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.

Provectus' Balance Sheet Should Be Flush With Cash

Provectus reported about $8.3 million on its balance sheet as at 9/30/13. I assume a fourth quarter cash burn of about $2.1 million or less (consistent with at least the prior two quarters). Management may have raised an additional $1.5 million in early-October (my guess, which may be entirely wrong). 12/31/13 cash on hand then should be $7.7 million.

The warrant "picture" as of 12/31/13 should look something like the below:

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There should be about 70 million warrants outstanding (or less), ranging in exercise price from $0.68 per share to $2.00 (a weighted average exercise price of $1.02). The supermajority of them (about 78%) have an exercise price of $1. It's believed the longer and higher the share price is above $1.25-1.50 (the "Threshold"), the more warrants would be exercised for subsequent sale of the underlying common stock. The Threshold is somewhat arbitrary; the essence here is that warrant holders contemplating exercise (to then sell the common shares) must feel the share price is sufficiently higher than their exercise price for a sufficiently long enough time to exercise & sell.

16 million warrants at exercise prices above or below $1 represent total cash to Provectus of $17 million if exercised on a cash basis. 55 million warrants at a $1 exercise price represent cash of $55 million if similarly exercised. Not all warrants would be exercised for cash; many, particularly the $1 kind issued recently, should be exercised on a cashless basis, where the holder receives a fraction of a share per one warrant depending on the exercise price and where the share price is at exercise.

Warrant holders in situations such as these (i.e., biotech companies like Provectus raising money via placements at below market prices with greater than one times warrant coverage), if they are inclined to exercise their securities in the first place, are more likely to exercise (with significant remaining time to expiration) and sell the resulting common stock. Finance theory would indicate exercising warrants just before expiry; however, a good number of Provectus warrant holders are more inclined to sell for quick (50 cents to 1-2 dollars per warrant or share) than for end-game (e.g., $20 per warrant or share) profit.

Through today the share price has been above the Threshold for 16 days, totaling (per Yahoo! Finance) nearly 43 million shares traded. Some people believe OTC volume prints are not accurate, perhaps by as much as 50%; so, perhaps somewhere between 21.5 and 43 million shares may have traded. This situation should have provided an opportunity for desirous warrant holders to exercise & sell.

How many warrants, converted only on a cash basis, have been exercised? Thus, what amount of money has Provectus taken onto its balance sheet in recent weeks from these exercises? Until or unless management issues a press release describing the cash position that must surely have materially increased as a result of warrant exercises, all we can do is speculate for now. I'm going to suggest (based on several diligence items) the cash balance "today" (e.g., now, this week, etc.) should be at least $20 million. If true, this would have resulted from the exercise of about 12 million warrants, or just 17% of the total number of warrants outstanding.

With $20 million or possibly much more on the balance sheet, and with no consideration given to additional cash that may accrue from China and/or India regional transaction upfront payments, Provectus should have more than enough cash on hand for whatever trial work is necessary going forward, whether melanoma (if at all) or liver.

We should know soon enough what the FDA will tell management about the pathway to PV-10 approval and commercialization for melanoma. I doubt any further trial work (if necessary or required) would be significant in terms of cost compared to the contemplated 180-patient special protocol assessment-designed Phase 3 trial once considered (and management costed at $12-15 million). Rather, the company likely would use some of its new capital to complete the expanded Phase 1 liver trial, where three additional trial sites may have been added to enroll patients.

Additional cash of this magnitude, with the potential of some more cash from some more warrants exercised for cash in the near-term, should mean a healthy balance sheet and no further or future punitive fund raising going forward.

And Now For Something Completely Different: $PVCT

Provectus' share price opened at $0.64 on August 22nd, a price it had closed at on August 21st and 20th, and August 1st and July 30th, and July 12th, and July 3rd, 2nd and 1st, and... Following Moffitt Cancer Center's August 22nd release of its rather startlingly titled press release Single Injection May Revolutionize Melanoma Treatment, Moffitt Study Shows, the share price closed at $0.63, down a cent from its open that day. The following day the share price closed at, you guessed it, $0.64. Average daily trading volume for the week numbered just north of 96,000 shares.

This week closed with a share price of $1.04 and an average daily trading volume (for the week) of a little more than 848,000, nearly 9 times that of the week Moffitt's PR came out.

