is germane. Thus, one aspect of regulatory clarity is attained. Complimentary to this would be signing an MOU for China. Thus, again, one aspect of commercial validation is attained.

I think, at this point, a perspective on Provectus cash on hand and inbound cash becomes important. The company's cash balance -- publicly, last, was about $5MM as at March -- is what it is or will be when either of both the SPA and MOU arrive at whenever point(s) in June.

Should Provectus sign the MOU in June, my experience would suggest (my guesstimate is) definitive agreements (contractual arrangements) between the parties, and thus funding of the upfront payment, occurs 30-90 days later (i.e., July-September). So, perhaps, $20-30MM arrives in September. MOU milestone payments for such things like the SPA, BTD, BTD specifics and drug approvals would come, by virtue of completing the documents, immediately after said documents were struck and signed, even though some of these milestones could be achieved before such.

The stock price should rise with the SPA and MOU, but it's possible Provectus would not tap either Network 1 or Lincoln Park for cash to maintain BDO's opinion until the upfront payment from the regional deal arrives. Evidence of monetization (commercial validation) like the MOU with Hisun-Pfizer should trigger significant warrant exercise activity (i.e., at least $5 MM) and therefore any financing for BDO purposes would not be necessary.

Fly Me To The Moon

$PVCT.OB: Did Some Shareholders Sabotage the $PVCTP "IPO," and Other Stories Stranger Than Fiction

As the events of the week of October 15 fade into memory, do we know more than less?

Peter's sense of value. I was gratified to confirm Peter's valuation expectations during his discussions with prospective financial leads investors like Aisling Capital and OrbiMed Advisors. You will recall I blogged about my thoughts about PVCTP "IPO" terms on September 23rd. I characterize them as "my thoughts," but I think of them as what Peter may have thought/did think at the time. My expectation of the PVCTP share price was too high (he was at $4, while I thought $5-6). I met expectations with the conversion ratio (he was at 1-to-1, and I thought the same) and the warrant coverage range of 40-60%. These parameters suggest a pre-money valuation of $614MM (using a fully diluted share base of 152MM as at June 30) vs. a $96MM pre-money figure using Friday's $0.63 common stock closing price.

Are we clear? Yes sir. Are we clear? Crystal. Peter was clear as crystal about his pricing expectations for the PVCTP "IPO," were he to utilize it for Provectus. That one other person with whom I interacted during that period of time had a good handle on this suggested Peter kept his cards very close to his vest about his discussions with prospective lead investors (other than to repeatedly say he would not do a bad or dumb deal) and angered or frustrated shareholders who could not or did not successfully read or believe him.

Greedy or sabotage? Did certain shareholders try to sink the PVCTP "IPO" purposefully or inadvertently? Earlier this year I wrote a blog post where I calculated (very roughly) Provectus' pre-money valuation before several investment rounds it consummated with institutional and accredited investors, going back several years. My intent was to highlight how I thought management approached fund raising, which was to raise the amount of money they needed for various reasons and ensure there was some cushion of cash available, and no more. The PVCTP "IPO" was, in my view, a much more of a formal raise, where the process of fund raising was as visible and awareness generating as the ticker symbol was to have been. There is no doubt Maxim Group made mistakes and Network 1's Keith Testaverde did Provectus no favor with his e-mail, but did certain shareholders actively push down the stock either to get a more favorable deal (thinking Peter indeed would do a dumb or bad "IPO") or simply kill the vehicle to which they were vehemently opposed for philosophical (?) reasons?

Value is as value does. I think I learned my/a lesson about trying to have a constructive e-mail dialogue with angry longtime Provectus shareholders. Next time, I won't give out my first name. I jest, and I digress. One such shareholder (angry, "long suffering" and, in my view, intellectually inconsistent) thought I must have been smoking something green, white or otherwise pharmaceutical if Provectus would be sold for $50-60 per share. I draw inspiration and cogency from a large shareholder who frames his view on valuation this way (paraphrasing):

• If I am dead wrong about PV-10 (i.e., it is "only" a loco-regional treatment), the stock is worth $5.
• If I am wrong (i.e., it's got systemic treatment "potential"), the stock is worth $10.
• If I am right (i.e., it is a systemic treatment), well then...

While $50-60 per share is the price for which Craig would sell the company, I think he is a pragmatic individual about valuation. He does not strike me as idealogical about this topic. I am sure he, together with Provectus' board of directors and well-heeled financial advisers (Bank of America/Merrill Lynch, not Network 1), will evaluate bids from Big Pharma companies and make the right decision for shareholders and management.

