By Nigel Somerville, the Deputy Sheriff of AIM | Friday 5 May 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.
You can’t say you have not been warned. This morning shares in AIM-listed Advanced Oncotherapy (AVO) have fallen firmly below the nominal 25p price of the confetti. Companies are not allowed to issue shares below their nominal price and that, in turn, means that for the time being Bracknor is lobster-potted with something like £2.5 million of convertible (death-spiral) loans which it cannot convert. My heart bleeds….
In ball-park terms, Bracknor has now ponied up two tranches of £1.3 million (less 5%) of loans to Advanced and charged a further approx. £0.7 million in fees which have been settled in more loans. So it will have paid out just under £2.5 million of its cold, hard cash.
On the plus side, Bracknor has converted £0.7 million of loan notes into golden tickets. One would assume they have long since been dumped, and that Bracknor will have managed to make a few quid on the side by riding the ups as well as the more plentiful downs. Might one assume that, with the 3% loan conversion fees (paid in shares), Bracknor has come out with maybe £0.8 - £1 million of cash from selling conversion and fee shares?
On that basis Bracknor will still be sitting on a net cash outflow of around £1.5 - £1.8 million which, for the time being, it cannot convert. Putting my AIM market death spiral financier hat on for a moment, I’d be getting rather nervous. Of course, nothing can possibly go wrong on the world’s most successful growth market so those nerves are totally unjustified…..they are, aren’t they?
The conversion terms are that shares are issued by Advanced at the lowest daily volume-weighted average price of the 15 days leading up to conversion notice. So with the shares now firmly below (both the bid and the offer) the 25p nominal, Bracknor can’t cash in its loans and dump the shares.
The get-out for Bracknor is that ten consecutive closes below 27.5p will trigger an EGM to drop the nominal price by at least half, under the finance package terms. On ADVFN figures, today is heading for consecutive sub-27.5p close number 4. But we don’t know how the closing price is defined – if it is the bid price, for example, then we are on track for number five in a row.
With Advanced Oncotherapy shares trading on a spread of 22 – 24p last seen, ADVFN has the market capitalisation at £17 million. But the convertible loan package with Bracknor is for up to £26 million, of which only 10% has been drawn so far. Bracknor makes its money converting into equity and selling at a profit, so there will be a big seller around for a long time to come.
One might reasonably conclude that whatever new nominal price might be proposed to an EGM will simply offer Bracknor a new target. Bracknor is not a charity: it will want its cash – and all the more so right now whilst it is lobster-potted.
An EGM to drop the nominal price would be a huge admission of defeat by Advanced’s directors, who only sought permission from shareholders to issue enough shares to Bracknor from loan conversions (and associated warrants) based on an average 44p conversion price and 57p warrant exercise price - the implication being confidence that this huge death-spiral package would not hurt the share price. Add in all the recent director share purchases, suggestions that Bracknor was a buyer (when it was selling) on the company's AIM Rule 26 website, the lead balloon shareholder briefings....it just looks like another in of a long list of spoofs.
The average loan conversion price is currently sitting at just under 29p. A drop in nominal to allow Bracknor access to the fire exit will only see that fall further. Will that force another EGM to increase permissions, or might Bracknor try to find an excuse to stop funding the company?
All in all, then, this is only heading one way. Tom Winnifrith has a target price of 0p. With hefty spending plans ahead as well as a large historical cash-burn and £5 million of Blackfinch loans to repay next year (if we dismiss the 100p conversion terms available), Advanced certainly looks to need the Bracknor music to keep playing. Bracknor, on the other hand, may have a few qualms about handing over any more cash. Certainly, I would imagine that it is checking the get-out clauses very carefully whilst it can’t even convert the debt it is still holding, let alone rack up some more.
Advanced has a lot further to fall - the phrase accident waiting to happen springs to mind. SELL.
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