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RedX – Administration proposals raise awkward going concern questions

By Nigel Somerville, the Deputy Sheriff of AIM | Thursday 10 August 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.

The administrators to (suspended) AIM-listed RedX Pharma (RED) have published their proposals for the rescue of the group. The good news is that something will indeed be salvaged, but details of what went wrong look to raise serious questions of the company and its Nomad – none other than Cantor Fitzgerald. You might remember that name with reference to the African Potash (AFPO) fraud where it is to be sued for its negligence.

As previously discussed HERE $40 million comes in from the sale of the BKT programme to Loxo Oncology and all creditors can now be paid off. That is good news, and I expect the company to resume trading on AIM in due course.

Given that the company had an asset which could be sold pretty quickly for that amount of money, you wonder how it got into the mess with Liverpool City Council over its approx. £3.5 million debt – especially as it happened within weeks of a £12 million fundraising.

What the joint administrators tell us sounds rather like they too are concerned. But then so too should Cantor Fitzgerald, the Nomad, be. What the shareholders make of this I dread to think.

We are told:

LCC loaned Oncology GBP2.0m in 2012, with the loan due for repayment in 2014. The term of the loan was initially extended for one year and again in 2015 for a further two years (to 31 March 2017). The Joint Administrators understand that at various times during the period of the extension, the Group had approached other financial institutions with a view to refinancing the LCC loan.

In February and March 2017, Pharma conditionally raised GBP12.3m on AIM via a placing of 32,779,957 ordinary shares at 37.5p each. Of these issued shares, Lanstead Capital ("Lanstead") subscribed to 11,500,000 subscription shares representing a gross value of GBP4.3m. GBP647k of this amount was allocated to Pharma and GBP3.7m was pledged to Lanstead under a sharing agreement pursuant to which Lanstead were to make monthly settlements to Pharma over an 18-month period.

This is summarised as follows:

  Conditional funding raised     12.3

----------------------------  ------

 Less: Funds pledged to

  Lanstead                     (3.7)

----------------------------  ------

 Funds received upfront          8.6

----------------------------  ------

 On 1 March 2017, LCC's lawyers wrote to the Group indicating that repayment of the LCC loan was due on 31 March 2017. A reminder of the repayment date was sent to the Group on 30 March 2017. Throughout April 2017, LCC informed the Group that it required the loan to be repaid, however, whilst reserving its position, LCC engaged (both directly and through solicitors) in discussions with the Group about settlement proposals. Throughout these discussions, the Group indicated that separate discussions were at an advanced stage with another financial institution regarding a possible refinancing.

On 17 May 2017, the Group published its interim results for the six months ended 31 March 2017, disclosing details of the fund raise in February 2017, and cash and cash equivalents of approximately GBP5.1m. In view of this financial information, LCC considered that the Group was in a position to repay the loan in full.

The Group continued to seek to agree terms to defer repayment of the loan, and informed LCC that agreement to refinance the loan was only subject to the lender's internal credit sanction and that an unconditional offer was expected to be issued imminently.

As part of the Group's negotiation with LCC, it offered a partial repayment of GBP0.5m to cover accrued interest while it completed a refinancing. This offer was declined by LCC, who, via its advisers, requested that the Group provide evidence of the stage of discussions with the alternative lender (for example, heads of terms and copies of relevant correspondence evidencing progress with the refinancing). The Group did not provide any such information and LCC made formal demand on Friday 19 May 2017 for full repayment of the loan.

An offer made by the Group, after the demand had been issued, to pay the sum of GBP1m by way of an immediate partial repayment of the loan, with the balance payable within 7 days, was declined by LCC.

On 24 May 2017, LCC appointed the Joint Administrators to the Companies under Paragraph 14 of Schedule B1 to the Insolvency Act 1986.

The Companies' books and records show that an indicative written proposal for a GBP1.7m loan facility had been made to the Group during the period that negotiations with LCC were ongoing.

The drawdown of the loan was conditional on an executed transaction for the licensing of one of the Group's intellectual property assets. At that stage, however, there was negligible prospect of any transaction being reached in respect of the licensing of any asset for several months, and even if this condition had been capable of being satisfied in a shorter time period and the new loan issued, the amount of the new loan would not have been sufficient to repay LCC's indebtedness in full.

Upon the appointment of the Joint Administrators in respect of Pharma, Pharma requested the suspension of the trading of its shares in accordance with the AIM rules.

The cash at bank at appointment of the Joint Administrators amounted to approximately GBP2.1m and GBP60k for Pharma and Oncology respectively.

The underline is mine.

So let’s get this right: the company raised £12.3 million in Feb/March, of which £8.6 million was cash on the nail, with the balance due over 18 months and at the end of March, the company faced an unpayable bill from LCC. Yet Cantor Fitzgerald was happy?

And the interim results to the end of March (and released 17 May) stated that:

The Group incurred a net loss of £10.7m during the period; however, the Directors are satisfied, based on detailed cash flow projections and after the consideration of reasonable sensitivities, that sufficient working capital is available to meet the Group's needs as they fall due for the foreseeable future and at  least 12 months from the date of signing the interim financial statements.

…and Nomad Cantor Fitzgerald was happy.

Sorry, but I’m not sure this all adds up, does it?

We now learn that the deferred part of the placing has been binned, with a bill of £610,938 turning up in its place from Lanstead LLP in relation to termination costs. Oops.

We also might note that of the £8.6 million raised, the company’s cash was only £5.1 million at the end of March, and slashed to £2.1 million when the administrators stepped in on 24 May 2017 – just 7 days after we were told that the company had sufficient working capital for the following 12 months!) Shall we call that 10 weeks, and £6.4 million had gone? Tom Winnifrith often mentions that plcs like to window dress their results….

And finally the statement of affairs: despite all the cash flowing out of the company we see that £1.3 million of unsecured non-preferential claims were stated. So that £2.2 million of cash was a bit illusory. Try £0.9 million – and all that is before Liverpool City Council’s c. £3.5 million debt.

Since the statement of affairs we are now told that a further £10.4 million of creditors have submitted claims, with the biggest of them being £9.7 million of grants from the Regional Growth Fund being reclaimed. But even without that, it means that the cash position (once bills had been paid) were essentially nil even before LCC came banging on the door.

Yet RedX Pharma was deemed a going concern on 17 May 2017, and Nomad Cantor Fitzgerald was happy.

As for discussioins with LCC, was this on the basis that loan discussions for a loan that did not materialse and which was too small to pay £3.5 million of debt? Why did RedX not furnish LCC with details of heads of terms of correspondence detailing progress, as requested? 

Assuming that RedX comes back to AIM, for me it is a firm member of the bargepole list and will stay that way. I like to believe what a company says when I am looking to buy a share, and I like to think that a Nomad will make sure that happens.

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