At the same time, the man understands what he has created. And day by day, the world of Big Pharma is catching on to it.

In my head exist many different kinds of trading and investing personalities, because different situations demand different approaches. Those personalities need data and information to inform their decisions. I cannot say with conviction, yet, what I think Provectus is truly worth and for what others would pay. I need more information. I am, however, guided by management's views on the topic, which are informed by others.

Former Justice Potter Stewart of the Supreme Court of the United States, in attempting to classify what material constituted exactly "what is obscene," infamously wrote, "I shall not today attempt further to define the kinds of material I understand to be embraced…[b]ut I know it when I see it…"

I will know what Provectus is worth when I see it; that is, the valuation that reflects what it is worth. 

The momentum trader in my head is whistling "Rocket Man" now.

$PVCT.OB: A Quick Post-Mortem On An Aborted $PVCTP "IPO"

There is much to which to look forward. Looking back:

• The finance industry can be the valuable grease that enables the gears of the global economy to operate more efficiently and effectively. A piece of the industry also is a cesspool. Investment banks, white shoe, boutique and, er, other, have bet against their clients since time immemorial (okay, that is hyperbole, but you get the idea). The "good" banks are not obvious about it. If you are going to bank Provectus (i.e., if you are going to provide, in this case, investment banking services like IPO underwriting and equity research coverage), could you not be more discrete about  the other part of your bank trying to drive down the share price (for the betterment of prospective "IPO" buyers)? Allegedly, of course.

• I have asked the company to open an investigation into the illegal solicitation (i.e., sell recommendations or "suggestions") and shorting of Provectus common stock: Claims of illegal recommendations by certain Maxim executives and retail reps to existing and prospective clients to (a) sell their common stock and/or (b) short the common stock in order to (c) profit from the subsequent share price decline and (d) ultimately benefit from their participation in the "IPO" from enjoying a better conversion ratio resulting from the premeditated driving down of the share price. There are undoubtedly much more productive uses of company time, resources and dollars; however, at a minimum, I hope FINRA knocks on a few Maxim doors.

• The PVCTP "IPO" process hurt management's credibility.

• Management's decision to terminate the offering helped its credibility.

• Bidirectional bridges between shareholders and management should be redesigned and then rebuilt.

Oh, I forgot. One more thing: Dear Maxim, yippee ki-yay, motherf@$#er!

$PVCT.OB's PVCTP "IPO:" Update on Maxim

There has been the feeling by some (experienced Wall Street veterans) that either or both of Maxim Group and Network 1 Financial have been "double dealing:" working with Provectus in appropriate, necessary ways to facilitate the "PVCTP" IPO, while at the same time (in other areas of the respective firms) contributing to driving the PVCT.OB share price down for the benefit of firm clients (the math here is simple: if these firms assume Pete will agree to an "at market" conversion ratio, the lower the common stock share price at "IPO" pricing [if the "IPO" goes off], the better the value proposition for the preferred stock).

In the case of Maxim, as lead underwriter of the PVCTP "IPO," Paul LaRosa, Executive Managing Director - Capital Markets, works with Pete in this regard. See my previous comments here.

At the same time, Maxim's retail side appears to have been tasked to seek 300+ prospective buyers (since the key NASDAQ listing requirements are a $15MM raise, minimum $4 per share price and 300+ round lot holders). There have been no pricing or other details for the "IPO," because, according to Peter, these parameters continue to be worked out between prospective investors and him. Maxim retail reps have been telling folks, allegedly, the "actual details" of the IPO, which appears to have contributed to the downward pressure on the common stock.

Have other parts of Maxim been talking down the stock down or facilitating its drop? Communications from Leonard Greenbaum, Maxim's Managing Director - Equity Derivatives, to Dr. Adams appear to indicate such activity or behavior:

Beginning last week, Mr. Greenbaum appears to have advised the initial sale of common stock (of an existing position) as soon as possible to avoid further losses because the share price was falling rapidly. It appears he also suggested taking an aggressive short position concurrently to take advantage of the greater share price decline Mr. Greenbaum believed was to come because the lower the price of PVCT, the greater the benefit to the eventual holders of PVCTP. It appears he also concluded all existing shareholders had the opportunity to participate in the "IPO," so this was fair.

Share your Maxim stories with Pete at pete@pvct.com. Please be accurate, and document as many details as you can.