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.
Click to enlarge.
At higher original exercise prices the math is different. Tendering is better than constructing the offering (the "unit") in the open market.
Click to enlarge.
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.
Click to enlarge.
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.
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.
Relying on anecdotal evidence in general and connecting the dots specifically, the Chinese have displayed a willingness to do deals before regulatory clarity has been made transparent, and this appears to be the case with Provectus too.
There may be strings attached, "ifs, ands or buts," etc. in any prospective deal structure between the interested Chinese party and the company to reflect future uncertainty or condition precedents.
The prospective partner in an eventual China regional transaction (at least, most likely, China, Hong Kong, Macau and Taiwan, and potentially certain other Asian countries and geographies) appears to have been narrowed to two companies: Hisun-Pfizer Pharmaceuticals and Eddingpharm.
Hisun-Pfizer is the joint venture between Pfizer and Zhejiang Hisun Pharmaceutical, initially formed to sell low-price generic drugs but more recently desirous of selling branded ones.
Eddingpharm is a private venture-backed company (venture investors include OrbiMed Advisors Caduceus Asia Partners Fund, Domain Associates, and Sequoia Capital China Growth Fund) focused on marketing drugs of Western pharmaceutical companies in China and Asia. Eddingpharm's willingness to do a deal prior to regulatory clarity may be seen in its license agreement with Syndax for entinostat in China and other Asian countries in early-September. Syndax received breakthrough therapy designation from the FDA for entinostat one week later.
Recent Eddingpharm deals include Syndax for breast, lung and other cancer indications (September), GlaxoSmithKline China for a breast cancer drug (April 2013) and Chiesi Farmaceutici for two respiratory disease products (April).
It's unclear to me whether Peter met with both Hisun-Pfizer and Eddingpharm, or one of them, when he was in China the week of September 2nd. I think Pete's September trip was a follow-up meeting (e.g., pre-screen, due diligence, etc.) primarily or exclusively with Eddingpharm, which has offices in Hong Kong, Shanghai (where Peter visited, at least) and California. Hisun-Pfizer was introduced to the company by Pfizer's Dr. Craig Eagle.
I understand Peter may be in New York already (i.e., today).
He has made three trips to China thus far: November 2012, February 2013 and September. Will there be a deal signed and announced this week or soon ("yes"), will be have to return to China ("maybe"), or will there be no deal ("no")?
The lead indication for China appears to be liver cancer,
There has been speculation of a $10 million upfront payment,
There has not been much rumor mongering on milestone payments. If I had to speculate, perhaps $50-100 million, but it will boil down to what the company can negotiate and ultimately would accept, and
The net present value of the deal is $1 billion. Like any discounted cash flow analysis, you utilize a variety of assumptions to arrive a number that easily can be revised or changed by the practitioner undertaking it. I think the goal of this number is to reflect the level or percentage of royalty or sales, together with the term of the agreement.
Horse, beggars, turnips, bayonets...
It has been speculated Eddingpharm already extended terms to Provectus. Peter may be in New York to determine if Hisun-Pfizer will consummate a transaction, or then proceed to accept Eddingpharm's deal.
What Provectus says via 8-K filing and press release, or does not say, whenever (should ever) it says (say) so, if it has anything to say, will go a very long way to telling us what the future of the share price holds.
A China deal would entice some buyers off the sidelines, initially staunch and then hoover up the sale of convertible preferred stock that has been and currently is being dumped. Once the preferred stock is dealt with, it's more than likely the share price would gap up to the next level of share or warrant selling-induced resistance.
I appreciate the comments and e-mails from blog readers I received over the last week. Thank you. I realize some of you would visit once or a couple of times a day, while others would visit 15-20 times during their daily waking hours. I'm still blogging, but not nearly as much as I used to (as I transition the blog per my "$PVCT: Moving On, Moving Up" post).
A blog reader commented, in regard to my "For $PVCT, it's the FDA's move" post, that although I wrote the ball is now in the FDA's court, Craig's recent remarks, including his letter to shareholders (May 13) and reported comments at the annual general meeting (June 27), suggest Provectus has not yet made an application to the FDA for some process that would result in an approval, whether for an special protocol assessment or breakthrough therapy designation ("BTD"). The reader went on to write: So, in a sense, the ball in is the company's court to first file [some application] with the Agency. I say it's the FDA's move because regulatory clarity is what is needed by Provectus, and I think the company has provided answers to all of the Agency's questions. Of course, the FDA cannot move if the company has not submitted an actual application for which a decision from the Agency is required. A consensus of opinions I solicited over the last couple of months pointed to the belief management had submitted an application for BTD sometime during that period. Recent information purports to suggest that, as late as last week, more time was needed to submit the application.