In between:

• Agora Financial came out with a newsletter alert about the company on August 27th,
• Peter traveled to China a third time the week of September 2nd,
• Provectus issued a PR about its ECCO 2012 abstract on September 12th,
• The company issued a PR about its new and novel synthesis patent on September 13th,
• An interview of Peter by The Wall Street Transcript ("TWST") was published on September 16th, and
• An interview of Peter by The Life Sciences Report ("TLSR") was published on September 19th.

Peter said very bold and interesting things in the TWST interview, which the company later revised (the original version was circulated via Provectus News, while the revised version is available on Provectus' website via the link above). He followed this up with equally bold language in the TLSR interview, which effectively was another press release (having been paid for by the company), albeit an informative one.

But, I don't think the stock jumped 40% in two weeks because Peter was bold (the share price moved dramatically in the last couple of days, as high as $1.14, a figure not seen since May 2011).

I think the market sniffed something(s) out: A China deal. Peter was in New York ostensibly, it would seem, to try to close a regional license transaction. Did he? Regulatory clarity. We've been waiting for what seems like forever for the moving playing field of oncology to stop moving. Did it? Time will tell if the market was correct.

To add to the anticipation of next week and the week after: First, Moffitt will hold a symposium on September 28th, Update for Clinicians on Diagnosis and Treatment of Melanoma and Other Cutaneous Malignancies, where one hopes PV-10 is mentioned. Second, Provectus' ECCO 2013 poster presentation will be made September 30th, when one hopes a PR or two are issued by the company to provide much more data from the MM Phase 2 final clinical study report.

Peter's TWST transcript revision is interesting. It was changed from "So our goals are to be in a Phase III trial in melanoma or submitting for FDA approval, and to be in Phase II in liver cancer, potentially with breakthrough therapy designation, because we have also filed the application for breakthrough therapy designation in both the melanoma and liver indications" to "So our goals are to be in a Phase III trial in melanoma or submitting for  FDA approval, and to be in Phase II in liver cancer, potentially with breakthrough therapy designation, which means an application for breakthrough therapy designation in both the melanoma and liver indications."

Transcription error? I doubt it. Slip of the tongue, or pen? Maybe, on two counts. First, I think next week should commence the earliest we might hear about regulatory clarity (as I previously wrote, and framed in the first of two blog polls). Second, with the incredible success of the 6-patient HCC Phase 1 trial, and patients already treated in the expanded Phase 1 trial, achieving breakthrough therapy designation for this indication would seem highly probable (I think the company will have much more to say about this indication, and there interaction with the FDA about it).

We are, however, approaching the end of the quarter, around when, whether before or after, the company undertakes a BDO-induced fund raising to maintain the accounting firm's going concern opinion of Provectus. Balancing this need to raise capital, or perhaps satiating it in full and then some, is the potential exercise of warrants priced at $1.00. As at December 31, 2012, there were approximately 14 million of these warrants outstanding and exercisable (out of about 30 million warrants with a weighted average exercise price of $1.05).

Since then, the company:

• Issued 1.9 million warrants to consultants in exchange for services during the three months ended March 31, while about 900K were forfeited,
• Issued 2.6 million warrants to consultants in exchange for services during the three months ended June 30, while about 1.1 million were forfeited,
• During the three months ended March 31, issued 7.8 million $1.00 warrants, which includes fee-based warrants to Network 1 Financial,
• During the three months ended June 30, issued 5.6 million $1.00 warrants (including those to N1), and
• Issued 4.3 million $1.00 warrants related to February's Series A 8% Convertible Preferred Stock issuance.

The above reconciles with the 50.3 millions warrants outstanding and exercisable as at June 30, 2013 on page 9 of the most recent 10-Q. Assuming the consultant warrants have an exercise price of $1.00 (both issued and forfeited), there are nearly 35 million $1.00 warrants as at June 30. Speaking to the company and several capital markets folks on this issue, the prevailing view is that a share price in the $1.25-1.50 range will cause a substantial portion of these warrants to be exercised and provide the company with a large amount of cash. Some of the resultant common stock may be subsequently sold at those or slightly higher share prices, while others may be held longer or much longer.

The next couple of weeks should provide several opportunities for news flow (e.g., a China deal, regulatory clarity, Moffitt, ECCO, CAB, etc.), and a completely different situation for the share price.

$PVCT's 10-Q: Q1 2013

Provectus released its 10-Q filing for Q1 2013 today. See here. Some thoughts...

#1. Quarter-over-quarter ("QoQ") -- Q1 2013-over-Q4 2012 -- monthly cash expenditure appears to have decreased by about 11%. Provectus' quarterly and annual filings since and including Q1 2012, the company appears to suggest an average monthly cash burn of approximately $950K (with a standard deviation of $133K).

