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Advanced Oncotherapy - saved by oriental white knight, but for how long?

By Nigel Somerville, the Deputy Sheriff of AIM | Thursday 7 December 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.

With a litany of Red Flags behind it, you might wonder that AIM-listed Advanced Oncotherapy (AVO) has managed to raise any money at all, but this morning’s news is – it seems – good news. Cash coming in (and large quantities of it) should pay down the payables nicely and give the company some breathing space – although we are told that the cash is still in China awaiting approval to be shipped out by the authorities. Followers of the ShareProphets AIM-China Filthy Forty might consider that as an indication that the completion of the deal is rather open to question.

As for the cash, we are told that (assuming the pen-pushers in China let it through) new equity investments totalling £37 million are on the way. It certainly is a big number, but is it all it is cracked up to be?

The Chinese deal, with Yantai CIPU Medical Technology Co Ltd, brings in £16.5 million in return for a distribution agreement covering China, Macau, Taiwan, Hong Kong and South Korea. Yantai is also to subscribe for £13.5 million worth of Advanced Onco shares at 30p. So that is £30 million coming in.

A further £7.4 million is coming from other investors, but this includes £4.1 million of loans and interest already handed over by the AB Segulah consortium and is therefore not fresh capital. That leaves £3.3 million of new cash, of which £1.28 million is coming from Advanced’s board. My maths says that comes to £33.3 million of new cash.

But Advanced has historical cashburn of almost £2 million a month, according to its last interims (to June), and had just £0.2 million of cash. Since the end of June it has borrowed the Segulah loan (£3.9 million) but mystery surrounds what happened to the outstanding death spiral loans from Bracknor, where I can’t help a suspicion that just £1 million of the Segulah loan was left after Bracknor had been settled. In cash terms, that would mean that Advanced will have burned through about £12 million in the second half and brought in a net £1 million from a near-enough empty bank balance. So cash of, say, minus £11 million?

Now add on the loans from Blackfinch, which are due for repayment in March – of which £5.55 million is payable against the main loan and a further £1.5 million secured against receivables (we assume a tax rebate). Assuming the £1.5 million has been repaid, that still leaves £5.55 million to find by the end of March.

All of that suggests that of the £33.3 million coming in, perhaps £16.5 million is already accounted for, leaving the same again to fund the company through next year. Except that historical cashburn is £2 million a month (so around £24 million for the coming year). Whilst Advanced is certainly in a much better place than it was a few days ago, it still looks to need to find another £7 million or so to get through the next twelve months.

The company tells us cheerfully that the Metric Capital loan announced way back in May 2016, but which hasn’t happened yet, may still be on – the parties have confirmed their intention to continue to work towards the provision of a £24 million loan facility. Dallas Cowboy cheerleaders?

And all of that is conditional on shareholder approval for the investment by Yantai (a given) and the approval of the Chinese authorities for the shifting of all that cash out of China to the UK (not a given). Then there is the somewhat chequered history of the last China distribution deal the company did – and could not deliver the product because it didn’t (yet) have one. It still doesn’t.

There are warrants going to Yantai if deals are signed and sealed which should bring in further cash, but the exercise period is to five years from the date of issue, so I doubt that will bring in any cash in for some years. Advanced is certainly not out of the woods yet, and accordingly – especially bearing in mind its previous form with regard to placings, director dealings and tardy ‘fessing up over Sinophi - whilst not necessarily a stand-out sell, remains very firmly on the bargepole list.

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