I've been trying to wrap my head around the role(s) Maxim Group's Dr. Echo Yinghui He, MD, PhD is playing for/with the company. Her position with Maxim is as an equity research analyst, and she provides coverage of Provectus. Dr. He's last company update note was dated January 29, and she is expected to provide another one after Moffitt's peer-reviewed article is published. It appears she has an additional role of some sort with the company as it relates to Provectus' efforts to seek and secure a regional transaction in China.
They're baaack... Is Maxim soliciting some Provectus shareholders to become clients and open accounts with the broker-dealer, again? From what I gather, the pitch comes right out of the movie Boiler Room. Maxim folks suggest marks, er, people to whom they speak open an account with the firm so as to give them (the marke, er, those targeted, er, called) favored status when Provectus next fund raises like the company did in February. Why buy in the open market when you can get a sweeter deal (stock + warrants) courtesy of your friends at Maxim? A small dog -- let's call him Seth -- purportedly calls the mark, er, prospective client. Then, purportedly, a bigger dog -- let's call him, um, Chris -- jumps on the phone to try and close the deal.
Update (4/17/13): Some readers of the blog have e-mailed both the company and me asking about this post. They are concerned Maxim is calling some shareholders because Provectus is raising money and, thus, no deal of any kind (e.g., China, India, Japan, global license, PH-10) is in the cards. Peter communicated to me the company has no relationship with Maxim in regards to any fund raising. It appears to me Maxim folks simply are prospecting for business, and are using their firm’s historical association with Provectus (i.e., equity research coverage, primary book-runners on the now terminated PVCTP “IPO”) as the starting point of the conversation. As far as I know, Provectus is not fund raising at the current time.
Maxim Group analyst, Dr. Echo He, MD, PhD, issued an equity research note today on Provectus. Management circulated the report via Provectus News.
Dr. He's $3.50 price target, which is mostly irrelevant to me (coverage is more important), did not change from her previous reports. The price target also remained the same as the price target of her predecessor, Dr. Yale Jen, Ph.D., who now is at Roth Capital. Because of management's refusal to play the Wall Street game, generally speaking, equity research reports like these have some but not extensive value.
I do not think she changed top line revenue figures to reflect the addition of a liver indication, although she did make expense reductions in her model. The analyst also did not include the potential, probability-adjusted value of out-licensing opportunities in China or elsewhere.
As such, the $3.50 price target yields a baseline valuation of about $400MM market capitalization (using Dr. He's diluted shares outstanding) that effectively is a reasonable estimate of liquidation value to which the current share price and market cap must catch up. This value of course is nearly or completely illiquid because management would never monetize the company at this level.
Further increases in either price targets or actual market cap obviously will be based on key and pivotal milestones actually being achieved.
I asked a lot of questions this week of and also did a lot of listening to management and fellow shareholders. My takeaways:
The IPO appears to be off the table for now. Provectus did not come to terms with a(the) lead investor(s) on pricing and others terms. Thus, management terminated it. Ultimately, their approach to this process was consistent with my expectations of it.
Check to make sure you still have your ring, watch and wallet if you ever visit Maxim's offices.
More seriously, after learning of/hearing the conversations of many shareholders with Maxim executives and institutional and retail reps, I think Peter did indeed treat Maxim folks like mushrooms: he fed 'em s@$% and kept 'em in the dark. As such, Maxim's "alleged" behavior reverted to the mean during the terminated "IPO" process. He could not control their behavior and actions; however, some mud remains on Peter's trousers because of it.
The opportunities for PV-10 and PH-10 are bigger than ever. Frankly, to understate the obvious, management knows more about how well the drugs work than you and I do. Breast cancer anyone? Just sayin'...
I would like to see what more information emerges on several fronts next week and through October 31.
Dr. Stephen Maturin: They're exhausted. These men are exhausted. You've pushed them too hard.
Capt. Jack Aubrey: Stephen, I invite you to this cabin as my friend. Not to criticise nor to comment on my command.
Maturin: Well, shall I leave you until you're in a more harmonious frame of mind.
[he stands and is about to leave]
Aubrey: What would you have me do, Stephen?
Maturin: [turns back to him and knows what to say] Tip the ship's grog over the side.
Aubrey: Stop their grog?
Maturin: Nagle was drunk when he insulted Hollom. Did you know that?
Aubrey: Stop 30 years of privilege and tradition. I'd rather have them three sheets to the wind than face a mutiny.
Maturin: You see I'm rather understanding of mutinies. Men pressed from their homes, confined for months aboard a wooden prison...
Aubrey: I respect your right to disagree with me, but I can only afford one rebel on this ship. I hate it when you talk of the service in this way. It makes me feel so very low. You think I want to flog Nagle? A man who hacked the ropes that sent his mate to his death? Under MY orders? Do you not see? The only things that keep this wooden world together are hard work...
Maturin: Jack, the man failed to salute. There's hierarchies even in nature. There is no disdain in nature. There is no...
Aubrey: Men must be governed! Often not wisely, but governed nonetheless.
