A Biotech company whose stock is soaring this year has caught the eye of short sellers after recent SEC filings showed possible self-dealings with company assets by its founders. I reported for Growth Capitalist last week, NanoViricides ($NNVC), was sued by a group of early angel investors in a shareholder derivative suit, filed in Colorado federal court, claiming company executives Anil Diwan and Eugene Seymour are abusing company assets and have breached their fiduciary duties. Yet last month the budding development company was still able to raise over $10 million through Midtown Partners with a private after market stock sale called a registered direct offering.
The RDO was offered to institutional investors at a discount of 26% percent. This means they can buy the stock after the close at the discounted price and then sell it into the market the next day at a profit. It creates trading volume in the stock but not necessarily long term value for main street investors because the hedge funds who buy the deal usually just dump the stock. Midtown Partners has done multiple RDO’s for NanoViricides raising over $30 million before fees in the last three years. But the recent offering apparently needed some help getting sold because Midtown, the placement agent, also had to offer 5 year stock warrants at $5.25.
When I asked Midtown Partners, Prakash Mandgi, about the pricing on the deal he tried to spin the terms explaining it was done at “a 20% discount to the 20 day volume weighted average price at closing and the warrants were issued at 120% of the 20 day vwap at closing”. Now here is why that is a suspect answer.
Instead of giving me the discount from the market price at the close of the day of the deal, he gave me the discount from the 20 day volume weighted average price. But, and this is important, traders do not compute NAV at 20 day VWAP prices, they mark to the closing market price. He was comparing apples to oranges.
So the units for $NNVC’s recent capital raise were priced at a deep discount (no matter how you spin it). The deep discount stock was not enough, however, and the deal also included warrants. The strike price of the warrants was at a premium to the “20 day VWAP”. Now, in the same way that the discount on the stock looks smaller if you use “20 day VWAP” instead of market price, the premium of the warrants looks greater when you use the “20 day VWAP”.
Here is an example of how this spin pricing works:
$NNVC Market price: 4.76
20 day VWAP price: 4.25
Deal/RDO Price: 3.50
So in this scenario the discount to the market price is 26.4% 1-(3.5/4.76)
The discount to the 20 Day VWAP price is 17.6% 1-(3.5/4.25)
To spin the deal as not being as bad, the bucketshop bankers like to talk about the discount from the VWAP price. Watch out if you hear your small cap stock broker or banker talk this way.
Now lets add the warrant pricing.
$NNVC Warrant Strike Price: $5.25
Market Price: 4.76
20 Day VWAP: 4.25
The strike price of the warrant computed using market price is 110% (5.25/4.76)
The strike price computed using VWAP price is 123% (5.25/4.25)
So using the VWAP price makes the warrants look less valuable. The lower the strike the more valuable the warrant. Bankers using VWAP pricing is a way to make the deal look less egregious than it really is.
Now NanoViricides CEO Eugene Seymour is fully aware of this magic math. Short sellers like Joe Spiegel of Dalek Capital Management, say they remember Seymour from a 90′s biotech stock that pumped up its share price but left long term investors in a dump. When Spiegel saw stock promoter, Patrick Cox, pumping the stock in 2010 he thought that signaled an opportunity to short it. One of the reasons listed in the investor lawsuit was that Cox had allegedly received inside information about a special biotech credit the company ‘might’ be able to get which would be worth millions of dollars. Cox allegedly published this info in his investor newsletter and the stock took a ride up. It also crashed latter when the info didn’t pan out. The suit also alleges there is a new stock promoter named ‘DrFeelGood’ who uses $NNVC stock message boards to rally interest in the stock with inside information. A look at the trading volume right before the biotech company files a press releases is something a regulator could be inspecting if they learn the stock promoters did not disclose they were getting paid to promote the stock or if they really did get inside info and traded against it.
NanoViricides hasn’t filed a response in Federal court yet to the investor claims and did not return a request for comment.
The medical technology they are working to build out, using plastic to attach to diseased cells and flush them through the blood stream, is possible but so far reads like a science project. Instead of news about the company completing medical trials investors keep hearing about their recent listing on the NYSE Mkt (the old AMEX or Scamex as some traders called it).
The details of how co-founder Anil Diwan is using $NVCC’s stock and balance sheet for side deals that benefit him personally can be found in my Growth Capitalist story.