By Nigel Somerville, the Deputy Sheriff of AIM | Thursday 18 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, well. How do you issue shares at a discount to par? Simple: pay a whopping fee to the subscriber. AIM-listed Advanced Oncotherapy (AVO) has announced another loan note conversion under its death-spiral funding package with Bracknor and a new fee seems to have appeared which might just derail discussions between the company and its auditor as they work on the going concern statement for the forthcoming FY16 results due out by the end of next month. Oh dear, oh dear.
The Bracknor package, which was supposed to deliver £13 million - and up to £26 million - into the company (less 5% discount, so actually £12.35 million up to £24.7 million) over a two-year period might have seen the company get a clean going concern sign-off from its auditor. But this morning it seems that the remaining £9.88 up to £22.23 million after the 5% discount) is set to be reduced.
Monday saw the company seemingly avoid (only by the narrowest of margins) being forced into calling an EGM to drop the par, or nominal, price of its shares by at least half. This was under a clause in its deal with Bracknor which, as per the last EGM Circular, which meant that ten consecutive closes below 110% of nominal (so 27.5p) would trigger the calling of a new EGM.
That looks to have been avoided (for now, although the clock is already running again) but Bracknor’s conversion terms are that loans are swapped into shares at the lowest daily VWAP (volume-weighted average price) of the 15 days ahead of conversion notice. Companies aren’t allowed to issue shares at below par so Bracknor looked lobster-potted.
On Tuesday it was announced that Bracknor was converting £200,000 (nominal) of loan notes. The applicable VWAP was 21.35p but the conversion shares were issued at 25p. Conversion fee shares (3%) were also issued at 25p but the company added that a cash payment to make up the difference between the 21.35p figure and the issue price was being made. The obvious question was why this was not also being applied to the conversion shares as well.
This morning, Bracknor has been announced to have converted another £200,000 lump of notes. Again the issue price is 25p (so 800,000 conversion shares issued), and again the relevant VWAP is 21.35p. But this time there is no cash payment announced to make up the difference with regard to the 3% fee shares.
This time, instead, we are told:
Additional fees of c.£37,000 are to be paid to reflect the conversion price being below nominal value of the Ordinary Shares. These fees may be paid in cash or deducted from the net funds owing to the Company in the draw down of the next tranche from Bracknor.
Now call me a pedant, but the difference between the relevant VWAP of 21.35p and the 25p nominal issue price is 3.65p. For 800,000 shares that comes in at £29,200. So why “c. £37,000”?
Having wondered whether Bracknor had been out-done by the board of Advanced, it rather looks as though Bracknor has come out very much with the upper hand. Great stuff: convert at (effectively) 20.375p and sell into the current 25.5p – 26p spread. Bingo: instant 25% profit (and those 3% fee shares on top).
But the big point here is that the fee is deductible from the next tranche of Bracknor funding. Carry on like this and Advanced could end up getting only £791,000 from its next drawdown via the issue of £1.3 million of loan notes!
The maths there is that still £200,000 of loan notes are outstanding from Tranche 1, the full £1.3 million is outstanding from Tranche 2 and then there are the fees of around £0.7 million – also payable via convertible loan notes. If Bracknor converts all of that on the same terms as this morning’s announcement that will rack up eleven more conversions of £200,000 lumps of loan notes and 11 times £37,000 is £407,000. Add on the £37,000 racked up this morning and subtract from 95% of £1.3 million.
Quite apart from the eye-watering magnitude of dilution this implies, there is the small matter of how reliable the cash in-flow of the package can be. A minimum of £13 million – less 5% so cash coming in of £12.35 million, all of which can be doubled under certain conditions now looks to be subject to a hefty haircut.
This morning’s conversion of £200,000 of loan notes (already issued at a 5% discount, so only a net £190,000 brought in) now sees £37,000 of fees racked up which look set to be knocked off the next tranche of Bracknor funding. Effectively, the headline £200,000 figure has been reduced in value to Advanced by a whopping £47,000 in cash terms – some 23.5%. Apply that to £13 million and you are down to just £9.945 million over up to two years. Under certain conditions the loan funding can be doubled up, but the message from this morning’s RNS is clear: the actual cash funding the company is certain to get from Bracknor is not so certain, is it?
Bearing in mind historical cash-burn of c. £1 million a month – and £5.55 million of Blackfinch loans to be repaid in less than 12 months and it rather looks to me that Advanced might have a going concern issue.
Meanwhile, perhaps the company would care to clarify a few points:
1) Does Advanced have to make a cash payment of £876 in relation to the issued 24,000 fee shares announced this morning?
2) Is there a fee in relation to the conversion shares issued as announced on Tuesday which was missed off the RNS? If so, how much is the fee?
3) Has there been a change in the terms of the Bracknor package? If so, what has changed, and when?
No doubt Bracknor will be delighted with itself – especially as long as it can continue with, in effect, converting at 20.375p and selling at 25.5p or above.
As for shareholders in Advanced Oncotherapy, the question which they might want to address is how much of the company they think they will still own if and when it ever generates any cash.
Oh to be a fly on the wall when the auditors discuss the Going Concern statement……
Never miss a story.
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