Maturin: That's the excuse of every tyrant in history, from Nero to Bonaparte. I, for one, am opposed to authority. It is an egg of misery and opression.
Aubrey: You've come to the wrong shop for anarchy, brother.
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.
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.
We may have a much better perspective on the "IPO" and others things Provectus sooner rather than later. There seems to be a convergence by the folks who make-up the PVCTP book running group -- American Trust Investment Services, Maxim Group, Network 1 -- pointing to the end of this week for the "IPO," if it happens: Thursday afternoon pricing, Friday morning trading. Update (via Maxim): Terms would be released, if a deal is consummated, after 4 pm EDT on Thursday.
We know what the market anticipates the terms to be. The question is: what will they actually be?
Fratres! Three weeks from now, I will be harvesting my crops. Imagine where you will be, and it will be so. Hold the line! Stay with me! If you find yourself alone, riding in the green fields with the sun on your face, do not be troubled. For you are in Elysium, and you're already dead! Brothers, what we do in life... echoes in eternity. -- Maximus Decimus Meridus in Gladiator
I want to:
Share my speculation about what I think happened towards the end of the third quarter and how it relates to the temporal nature of the PVCTP "IPO,"
Explain why I will invest a token amount of money in the "IPO" if it happens, and
Write about management's poker hand, the hand they have dealt shareholders, and how both of them might be played.
I think management was convinced the SPA would arrive by the end of Q3 and the PVCTP "IPO," which was supposed to have been in the right place at the right time, was being teed up to follow it.
As we know, Provectus and Peter have been working several financing options:
The "IPO,"
A dermatology license deal,
One or more geography-specific oncology license deals, and
A strategic investment from a Big Pharma entity like Pfizer as the sale of common stock at a premium to the share price (or, as mentioned above, an "IPO" led or co-led by a Big Pharma company).
Each of these has its own value proposition (i.e., pros and cons), but the propositions are temporal, having greater or lesser value as a function of time.
For example, the best option today for shareholders would be an optimally valued (i.e., net present value) and structured (i.e., upfront, milestone and royalty payments) dermatology or geographic-specific oncology license deal yielding an upfront payment sufficient to at least pay for the pivotal MM Phase 3 trial. Optimality, however, might be more likely to be achieved later rather than sooner, in November or December.
A sale of common stock to a Big Pharma company would be "more optimal" if the price at which these shares would be sold was much, much higher than Friday's close of $0.59, like at least $4. But why approach or ask a Big Pharma company like Pfizer for this kind of strategic investment unless you have or need to ask? In my view you ask after the SPA is in hand and if you determine (a) the PVCTP "IPO" is not feasible and (b) dermatology or mini-oncology optimality is later rather than sooner.
Up next is the PVCTP "IPO," which, for a certain period of time, provides attractive and pragmatic ways to begin driving company valuation dramatically upwards:
Attractively: A NASDAQ listing would facilitate new buyers, who could not buy the common while it remained an over-the-counter stock, and more national media attention from major journalists and reporters, who would not cover Provectus until it traded on a major stock exchange and was in Phase 3 trials.
Attractively: A smart IPO, led by Pfizer (and J&J or a life sciences investor like OrbiMed) and with a conversion ratio and warrant coverage good for existing common shareholders, would draw many more new buyers to the preferred stock listing itself over time.
Pragmatically: A $15-20MM raise at an acceptably high valuation, while creating dilution that a dermatology or a so-called mini-oncology license deal would not, fully funds the pivotal MM Phase 3 trial. There would be no need to force or rush dermatology or oncology deals, nor completely rely on them to commence the MM trial. The trial could start within 30 days of the SPA PR and move Provectus and its shareholders closer to the interim analysis of at least the first half of the trial's patient population.
A smart PVCTP "IPO" is a better temporal option in October than a dermatology or mini-oncology license. In November, it might not be.
Back to the SPA PR. It was the first domino to have fallen in a hoped for series of them, whether the next temporally best one was a license deal or the "IPO."
But the SPA did not arrive by the end of September, despite very ernest and serious expectations set to the contrary by folks directly interacting with the FDA. It is coming, but it was not nor is not here yet.
To compound these missed expectations were:
Shorting of the stock (end-of-September short interest was nearly 100% greater than the end-of-August figure) for whatever reason(s),
Selling of shares (September's monthly amount of traded shares was nearly double that of August's) for whatever reason(s), and
The PVCTP "IPO" process, and particularly the aspect undertaken by Maxim Group's retail banking side.
Th "alleged" sloppy "IPO" process was made much more so by "alleged" disgusting behavior by some Maxim retails reps spreading baseless "facts" about the "IPO's" details. I used "alleged" because, while Paul LaRosa from Maxim's capital markets part of business agreed Maxim reps should not have been saying what they were saying, the reps themselves probably would say they were doing nothing wrong. "Alleged?" I crack myself up.
The rep revenue model is predicated on the number of transactions they encourage and facilitate. The revenue model is not based on asset appreciation.
