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Advanced Oncotherapy - Report back from Proactive ramp session: the Maths of Doom

By Tom Winnifrith, The Sheriff of AIM | Saturday 28 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.

I had a couple of contacts attending Thursday's attempted rampfest by floundering Advanced Oncotherapy (AVO) hosted (for a fee) by the sleazy IR promoters at Proactive Investors. I am grateful to one financial analyst - who is short of the stock - for his notes.

I went to the Proactive event on Thursday evening where AVO were presenting. Not that I’m interested in investing in ANYTHING that gets presented at a Proactive evening because my theory is that everything that’s presented at Proactive is a promote and probably overpriced.

Anyway, I hear that you’re going to write something this weekend and was just going to note that I asked various question to the IR guy (David Navas - very white teeth). Some quick points:

1. The milestone payment is recorded in note 21 to the 31 Dec 2015 accounts, it’s shown as =£161,033 “Customer order deposits received”.

2. He refused to be drawn on whether the milestone payment was refundable or not, now that they appear to be suing Sinophi. But the contract is with the UK entity and there are no guarantees from the Chinese parent, thus I asserted that suing them is pointless and he didn’t deny that.

3. Supposedly the big benefit according to him is that they are now talking directly to the Chinese hospitals.

4. I was quite shocked to hear that their funding from Metric Capital is LIBOR + 150bps + 850bps PIK but then I found that those details are disclosed in the original announcement and that on top of that pricing the whole thing is convertible. 

This pricing is incredibly generous, but I guess that you know that already. 

5. The supposed non-dilutive funding is going to be a subordinated loan, no terms revealed but to be honest if they’re prepared to pay LIBOR + 10% for a convertible that’s obviously going to convert then I suspect that they’ll be able to get sub-debt away. Happy to be told otherwise if you’re in the know.

I picked up our correspondent on point 5. Advanced has assured us that the new funding will be non dilutive so it cannot be convertible and I put it to him that with an order book reduced from $150 million to NIL the banks (for it is the banks) will not pony up the cash which means the Metric debt cant be drawn down.

On point 4 I note that post that announcement there has been a 25-1 share consolidation.

He, and as it happens he is a banker, replied:

No chance of getting that from a bank at all, the UK banks shy clear entirely of junior capital.

It would have to be convertible because there’s a possibility that equity will be the only way out. But what if you limit the convertibility options such that the investor can only convert in limited circumstances, then you might be able to at least present it as “non dilutive”. And it looks like it could be senior to the Metric capital convertible, which gives it an equity cushion.

But don’t get me wrong, I’m short of this, the equity is vastly overpriced, they’re not going to have any revenues until April next year at the earliest and in the meantime they have the most bloated board/leadership team that I’ve ever seen in my life!

Back to me - what is my take on this? We will come to the issue of Advanced's overhead and where the cash goes later in the weekend. One point is clear, there is no way that Advanced can get cash out of Sinophi so its order book is nil. The idea that it can now talk direct to hospitals in China and this is a good thing is bonkers. It had to get in Sinophi as it had no Chinese presence. Now it a) has no Chinese presence and b) its name is mud in the PRC. Its chances of securing any sales out east are somewhere between Bob and No.

More important is the issue of the financing. A critical point is that when Metric agreed its facility with Advanced the shares were c200p and had within the prior year and a bit been at 350p+. All appeared to be going swimmingly and thus part of the deal was that Metric could convert its debt at 250p per share (1-p as was pre consolidation). So it earned bumper interest, got a stack of warrants and assuming that things all carried on going well ( more contract wins in China etc etc) it could forward sell and get its debt back via pre-dumped equity. It was a nil brainer.

But things have changed. With an order book of nil, real questions about non disclosure to investors and about RNS statements that stink to high heaven (the idea that Sinophi may still be on the hook for $150 million being last week's laughable RNS untruth) there is no chance whatsoever of the shares hitting 250p. There is more chance of West Ham winning the Premiership this year. It is just not going to happen.

Thus Metric now knows that if its loan is drawn down this is a straight loan with out of the money warrants and that there is a very good chance that - with a zero order book - Advanced just cannot repay and will, in time, default. I put it to you that, given those very changed circumstances, Metric would rather that its loan was not drawn down at all.

One easy way out is for it to insist that the new £15 million loan that Advanced said it would complete by December 31 2016 but which it has not and which it said would be non-convertible is indeed non convertible. Of course those who took part in the placing on September 30 2016 on the basis that the loan be non convertible will also want to insiat that this clause stays in place.

Here is the RNS of September 30:

As announced earlier this morning, the Company has agreed with Metric to waive this condition and to make the full £24 million financing facility available for drawdown, subject to completion of the Subscription and the implementation of an additional financing plan supported by banks and strategic partners which will not be dilutive to equity investors. Further details of this financing plan are expected to be announced by the end of the year.


This implies that Metric's waiver on amending the draw down terms is reliant on the new financing beening non convertible. 

And that brings me back to what my bankster friend says about the new debt. He insists the only debt Advanced could get would be convertible. But now we have two key stakeholders who will want to stop this, the shareholders might be persuaded that they have to agree to whatever is on offer since the alternative is "tits up time" in a few weeks but why on earth should Metric agree to a waiver when not doing so is its "get out of jail card?"

The risk of insolvency is now very high indeed and that makes the shares a slam dunk sell.

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