By Nigel Somerville, the Deputy Sheriff of AIM | Thursday 20 April 2017
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
As shares in AIM-listed Advanced Oncotherapy (AVO) again sit below that all-important 27.5p mark which, if continued for 10 trading days, will trigger a EGM to reduce the nominal value of the company’s shares, a quick trip to the Companies House website reveals the debenture paperwork (HERE) related to the company’s recently announced loan deal (with spoof 100p conversion terms) with Blackfinch as announced on 27 March (HERE). Most of it is legalese, but on page 36 we get some cracking tit-bits. Such as the planned expenditure on the Harley Street premises (some £19.14 million) as against potential resale values of between £9.44 million and £10.71 million – and that is just for the kit and fitting, not for the value of the property itself. As security (including the property) for a £3 million loan (with an option for a further £2 million) it is quite something!
We also learn that as at December 16 (one would presume this means as at the end of December 2016) a total of £8.73 million had already been spent on Harley Street. With the works less than half way through there are a few minor cost over-runs already clocked up, although perhaps on a £19.14 million project we should not be too surprised.
A look at the third line item from the bottom tells us with reference to the “Beam Transfer Line” that it is still in design. Hmmm.
With Advanced Onco planning to spend £19.14 million to get its Harley Street operation assembled (even though it appears that part of the kit is still in design), the RNS of 17 March told us that:
The loan is secured on the Company's lease for 141-143, Harley Street and on certain other equipment of the Company.
Meanwhile the debenture document – which seems to have been put together by Tom Winnifrith’s very good friends at Memery Crystal LLP – tells us that the “Security Assets”:
means the assets of the Chargor charged to the Lender under the terms of this Deed comprising the Agreement for Lease and the Equipment
…the “Agreement for Lease” being detailed as number 141 and parts of 143 Harley Street and 28/29 Devonshire Mews, and the “Equipment” being as listed in “Schedule 1” – that being the kit which is the subject of the schedule of planned works costing £19.14 million (see below).
I wonder what the value of the Harley Street and Devonshire Mews lease is?!
What we do know is this: the Blackfinch loan – at an interest rate of 11% pa – is repayable after 12 months. In theory the company has plenty of cash available to it in the form of the Bracknor death spiral package, so one might guess that the hope is to pay back an expensive loan with death spiral financing!
But seemingly as at December last year, Advanced still had the best part of £10.5 million of spending on its Harley Street pad to go, on top of whatever development costs remain to be funded in order to get from being “in design” to being “in use”, as well as all the usual plc costs, boardroom costs – and not forgetting the odd boardroom gym membership.
That adds up to a rather more than £5 million. The (approx.) £1.2 million drawn so far from Bracknor hardly looks set to scratch the surface, and with liquidity pretty thin right now it is hard to see Bracknor being in any rush to hand over more convertible loans until it has got its cash from the first tranche safely banked.
Advanced last reported numbers to June of last year when it had cash of not very much in the context of having used up £6.5 million on operating activities, but had about £5 million of trade payables queuing up. Since then it has bagged the Bracknor cash (about a month’s worth of operating cashflow) and should have £5m coming in from this one-year loan deal. Oh, and let’s not forget the subscription and open offer which should have landed about another £13 million after costs.
So let’s see: June to, say, end of April at a spend rate of about £1m a month will have used up most of the fundraising last autumn – perhaps £4 million left over. But with £5 million of payables that will in all likelihood be gone too - as will the first tranche of Bracknor funding The company may have a £5 million facility but it has to be paid back next year (plus interest).
By my maths, Advanced may already be running on fumes and has £10.5 million of bills from Harley Street to find. In another 12 months past cashburn suggests that a further £12 million will have been spent on top.
So how does Advanced expect to repay Blackfinch? With Bracknor financing, which seems to be taking forever for Bracknor to churn? That package has been up and running for two months and Bracknor hasn’t even got half way through converting the first tranche (netting Advanced about £1.2 million) yet.
So what happens when Blackfinch says it is time for Advanced to pay up?
Well, of course, that (up to) £5 million loan is secured on about £19.14 million of spending by Advanced on its Harley Street site – and the property lease. Blackfinch now knows that if it calls in security it has a decent chance of realising around £10 million from the sale of kit – and whatever the lease gets.
The bad news, for Blackfinch, would be if Advanced somehow managed to repay the loan – for then the gains would be limited to 11% interest. No, the big bonanza would be calling in the security.
And that is why the RNS announcing that loan told us:
Should the Company not meet its obligations under the Loan Agreement and after a four month period during which the lease is offered for sale, Michael Sinclair, Executive Chairman of the Company, has agreed with Blackfinch to buy back the lease at a value equivalent to the outstanding amount of the £3m loan plus accrued interest and expenses. Michael Sinclair has also undertaken to the Company that, should he be required to buy back the lease from Blackfinch he will offer to the then shareholders of the Company to participate in the buy back on the same terms as his participation pro rata for their shareholding in the Company.
Right, so for the sake of as little as £3 million, Advanced has risked its entire Harley Street project lock stock and barrel, and could lose the lease and all the equipment and development cost of an estimated £19.14 million.
Ah but there is the Bracknor cash I hear you cry. Well, yes there is. But Bracknor isn’t managing to offload the conversion shares very fast, is it? For that to happen the nominal price of the shares will have to be dropped and then Bracknor can sell the living daylights out of the shares to speed up the flow of cash.
And if it can’t – and Advanced can’t raise other funding which doesn’t obliterate existing shareholders….?
Rock: lose Harley Street and all that goes with it; share price collapse, insolvency
Hard Place: massive dilution, share price collapse.
Unless, of course, Blackfinch can’t sell the Harley Street site after four months. Then the good Dr Michael Sinclair can ride to the rescue by paying Blackfinch its £3m cash (plus interest and expenses) and take the whole Harley Street site himself.
Very generously, we are told he will offer existing shareholders the chance to pony up alongside him on the same terms.
Can anyone see a pre-pack coming?
If I were a contractor, I'd be keen to see cash up front.
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