I now have what I think is a better handle on the increase in short interest, and will wait until October reporting dates to confirm this. In the interim, am I concerned? No. Am I annoyed and irritated? Yes.
There is the thought one very determined seller has been and is getting out of the stock. Could he/she/it have thrown in the towel for whatever reason(s)? Most likely yes. Does he/she/it know something we do not? I am betting my share ownership (note: no sales of any shares bought) the answer is "no."
Funds holding Provectus preferred and/or common shares have much different pressures than entities and individuals. The quarter-to-quarter reporting to investors and limited partners funds in this group (as opposed to a venture capital or private equity fund) are required to provide make it difficult to hold to an investment thesis because of complaints of poor performance by these very investors and LPs. Such theses turn into trading ones, if they did not start out as such. Did someone's patience runout? Probably.
So, here we are today, observing an IPO that keeps getting pushed out, from the week of:
October 1st to
October 8th to
October 15th to, likely,
October 22nd.
While the preferential path to financing might be a dermatology deal, the "IPO," for the reasons I presented above and others, is temporally better. I think, however, it needs an SPA PR to launch it, and I do not see the "IPO" occurring until after an SPA PR is issued. As such, if the "IPO" does not occur in October, management will probably pull the plug on it because other financing options would have become temporally better.
2.I got your initial public offering RIGHT HERE! (w/gesture)
If the PVCTP "IPO" goes off, I will participate in a very small way. I prefer buying common stock.
I work hard to maintain an objectively dispassionate investment case to buy and hold Provectus stock, but I am not always successful as emotion does creep in from time to time. I have an emotional attachment to this situation. Seriously folks, who blogs this much about one company or stock if they are not part of it? Participating in a token way in the "IPO" is something to add to "the box" that holds the collection of my life memories.
Emotion aside, however, the ROI from buying common stock should exceed the ROI of buying preferred stock (when compared together and presented as a choice of whether to buy the "IPO" or spend the equivalent amount of money buying the common stock), irrespective of what a Maxim retail rep tells you. Of course, you could always trust Chris Varick.
Let us make some assumptions to frame this analysis -- and please let me know if you disagree with my work below (as I am open to feedback and being corrected). I will toggle these later under certain circumstances to make some illustrative points. Nevertheless, the key assumption underlying my belief of a better common share ROI is that Provectus will not do a dumb IPO.
Let us assume you have $100,000 to either spend on the "IPO" or just buy common stock. In this analysis, you cannot buy both. Furthermore, since you do not know if and when the "IPO" goes off, you have to make a reasonably timely decision: wait for the "IPO" to happen or buy common stock before the SPA PR is issued. The SPA, which management surely knows they now have, should not affect the terms of the "IPO" but should increase the price of the common stock post-announcement.
Do you buy the "IPO" whenever it goes off, or do you buy common stock, say, starting Monday?
I assume about 150MM fully diluted number of shares of non-listed preferred and common stock, stock options and warrants. PVCTP deal terms then suggest some more shares. "As converted" means I used the conversion ratio above (i.e., 1) to convert the PVCTP shares and warrants on PVCTP shares into the appropriate but requisite number of common shares.
On an as converted basis, your $100,000 gets you (a) 35,000 PVCTP-derived common shares or (b) 166,500 common shares.
Let us assume the company is acquired for, among other things, a $1B upfront payment (i.e., the preferred shares you bought when converted into common stock or your common shares you bought are exchanged for your pro rata share of $1B) on December 17, 2013. Let us also assume the IPO still happens: you either participated in it, or you bought common shares and did not. I make this assumption only to simplify the analysis in some ways. If you buy common stock and the IPO does not go off (i.e., it is November and Provectus completes a license deal), the fully diluted shares outstanding figures remains at $150MM and your common stock ROI is higher.
Let us also assume you convert & exercise/sell your preferred shares and warrants, or your common stock, when the acquisition transaction occurs.
The outcome makes sense. A smart IPO implies a healthy valuation at which PVCTP "IPO" shares were sold and, thus, a substantial uptick (about an order of magnitude) from today's market capitalization. Under this scenario, one should of course buy the common stock, say, starting Monday, then wait and buy the IPO.
Hold on a second! Didn't your stock broker, er, Maxim retail rep "allegedly" tell you to flip the preferred shares and hold onto the warrants as "a lottery ticket?"
The flipping-your-preferred-shares ROI is less than the hold-your-preferred-shares ROI, which should be much less than the buy-common-stock ROI.
Maxim's "alleged" story only works -- that is, you make out like a bandit by indeed cashing in a lottery ticket -- if the conversion ratio and, to a lesser extent, warrant coverage is very punitive to existing common stock shareholders, such as 6- or 7- or 8-to-1 and 60%, respectively. That is, the "IPO" is a dumb "IPO."