#2.  Management expanded on their Q4 2012 MD&A statement via the 10-K of...

"We are seeking to improve our cash flow through both the licensure of PH-10 on the basis of our Phase 2 atopic dermatitis and psoriasis results, and the geographic licensure of PV-10 on the basis of our Phase 2 metastatic melanoma and Phase 1 liver results in certain areas of the world, as well as pursuing a strategic investment strategy, including equity sales to potential pharmaceutical and or biotech partners, and continuing with the majority stake asset sale and licensure of our OTC products as well as other non-core assets. The geographic areas of interest for PV-10 principally include China, India, Japan and Middle East and North Africa (MENA). We are also considering the global licensure of PV-10 as well since it has come to our attention that this is of interest to potential partners."

...with the following in their Q1 2013 statement:

"We are seeking to improve our cash flow through both the licensure of PH-10 on the basis of our Phase 2 atopic dermatitis and psoriasis results, and primarily the geographic licensure of PV-10 on the basis of our Phase 2 metastatic melanoma and Phase 1 liver results in certain areas of the world, as well as pursuing a strategic investment strategy, including equity sales to potential pharmaceutical and/or biotech partners. In addition, the data now available from Moffitt Cancer Center in Tampa, Florida has been particularly helpful in supporting our development plans with both the FDA and prospective partners. The geographic areas of interest for PV-10 principally include China, India, Japan and Middle East and North Africa (MENA). We are also considering the global licensure of PV-10 as well since it has come to our attention that this is of interest to potential partners. We also expect to continue with the majority stake asset sale and licensure of our non-core assets. However, the primary objective of ours is to strategically monetize the core value of PV-10 and PH-10 through various transactions, leveraging value creation up to and including an appropriate Merger and Acquisition transaction."

primarily suggests to me management is prioritizing a series or string of regional/other licenses (e.g., China, India, Japan, PH-10) to boost company valuation towards their end game valuation expectation.

In addition... suggests repetition of the importance of Moffitt to what the FDA and Big Pharma needed regarding PV-10's systemic benefit and potential, and that is very likely crucial to securing and most assuredly dispositive of receiving breakthrough therapy designation for PV-10 for recurrent and metastatic melanoma.

However... suggests focus on smartly, intelligently and thoughtfully protecting valuation to, again, achievement management's end game valuation expectation. Noteworthy to me was the inclusion of the verbiage "an appropriate Merger and Acquisition transaction."

#3.  Noteworthy to me was the issuance of 1.92MM warrants to consultants in exchange for services in the quarter. To whom and why?

$PVCT Dilution: 2009 to 2013YTD

$PVCT: Form 4 Filing -- Insider Buying

Peter filed a Form 4 today in which he bought another 133,333 of common stock, a cash expenditure of $100K.

This purchased related to Eric and Peter's prior purchases of common stock at $0.75 per share in the October raise for which Form D filings by each of them previously were made. Investors in this fund raising placement were issued one 5-year warrant for each common stock share purchased (i.e., 1-to-1). The warrants have a $1.00 strike price.

$PVCT: Form 4 Filings -- Insider Buying

Eric and Peter filed Form 4s today in which:

• Eric bought 666,666 shares, and
• Peter bought 133,333.

It appears they were two of five investors who bought common stock at $0.75 per share in the October raise for which the Form D filing previously was made. Investors in this fund raising placement were issued one 5-year warrant for each common stock share purchased (i.e., 1-to-1). The warrants have a $1.00 strike price.

Since the raise had to take place after the PVCTP "IPO" was terminated, the premium to the then current closing share price probably was in the range of 15-25%, and 30%+ from today's closing share price.

UPDATE (correction): I misread the filing, and have since updated this post. My apologies.

Blog Reader Questions

You mention that management believes the company is worth between $7-10 billion. At 113 million shares outstanding, that would indicate a price per share between $62 and $88. Is this plausible?

The figure you should use in the denominator is about 155 million shares fully diluted, which would includes preferred and common shares, stock options and warrants. Using, for example, the 2011 10-K:

• 3,531,665 preferred shares,
• 110,596,798 common shares,
• 14,890,956 options, and
• 25,119,247 warrants.

$7 billion ÷ 154 million = $45 per share. At $10 billion, $65. 

