By Nigel Somerville, the Deputy Sheriff of AIM | Wednesday 17 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.
Well this is most bizarre! Lobster-potted Bracknor has converted another lump of its death-spiral loan notes. That, of course, is not a great surprise until you study the detail of yesterday morning’s announcement from AIM-listed Advanced Oncotherapy (AVO), where we discover that the conversion shares have been issued not at the lowest daily volume-weighted average price of the past 15 days (21.35p) as per previously announced conversion terms, but at 25p (par price of the shares). Why has Bracknor elected to pay a 17% premium?
Firstly, the par, or nominal, price of Advanced shares is currently set at 25p. The rules of the game are that companies are not allowed to issue shares at below par so Bracknor had to take the 25p conversion price or be left hanging around with unconvertible loan notes until such time as 15 days had passed with the share price above that mark.
You would have thought that Bracknor would simply have waited for that, or for the 10-day trigger of consecutive closes below 110% of par (ie 27.5p) to force an EGM to drop nominal. But, as indicated on Monday, I sensed that heavy director buying in the market might just lift the shares enough to avoid that ignominy on deadline day. NED Prof. Steve Myers duly obliged with a thumping 400,000 shares taken out of the market as announced on Monday lunchtime and, as if by magic, the shares closed that day bang on the threshold. EGM averted, then? Sighs of relief all round.
Naturally, this was a straightforward investment decision completely uninfluenced by the impending calamity of a Bracknor-forced EGM.
There are some really bizarre things about all this. Firstly, until yesterday morning’s RNS, the board had, in market purchases and direct subscriptions into the company, nigh-on matched the number of conversion shares Bracknor can have offloaded since this funding package was announced.
Indeed, with Monday’s 400,000 shares at 26p (so a total of £104,000), 202,500 at 25p by Prof Chris Nutting last week (so £50,625 worth) and a £250,000 subscription at 30p from another NED also last week that comes to a very impressive £404,625 put up by the boardroom in just eight days.
Before that we had boardroom purchases of 200,000 shares at 30.44p (£60,880) as announced on 26 April, 100,000 @ 26.96p (£26,960) on 25 April, 100,000 shares @ 27.5p (£27,500) on 13 April as well as 25,000 @ 29.25p, 75,000 @ 28.67p and 100,000 @ 28.35p (totalling £57,165) on 4 April.
By my maths the boardroom has collected 2,035,833 shares, spending £577,130 since the Bracknor deal was announced, during which time (ahead of the latest Bracknor conversion announcement) Bracknor had only been able to convert £700,000 of loans into 2.4 million shares to sell. You would almost think that the boardroom is simply buying up the Bracknor stock – in which case, why do the Bracknor deal in the first place? Why not just have the board pile in for newly minted stock as/when the meter needs feeding?
Of course, the answer to that is pretty simple: the Bracknor package is due to deliver up to £26 million (less 5% in fees/discounts) to the company and one would rather doubt that the board could provide the whole of that. In which case, if Bracknor keeps on selling conversion shares (which is, after all, its business model) then surely the 25p mark will eventually crack irredeemably.
In the meantime, one almost feels like cheering the board of Advanced on as it is hard to imagine that Bracknor had envisaged converting at 25p as announced yesterday morning when the contracted conversion price (notwithstanding legal matters like not issuing shares at below par) would otherwise have been 21.35p. Is it a sign that Bracknor is getting concerned about the amount of cash it has ponied up and not been able to recoup in share sales? Has Bracknor been out-manoeuvred (pro tem) by the board of Advanced?
And with all that director buying in the market soaking up most of Bracknor’s sales of conversion shares, why has the share price declined so dramatically whilst the funding package has been running. It’s weird: the shares have more than halved.
Also in the bizarre category is the conversion fee announced yesterday morning. Bracknor gets a 3% fee when it converts (every little helps, as they say) and yesterday morning’s RNS-announced 3% fee was paid in shares issued also at 25p (par). Except that the difference between that and the lowest daily VWAP over the last 15 days (21.35p) was paid in cash. So effectively the 3% fee was settled at 21.35p per share.
Why not the main loan conversion too? Was this the subject of some negotiation between Advanced and Bracknor?
I can only imagine that Bracknor settled for a 25p conversion price because (in order to get the conversion done) it had to. And that suggests that Bracknor was more than a little keen to get its hands on conversion shares pronto – even if it couldn’t cash in on the 21.35p price. Perhaps that particular pill was sweetened by Monday’s rise to 27.5p (which avoided the EGM trigger right on the wire).
None of this makes a great deal of sense to this simple soul – perhaps it is time to get hold of some of Tom Winnifrith’s mushrooms which haven’t been seen for some while at ShareProphets Towers.
Why has Bracknor taken such a haircut on converting loans? OK, the par price explains the pricing, but why not just sit it out and wait either for the price to rise or for an EGM to be triggered to drop par? Why is Bracknor apparently so keen to convert now rather than simply wait? As for the board of Advanced, their largesse is mightily impressive but leaves the whole thing making little sense.
However, it seems to me a slam-dunk certainty that the wheels will come off eventually. Whether that will be Advanced running out of cash when it has to repay the Blackfinch loan next year (in less than 12 months, so a c. £5.55 million current liability when it comes to discussions with the auditor over the Going Concern statement in Advanced’s forthcoming FY16 results, unless the auditor accepts an inevitability that Blackfinch will convert at £1 a share) or funding its part of the Harley Street works and product development as well as plc costs such as boardroom salaries and gym membership, I know not. Maybe some part of the Bracknor funding deal could go wrong – such as just running out of shareholder authorities to issue shares to Bracknor some time down the line. I don’t know which it might be, or whether some other nasty might emerge.
With still boat-loads of conversion confetti to come, another attack on the par price of the shares seems inevitable. Eventually, unless the board is prepared to carry on piling in for shares at the rate it has been since the Bracknor deal was announced (in which case why not just pony up themselves, up front and directly into the company rather than deal with Bracknor at all), we will see that par-busting EGM and an acceleration of Bracknor’s loan conversion/share selling and thus a further declining share price. It just looks inevitable.
And, of course, there is that sword of Damocles in the form of the security held by Blackfinch over the Harley Street site and all the kit heading there which could simply see the whole lot sold if Advanced can’t repay its loan. The Chairman has promised that if the site can’t be sold within four months of Blackfinch enforcing security (oh, so if it can then Advanced loses the lot?) then he can buy out Blackfinch for the value of the outstanding loan and has promised to let other Advanced shareholders in on the deal? Well great, but if I were a contractor on the Harley Street site or on the development and building of the kit, I’d be a bit concerned about getting paid!
As such, the shares remain a stand-out sell.
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