A 2-to-1 conversion ratio (and, say, 50% warrant coverage), worse than my initial example above but far from punitive more than doubles your return from buying the "IPO;" however, one makes more money, again, by just buying common stock soon.
To be fair, a dumb IPO produces a result where buying PVCTP and eschewing the common stock is the better course of action.
3."Poker is not a game of cards played with other people, it is a game of people played with cards."
Right now, Provectus only needs money to literally keep the lights on and the water running (note: hyperbole). Fixed costs are low. The burn rate can be turned down and compensation deferred, with a focus on those activities, and whatever variable costs are associated with them, that drive value (e.g., the end-of-phase 2 meeting with the FDA for psoriasis, remaining toxicity study parameter elucidation, etc.) until money targeted for key, pivotal and other trial work is raised or obtained.
In this game of poker, management will play the hand they think they have the way they see fit. I think:
The company's hand is very strong,
Management thinks the hand is a royal flush (I think the hand is a royal flush, too),
Provectus has enough chips (cash on hand, and temporal cash needs) to play it well, and
Management will play it well (i.e., not raise money in a dumb way).
I am betting my share ownership on this. Of course, I could be quite wrong (note: the usual economist's conviction of "on the one hand, ..." but "on the other hand, ...," which is why we need more one-armed economists).
Now, what kind of poker hand do you think it is: a straight flush, four of a kind, a full house, worse or one that can be beaten? Which hand you have is up to you to determine. How you play it also is up to you.
There is no doubt of the battering the share price has taken since the beginning of September, let alone this year or over the last several years. I see it. I feel it. I understand it.
You got to know when to hold 'em, know when to fold 'em, Know when to walk away and know when to run. You never count your money when you're sittin' at the table. There'll be time enough for countin' when the dealin's done.
The company needs money, but not in the way the markets and most observers think Provectus does. Management has indicated they will do a smart IPO if they do one at all, and that raising money below $1.12 is not in the cards (pardon the pun). Anonymous wrote "[p]oker is not a game of cards played with other people, it is a game of people played with cards."
Playing your poker hand requires you to ask yourself how management will play their hand.
Disclaimer:This blog is neither intended to be nor is investment advice. The author of this blog (the "Author") is not a registered investment advisor. Under no circumstances should any content from this blog be used or interpreted as a recommendation of a trade or investment in Provectus Pharmaceuticals, Inc. Trading and investing can be hazardous to your wealth, health or both. Any investment decision must, in all cases and without exception, be made by the reader or by his or her registered investment advisor. This blog is only and strictly for educational and informational purposes. The Author may have a position in Provectus Pharmaceuticals, Inc. at any given time that is not disclosed at the time of publication. All opinions expressed by the Author are subject to change without notice. You, the reader, should always obtain current information and perform the appropriate due diligence before making any investment or trading decision. All efforts are made to ensure the information contained in the blog and/or a blog post is factual and accurate; however, the Author does not guarantee its accuracy under any circumstances.
Much to Maxim Rep #6's credit, he eventually facilitated a call for me with Paul LaRosa, Maxim's Senior Managing Director of Capital Markets. Paraphrasing:
There was no deal in place.
He had taken Provectus management on a roadshow to 30-40 prospective investors.
Such investors would negotiate terms with the company.
They would meet somewhere in the middle (my note: an illustrative comment), and a deal would be struck.
A final prospectus with detailed terms, numbers, etc. would be circulated a day before the PVCTP security would trade (update: final terms, however, more than likely would be socialized with prospective "IPO" buyers to provide enough time to understand deal terms and the like).
Maxim retail reps should have not been saying what they were saying.
Thought: PVCTP "IPO" pricing has not yet been established.
Non-Thought: Maxim Rep #6 said (paraphrasing) his earlier comments on the call regarding an "at market conversion ratio" as a definitive deal term was hypothetical and he did not know what the conversion ratio was or would be until it was told to him. I said (paraphrasing) I appreciated these latter comments. He must be new to the financial services industry and the Maxim retail desk.
Non-Thought: This same rep said (paraphrasing) Peter told him the conversion ratio was "at market." When pushed on the veracity of such a claim, he said (paraphrasing) Peter implied it to him. When asked for an e-mail of this be sent to me, none arrived. When he offered to set-up a call first this in the morning with the capital markets/investment banker point person on the deal and I said (paraphrasing) "Please do," no call thus far has materialized.
Non-Thought: According to Maxim, the PVCTP "IPO" appears to have been pushed off to the week of October 15. Non-Thought: Maxim Rep #4 empathized with me as a common stock shareholder by saying (paraphrasing) he too felt saddened or aggrieved that "others" were suggesting selling the common stock to buy the preferred stock. An important aspect of customer service indeed is to empathize with a prospective client.
Thought: According to several sources, Maxim has secured the necessary 300+ prospective "IPO" buyers for the security to be listed on the NASDAQ. This item is important because, aside from establishing the appropriate deal terms for the PVCTP vehicle, the confirmation enables Peter to know whether Provectus can indeed use this financing approach if the board and management chooses to do so.