Since there will be a difference between the strike or exercise price and the share price at the time either a stock option or warrant are exercised, as well as cashless exercises features, the total number of options and warrants included in the denominator typically would not be the figures above, but a lesser amount. So, the per share range is a rough estimate.

I think you approach the answer to plausibility in two ways by asking: at what price would management sell, and for what price would Big Pharma pay?

You won't pry the company out of Craig's cold dead hands for less than $50-60. That is the easy answer. If you think you have a/the near cure for a number of cancer indications (and can validate it as such), at what price would you sell?

As for what Big Pharma would pay, I think it ultimately depends on the intensity of the auction. The corporate development or M&A folks at a Big Pharma company will do their respective valuation work to arrive at a range of valuations for Provectus (e.g., Comparable Company Analysis, Discounted Cash Flows Analysis, Precedent Transactions). They will use this (and knowledge about the size of their respective checkbooks) in their discussions with the company, but also in the context of negotiating against other Big Pharma companies interested in buying Provectus. Management's valuation work along these lines informs their own expectations of value.

Why did they need the IPO for a Nasdaq listing if a derm or geographic deal was in the cards? Or the SPA, for that matter?

I think management thought they could secure a NASDAQ listing through the PVCTP "IPO" for the sake of the listing itself: the greater awareness it would bring the stock and company, and the greater accessibility to the stock for a wider swath of buyers. Management had a valuation threshold below which they would not consummate a deal (i.e., pricing) for the IPO. If they got the terms they wanted, they would do an "IPO." If they did not get acceptable terms, they would not do an "IPO," and continue exploring deals for dermatology or oncology in certain geographies. The latter, of course, is what transpired.

$PVCT.OB Files A Preferred Share Prospectus

Here is my follow-up to my post on today's prospectus filing.

Management filed a preliminary prospectus supplement for the issuance of:

• Series A 8% convertible preferred stock, and
• Series D Warrants to purchase Series A 8% convertible preferred stock.

Note the above preferred stock is different -- it has a different CUSIP number; that is, it is a different security -- than the convertible preferred stock, which had its own CUSIP number and warrants to purchase common stock, Provectus issued in March 2010.

The filing had blanks for numbers of shares and warrants, warrant exercise price, etc. Basically, the filing was a placeholder. This filing, the specifics such as they are, and the process behind it are a big deal [to me]:

• As I mentioned earlier today, this new preferred stock security will list on the NASDAQ CM (Capital Market) under the symbol PVCTP.
• Note, again, that the other preferred stock security is not related to the new preferred stock security and, thus, will not list.
• PVCTP also is ready to list, if and when the company issues it to fund raise; that is, there is no waiting period. Like an IPO, when the security is issued for money, the "paper" goes live.
• The new preferred stock will be priced above at least $4 per share, and the associated warrants to buy PVCTP will have an exercise price of at least $4. The $4 level is the minimum requirement of NASDAQ to list any new security (e.g., like an IPO).
• Final PVCTP pricing likely would be influenced by the price of the common stock at the time the issuance is finalized or "goes public." If the common stock is below $4 per share, PVCTP would be sold for no less than $4 per share. If the common is higher or much higher than $4 per share, PVCTP could or would be priced above $4.
• The bookrunner or underwriter is Maxim Group (again, note the different language of prospectus supplements and placement agents, versus underwriters and this issuance).
• By approving Provectus to list this new preferred stock security, the NASDAQ undertook a due diligence process that included vetting the security, management, the board of directors and the company.
• While the new preferred stock certainly could be issued to life sciences investors, name or otherwise, I think it is clear the security is targeted at and destined for a Big Pharma company as part of the strategic investment strategy Provectus noted in its second quarter 10Q filing. If I had to, er, guess, the Big Pharma company is Pfizer.

With the mechanics already in place for a minority equity investment from a corporate like Pfizer or J&J or other Big Pharma company, now the focus turns to closing such an investment.

Strategic Investment Strategy?

Provectus filed a prospectus to raise money through the issuance of Series A preferred shares and warrants on these preferred shares today. No announcement of the actual sale and, thus, fund raising, has been made.

These preferred shares will trade on the NASDAQ as PVCTP (see below).

More later...

Consultants

I previously highlighted the warrant issuance below noted in the Q1 2012 10-Q filing:

Following up on this thread, now from the Q2 10-Q filing:

1,003,000 issued in Q1. Another 454,500 in Q2. Different consultants? The same consultant? Pardon the pun, but what kind of relationship warrants these amounts (this amount) of warrants?