By Tom Winnifrith | Wednesday 11 January 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.
Cynical Bear has twice reported back on the great Jim Mellon Diabetic Boot spoof. This is a private company originally backed by Mellon with his own cash but then backed at ever higher valuations by PLCs controlled by Mellon, i.e with other folk's cash. But something happened before Christmas - surely the listed vehicles need to fess up? The spoof is not funny anymore, it is seriously related party unfunny;.
Let's start with a recap of how this company was funded courtesy of Mr Bear.
DBC is a biotech company with one product focussed on the treatment of foot ulcers that has promised lots but failed to deliver to-date. Jim Mellon put his own money in back in November 2013, giving him 32% of the business. It needed further funds in mid-2015, so Jim utilised a connected vehicle, the Hong Kong–listed Regent Pacific, to lead the funding at that stage, putting in £1.2 million.
At a similar time, Jim also encouraged FastForward Innovations (FFWD), another investment company that he was involved with to make an investment.
On 22 April, earlier this year, DBC announced that it was raising £3.5 million and that £3 million of that was going to come from Regent Pacific. Funnily enough, now that Lorne Abony was in control of FastForward, he declined to make any further investment in Mellon’s pet project. On 11 May, it was announced that the first £1 million investment had been made. The further tranches would be based on certain milestones being hit.
Wind forward to 10 October 2016 and we get another announcement, this time from Life Science Development (LIFE). Back to Mr Bear.
Just as a reminder, Life Science is a reincarnation of Copper Development Corporation and came to life in October 2015, when it officially became an investment company focussed on biotech and Jim Mellon came on board as a non-executive to lead the search for the right opportunity.
As you know, on AIM, investment companies have a year to find a suitable acquisition before becoming suspended. Today was the day that the year was up for Life Science, so what did it do? Hilariously, after a year of searching, it announced that it was going to acquire a business of Jim Mellon’s doorstep the whole time, namely DBC. Existing shareholders of Life Science will end up with 7% of the enlarged business apparently.
What a crap deal!
The company has also agreed to provide a loan of £200,000 to DBC so one assumes that the £1 million from May has been used up already. One also assumes that either Regent Pacific reneged on the deal to put in further funds or DBC failed to hit the milestones set, so it appears that Jim has just foisted the business on to another of his connected companies.
Well that does not read too well either. Wind forward to 22 December when Port Erin Biopharma (PEBI) - another Mellon vehicle announced God-Awful results which included an admission about Diabetic Boot. Back to Mr Bear:
Port Erin stated that:
“Port Erin announces that on 13 October 2016, the Company entered into a loan agreement with the Diabetic Boot Company Limited ("DBC") to provide it with a short-term loan ("Loan") of £200,000 less expenses, for working capital purposes. The Loan pays a coupon of 7 per cent., is unsecured and is fully repayable on the earlier of 31 March 2017 or the date on which DBC secures additional equity funding of £1,000,000.”
Hold on a moment!
The loan was made on 13 October and was only announced on 22 December. What’s that all about? This is a material investment for a business with only about £2 million of assets and a market capitalisation well under £2 million. Secondly, this is a massive related party transaction as Jim Mellon, the Chairman and 29% shareholder of Port Erin is the 44% shareholder of DBC. Shouldn’t that be disclosed?? I presume that Northland Capital, its Nomad, is already on its festive break.
Thirdly, this was about the same time as the Life Science loan to DBC mentioned above and is on exactly the same terms. Was this additional funding on top of that or was it just that DBC actually needed £400,000 desperately? So many unanswered questions and such poor disclosure. Care to provide the full story, Jim?
The interesting part of this tale is that if one does want slightly fuller disclosure about DBC, rather than just the normal spin, then one can turn to the results of FastForward Innovations (FFWD), which invested in DBC when Jim Mellon was in control but, now with Lorne Abony as CEO, it has refused to make any follow-on investment in DBC and is a bit more honest in its review of the investment.
FastForward’s interims, also released this week on 20 December, included the following paragraph:
“In April 2016 DBC raised additional capital from, among others Regent Pacific Group Limited. This additional capital was dependent on DBC achieving certain milestones which it has not. On 6 October 2016, Life Science Development Limited ("Life"), a company listed on the AIM market and in which Jim Mellon is a director and has a 44% shareholding, announced that it had entered into a non-binding term sheet to acquire 100% of DBC for new shares in Life. DBC has successfully obtained short term debt finance and a convertible security in which Fast Forward did not participate”
Now ignoring the fact that it got the name of Life Science wrong and it’s also got the wrong end of the stick about which company Jim Mellon has a 44% shareholding in, it does say that DBC has missed milestones and had to turn to other related entities to obtain “keep the light on” funding, but still DBC has failed to raise the significant funds it needs to give it a chance of success.
So where does Mr Mellon turn next?
Well in fact it appears that by 22 December Mr Mellon had already turned elsewhere, according to documents filed at companies house on 21 December relating to a deal finalised on 20 December. These documents show that the company has secured a two year £2 million loan which is convertible into shares and which offers the lender (who appears to be Jim Mellon) a fixed and floating charge over all of Diabetic's assets. In other words if Diabetic can't repay in two years, Mellon can tale the whole company.
So where does that leave the investments & loans of FastForward, Port Erin and Life? Can the ever greater book value ascribed to DBC by these vehicles which came only as a result of fundings driven by Mellon companies now be justified? Where does this news leave Life's RTO? Why is Mellon getting better terms on his loan that Port Erin secured in October? Why if this deal was finalised on 20 December was it not revealed in the Port Erin results statement? Why, indeed, have none of the companies commented? How screwed is the Diabetic Boot Company's balance sheet? What have been the delays that have seen it miss development milestones?
Questions aplenty for my friend Mr Mellon. The time for answers and explanations is now. Meanwhile Nomad to Port Erin (Northland) might want to consider its position very carefully in light of the material non disclosures in the results statement, a statement to which it put its name.
Never miss a story.
This area of the ShareProphets.com site is for independent financial commentary. These blogs are provided by independent authors via a common carrier platform and do not represent the opinions of ShareProphets.com. ShareProphets.com does not monitor, approve, endorse or exert editorial control over these articles and does not therefore accept responsibility for or make any warranties in connection with or recommend that you or any third party rely on such information. The information available at ShareProphets.com is for your general information and use and is not intended to address your particular requirements. In particular, the information does not constitute any form of advice or recommendation by ShareProphets.com and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.
Comments are turned off for this article.
Search ShareProphets |
Stock market news |
Recent Comments |