Thought: You will recall management has not raised money through common stock or warrant issuances below $1.12 for some time (I should get around to listing such information in a subsequent post in a few days). Raising money at or above this level for philosophical (they have drawn their own line in the sand on this issue) and mechanical (there are several warrant reset provisions for fundraising common stock share prices below $1.12 and other price levels) reasons is important to them. Thus, doing an "at market" conversion ratio, or a ratio utilizing a common share price below $1.12 and/or issuing warrants with exercise prices (when the exercise price of a warrant on a share of PVCTP is translated into a common stock exercise price) below $1.12 would be contrary to management's current position on fund raising, go against recent historical actions and have a significant impact on the overal capital structure of the company.
Thought: In the month of September, Knight Capital (NITE) appears to have been responsible for less than 25% of traded shares. If, as has been speculated on PVCT stock chat rooms and elsewhere, Dr. Adams' shares are transacted through NITE, more than 75% of selling (and buying) was by folks and entities other than Dr. Adams. I am not focusing on the amount of shares, since there is thoughtful commentary that volume statistics for over-the-counter stocks are much higher than commonly reported (perhaps by as much as half), but rather the relative proportion of transactions.
Thought: I previously expressed my thoughts about the "IPO" to management. In communicating my view on its pros and cons, Peter clearly indicated to me he would take a thoughtful approach to a PVCTP "IPO" (if the company were to use it). I take him at his word until and unless his word, in my view, is not worth taking any more.
The reps on Maxim's retail desk continue to call around with details of the upcoming PVCTP "IPO:"
At market conversion ratio (i.e., 6-7 to 1: 6 or 7 common shares are received when 1 preferred share is converted),
40-60% warrant coverage (the warrants will remain with the "IPO" participants, so one could sell one's PVCTP shares and still retain upside while making a profit if one flipped one's PVCTP shares after the "IPO"),
etc.
Maxim's retail desk is separate from their investment banking side (the folks working with Peter as underwriters of the "IPO"), so the reps do not have specific deal terms to inform prospective investors they are calling.
Management may not ultimately utilize PVCTP, but these retail reps are sharing the above details and more with certainty.
Deal terms are circulating around Wall Street, in Connecticut and elsewhere.
Some of Wall Street's denizens are paying attention to the situation; the ones who look to turn a quick buck, and have little to no interest in Provectus' long-term story.
A buck is a buck, and their short the common-and-cover through a conversion of the preferred is a viable trading strategy.
My feelings about the strategy, as a large shareholder, are immaterial. It has worked in the past, and it will work in the future.
Should management not go through with a PVCTP "IPO," and I think the probability of an "IPO" has materially lessened, there will be a short-covering rally. Until then, continue to gird yourselves.
When do you now expect the FDA issues an SPA to PVCT?
Do you have any other insight into a possible dermatology deal and/or regional oncology JV? The pressure on the stock due to a lack of clarity on the financing to go forward and announcement of an SPA can at times be very unnerving.
Do we now have the "investors" in the preferred shorting the ____ out of the common for a better conversion rate? A low price helps only the person buying the preferred shares.
It really seems a moment to consider cutting your losses. My confidence is seriously waning. SI poster
The above is a sampling of what I have received recently via calls, e-mail (directly to me or through i.am.a.pvct.investor@gmail.com) and the blog. As much as readership statistics clearly indicate growing interest in and awareness of Provectus and PV-10 (a great thing taking the long-term view of eventual price appreciation), in the short-term increasing numbers of comments such as these anecdotally suggest shareholders feeling more and more unnerved and lost.
These emotions are natural. You feel them when you are considerably underwater in your share cost basis, cannot easily foresee the path forward for the share price to higher and loftier levels, and feel insecure in your investment or trading thesis of the stock.
Proponents and practitioners of behavioral finance would suggest now might be a good time to begin buying the stock. But that will not make some of you feel better.
There is selling: The simplest reason for the drastic drop in the share price is there are more sellers than buyers. Sellers, whether forced, shorting structurally or purposefully, fearful of dilution, having lost the conviction of their principles or belief in their investment theses, etc., are selling. Buyers need more information and clarity, and are not buying enough to offset the selling.
Barring news, it is not unreasonable to expect further pressure on the stock this week and into the middle of next week. More people will get unnerved and more people will sell. You could and probably will be tested further.
PVCTP is not exactly helping: The uncertainty surrounding the PVCTP "IPO" remains. I have heard no specifics regarding pricing, save the speculation masked as certainty from Maxim. If the preferred offering is utilized, having Pfizer and Johnson & Johnson co-leads would mean company friendly terms.
The SPA?: The lack of an SPA PR announcing its receipt has disappointed some.
It is not difficult to see why an agreed upon SPA would be desirable to have...An SPA can be appealing to the industry since it is sometimes difficult to get timely feedback from the agency. Once FDA has indicated it accepts the protocol, a company will assume it has a written contract with the reviewing division assuring acceptance of the proposed efficacy claim if the data fit the prospectively defined success criteria. This is perceived to reduce risk by eliminating the fear that a positive outcome in Phase III might not result in approval if the trial design is not acceptable to FDA. Obviously that kind of risk minimization is alluring to analysts and board members. (Source)
Management is committed to the process. As I wrote yesterday, I am led to believe there is no more negotiating or discussion with the FDA on the trial design. But, the SPA will arrive when it arrives.
It is also important to be realistic about the SPA time frame...[T]he SPA process has, at times, become a protracted early battleground for future efficacy claims. Very often the disagreements are centered on the primary outcome variable and intended statistical analysis. Of course those are intimately related to future label claims and size of the study, possibly the most vital elements in a development program. (same source as above)
Balance sheet?: And concerns remain about the company having sufficient money to begin conducting, let alone completing, pivotal, key and other trial work.
There is no doubt the stock is broken, but the company is not. Broken stocks see their share prices fall despite sound fundamentals; in Provectus' case, very attractive clinical, regulatory and business value propositions (and some aspects of the stock value proposition as well). Broken companies are flawed in one or more fundamental ways, and their share prices are very validly beaten up for them.
Nothing has changed from my depiction of the horserace on Sunday. Timing is an issue, but when is it not. These things will play themselves out. My investment thesis remains. I am not here to hold your hand, but to ask you:
Has PV-10's clinical value proposition and, thus, your investment thesis changed for the worse?
I agree with your recent blog post that the fireworks will all go off in one day (or week) to catapult the share price. Yet, in your opinion, why hasn't the share price reflected anticipation? Perhaps the fear of dilution?
The above is from a reader with whom I regularly and very enjoyably e-mail back-and-forth about all things Provectus.
There is market confusion regarding the PVCTP "IPO." The company is in control of the process by which terms are set; that is, management is negotiating with the prospective lead investor(s). Of three potential investing entities (two strategics, one financial), one or two of them would lead or co-lead the round and account for about of half of its proceeds.
Maxim, in order to gauge whether there are 300 or so fellow round lot holders to follow the lead investor(s), is circulating "not established" deal terms of a potential "IPO" that are (a) very attractive for prospective investors subscribing for it and (b) very unattractive for existing shareholders and prospective pre-"IPO" buyers of the common stock.
Specifically, the "at market" conversion ratio -- the purported $4 per share PVCTP offering price divided by the PVCT.OB share price when the "IPO" closes, which at today's closing price of $0.67 would yield a conversion ratio of 6 -- and warrant coverage -- at least 40-50% to perhaps as high as 100% -- indicate drastic dilution of about 25-30%. I do not think nor do I believe management would allow existing shareholders, particularly long-time and very long-time supporters, to incur such pain. Market uncertainty, however, is being created.
As a result, some existing shareholders may be selling some or all of their share ownership and/or refraining from buying more shares. This group believes it sees likely dilution ahead. There may be other contributors to selling in September, too. Prospective new investors may be refraining from buying more shares because of the dilution they too believe will result from the PVCT "IPO."
There also is, more broadly, a continued "show me" attitude with prospective investors who are not confused by nor care about the PVCTP "IPO" and a dilution bogeyman: Show me the SPA. Show me the final MM Phase 2 trial data. Show me more Moffitt data. Show me more about the Pfizer interest. Show me. Show me. Show me.
Yes, kalkoen-man, the SPA did not show up this week. I admit, pabo-tao, that Q3 effectively ended today. You may commence the grief giving indioilar-man.
In all seriousness, however, I am focused on the outcomes of next week following ESMO 2012. As arguably the biggest event in the company's history, I expect management to use the venue as a platform for Provectus and PV-10. What is more critical to the common stock is not the nervous nellies, nor is it sharp investors looking for a good deal. Rather, it is the Missourians in the crowd who, upon reading the SPA PR, the ESMO PR(s), the Moffitt PRs, etc., come off the sidelines and buy, buy, buy.
Let us circle up towards the end of next week and take stock.
Does the conversion rate equal $4 + the closing PVCT.OB share price at PVCTP deal closing or is it $4 / the closing PVCT.OB share price at PVCTP deal closing. It is not clear one blog entry looks like a addition symbol the other looks like a division symbol.
The conversion ratio = $4 / the closing PVCT.OB share price at PVCTP deal closing.
NOTE: It appears the "target" deal closing date of next Wednesday or Thursday (October 3rd or 4th) has been pushed into the week of October 8th. Is the SPA PR, then, out next week?
The current Maxim presentation of some of the deal terms:
There appear to be 2 lead investors who would subscribe for one-half of the deal.
A closing next Wednesday or Thursday,
A $4 offering price,
An "at market" conversion ratio, where the ratio is based on the common share price at closing/final pricing of the PVCTP "IPO," and
i.e., conversion ratio = $4 ÷ closing PVCT.OB share price at PVCTP deal closing
The conversion ratio may be lower. That is, a higher-than-actual common share price could be used.
At least 40% warrant coverage at an exercise price of a 10% premium to the offering price
i.e., $4.40
The coverage percent may increase.
Management needs to know if it can secure a sufficient number of round lot shareholders to meet the minimum NASDAQ listing requirement. Maxim investment bankers and stock brokers are not directly privy to the company's discussions with prospective PVCTP lead investors, but the underwriter is a management tool for this piece of information discovery. The process to determine if there are 300 round lot shareholders to participate in the PVCTP "IPO," should management ultimately decide to utilize it is what it is. The uncertainty it may cause to the common stock share price in the process is an irritant.
On the topic of the SPA PR, I continue to hold to management's Q3 guidance as my baseline expectation (until I am required my expectation). I am certain to get grief from Hr. Tyrkiet, a chief Investor Village poster, reader of this blog and periodic e-mailer (bring it on Señor Pavo!), about this should no SPA is announced in Q3. Today (last evening to this evening) is Yom Kippur, and I would imagine not an appropriate day on which to issue an important PR.
Regarding the new preferred stock issue on the NASDAQ, if and when it starts trading, which would have a price of 4.00, how does that affect the common stock?
[The source for this answer comes directly or paraphrased from material and text found here. There are other places on the Web to learn about convertible preferred shares. Look here.]
The market price and behavior of convertible preferred shares (the "convertible") is determined by the conversion premium, the difference between the parity value (or parity price) and the value of the preferred shares if the shares were converted.
Let's say Provectus issues 4MM convertible preferred shares priced at $4 a share (X), raising "net" proceeds of $16MM. Why $16MM? That's the likely cost of the pivotal metastatic melanoma Phase 3 trial. Management may elect to raise a lower or higher amount for certain reasons. My analysis ignores underwriter fees, the 8% dividend, and the preferred share's warrant coverage (which is not as yet known).
The conversion ratio (Y) is the number of Provectus common shares (PVCT.OB) investors in the preferred stock offering would receive for each convertible preferred share (PVCTP) they own. The conversion ratio is set by management prior to issue with guidance from Maxim (for now, the lead and only underwriter), although the demand or lack thereof from prospective investors in the offering strongly influences the conversion ratio. The greater the demand for the offering, the stronger management's negotiating position is in lowering the ratio (i.e., less common shares per [one] preferred share). Alternatively, if the demand is weak, management may induce investors to purchase preferred shares by raising the ratio (i.e., more common shares per [one] preferred share).
In addition, the warrant coverage, which typically is a sweetener in most any equity deals, is a positive influence on the conversion ratio, since management wave the warrant in front of a prospective investor as an inducement, rather than simply solely focusing on adjusting the conversion ratio to make them happy.
Since the conversion ratio is to be set, and no fund raising has yet occurred, we do not know the ratio (for now). At Friday's closing price of $0.693, the "gross pre-deal break-even" conversion ratio -- the point or ratio where raising money by selling common stock is equivalent to raising money by selling preferred shares (again, ignoring certain items) -- is $4 ÷ $0.693, or 5.77.
If management can strike a deal whereby the conversion ratio is lower (less dilutive) than 5.77, like 3 or 4 or less, great. If not, one would question why they would raise money via the preferred stock offering, unless there are qualitative or tangibly intangible reasons to do so.
The conversion ratio shows what price Provectus common stock needs to be trading at in order for the preferred stock shareholder to want to convert his, her or its shares into common stock, which they will do if they the conversion is profitable. This price, known as the conversion price (Z), is equal to the purchase price of the preferred share divided by the conversion ratio. Thus, Z = X ÷ Y. For this analysis, let's assume the conversion ratio is 4. For Provectus, the market conversion price is $4 ÷ 4, or $1.
PVCT.OB, at the time, then needs to trade higher than $1, or Z, for investors in the preferred stock offering to gain from conversion. If preferred shares convert, and PVCT.OB drops below $1, investors suffer a capital loss. If PVCT.OB rises above $1, investors enjoy a gain.
$4, or X, also represents the parity value of the preferred shares.
The value of the converted preferred share is equal to the market price of common shares multiplied by the conversion ratio. At a closing price of $0.693, the value of the preferred shares is $0.693 × 4, or $2.77. This is well below the parity value of $4. At $0.693, the conversion premium is 31% [($4 − $2.77) ÷ $4].
The lower the premium, the more likely the convertible's market price will follow the common stock value up and down. Higher-premium convertibles act more like bonds since it's less likely that there will be a chance for a profitable conversion. Convertibles trade like stocks when the price of common shares moves above the conversion price. If the stock price slips below the conversion price, the convertible trades just like a bond, effectively putting a price floor under the investment.
