NEWTON, Mass.--(BUSINESS WIRE)--Novelos Therapeutics, Inc. (OTCBB: NVLT - News), a biopharmaceutical company focused on the development of therapeutics to treat cancer and hepatitis, today announced that Novelos issued approximately 2,100,000 shares of its Common Stock to certain holders of warrants to purchase approximately 6,900,000 shares of Novelos Common Stock. The warrants, issued in March 2006 in connection with a private placement of Novelos Common Stock and expiring on March 7, 2011, were exercisable at a price of $1.82 per share of Common Stock. Novelos effected the exchange pursuant to an exchange agreement with each warrant holder who agreed not to transfer or dispose of the shares of Common Stock acquired until February 18, 2010. Immediately following the exchange, warrants to purchase an aggregate of approximately 5,400,000 shares of Common Stock at $1.82 remained outstanding.
“We are pleased to have completed this warrant exchange,” said Joanne Protano, Chief Financial Officer of Novelos. “In increasing the number of outstanding shares of our Common Stock from 47,200,000 to 49,300,000, we, at the same time, reduced the number of outstanding shares, on a fully diluted basis, by about 4,800,000 to about 142,200,000. We eliminated a portion of the market overhang and increased the number of authorized shares available for use in funding the remainder of our pivotal 900-patient Phase 3 trial of NOV-002 for treatment of non-small cell lung cancer. We expect the trial to conclude in early 2010.”
The Common Stock issued to warrant holders was not registered under the Securities Act of 1933, as amended, or under any state securities law.
"instead I will sell OLD shares that I currently have "
As a warrant holder, you do NOT have any shares currently, you have the right to buy, think warrants as options.
I'll make a stronger case for you (the warrants holders), let's say the price will be $3.64 after the results, you can buy at $1.82 and double your money if you hold on to your warrants. But you can do better if you get 2.1 mil now and accumulate another 4.8 mil shares from the open market, let's say your cost of the 4.8 mil shares are between $0.78 and $1.82, with an average of $1.3, so your average cost of the 6.9 mil shares is only $0.9, when the price reaches $3.64 you quadruple your money.
I write this as very looooooooooooong the stock, and so wanting to understand this a little more.
My concerns were similar to John's. I was thinking: as a warrant holder I have 6.9 million shares in the company. These warrants are expiring on March 7, 2011. If (and as we all here invested expect) this stock goes to the proverbial moon, soon after Q1 2010, the exercise price is of little relevance to me because my leverage with so many shares more than makes up what I have to pay to excecise the warrants.
Now I have 2.1 million shares in the money. Why do I want these shares, and why NOW? If the company "goes to the moon" I want 6.9 million shares. If NOV-002 is a bust and the stock goes to zero, it does not matter the multiplier because any number times 0 is 0.
My only conclusion for wanting stock NOW is if I want to sell it NOW (for whatever reason, sick of it, some money back for investors, can't wait etc etc). If I wanted to hold it I wold prefer the hold the warrants (as above). You can argue that they agreed NOT to ell these shares unitl Feb 2010, BUT ok I won't sell these new shares. instead I will sell OLD shares that I currently have.
The benefit to Novelos is a little clearer (reduce shares outstanding). I for one, if holding the warrants, would not have traded them in and wonder whether others on the board would have done so.
"Cash" is my initial thought, I forgot that those deep out of money warrants still worth something.
As mentioned by ivoroshea, those implied price of warrants can be deducts as $1.63 m / 6.9 m = $0.236. which might be the calculated by Black–Scholes formula.
Here is my understanding now: warrants holders gives up their rights to buy 6.9 mil shares at $1.82 before March 7, 2011, in exchange, they get 2.1 mil shares now.
This will benefits both parties. Nvlt's shares outstanding gets reduced. The warrants holder (now the shareholders) get a safer bet, because between Feb. 11, 2010 and March 7, 2011, if the price of nvlt is below $1.82, they still can sell their stocks to make money.
OK, that makes sense too. Otherwise it would be "unfair" to the warrants holders since they spent cash to have those warrants in 2007 already. Bottom line is the fully diluted shares outstanding has been reduced so when they issue more shares for cash, the total shares outstanding may not increase. If they need $3 mil, then they could sell 3.8 mil shares at $0.79 now. Not as good as I guessed, still good.
As regards the value of what happened today, these warrants were well out-of-the-money with an exercise price of $1.82. The warrant-holder was probably using the Black-Scholes formula to value them on his own balance sheet - this puts a price on the “hope value” of the stock exceeding $1.82 before March 7 2011. We can take a guess at this valuation price as follows:
* Based on Friday’s closing price of $0.78, the 2.1m of issued shares were worth $1.638m.
* Therefore, each warrant had a notional value in this deal of 26.85c (i.e. $1.638m / 6.1m).
This situation is complicated by the warrant holder agreeing to lock in his 2.1m shares until Feb 18 2010.
Novelos probably obtained today’s deal (and the Feb 18 2010 lock-in) by some or all of the following:
* The notional value of 26.85c was higher than the warrant holder’s own Black Scholes balance sheet valuation (i.e. Novelos paid a premium over the theoretical value).
* Shares are inherently more liquid than warrants – even if the trial fails its end-point the shares would have some tradable value.
* The warrant holder figured the chances of the stock breaching the exercise price of $1.82 before Feb 15 2010 were trivial & so it was a minor concession – i.e. only a positive trial result would make it go above $1.82.
I think the more interesting issues here are:
* Novelos can now issue 7.8m new shares instead of the previous 3.0m limit. Based on today’s close of $0.79, that means $6.162m worth of cash versus only $2.37m of cash (before issuing expenses). The warrant holder not swapping all of his warrants today indicates the net reduction in dilution of 4.2m was deliberately chosen. Given Novelos had working capital of $1.8m at June 30 2009 & had a cash burn of $6.0m in H1 09 then $6.162m looks about right to get to Q1 2010.
* If management does one thing between now and Q1 2010 it should do more deals to reduce net dilution. The cashless exercise of warrants that occurred in July 2009 (detailed in the latest 10Q) is a good start.
Very simplistically, let’s say the trial is a clear success and the market decides NOV-002 is worth $1,000m as an asset. With 49.3m of issued shares that’s $20.28 per share. However, with 142.2m of fully diluted shares, that’s $7.03 per share. Put another way, it’s like saying NOV-002 has only $347m of value as an asset instead of $1,000m. Or even another way, it’s like the difference between a trial result of median survival of 15+ months versus median survival of 12 months.
Even if it means issuing shares at a premium to the Black-Scholes theoretical value then they should just do it – i.e. if the trials succeeds then Novelos got a bargain & if the trial fails then everything is nearly worthless anyways. This strategy could cause the price to temporarily fall as the converted shares get dumped on the market (as happened in July) – but this would be swamped by the impact of the trial result in Q1 2010.
Thanks for the responses to my question from all of you folks. I think the wording of the PR just didn't seem to work for me and the warrant math didn't make sense to me as I would have loved to have a warrant option attached to my retail shares. I have always figured full dilution at 150M shares when I play with models of what we could be worth in the future. The financing was the only concern I had outside of the trial results.
Ortlvestor pointed out that Harry mentioned the 6 weeks for data accumulation was factored into the first quarter announcement, therefore the worst date for event 725 would be mid November....20 months and 1 week after the last patient was enrolled.
Every day past January 1 is a great day for the NVLT faithful.
My best and thanks to all for the help.
some quick math shows that Novelos is expecting greener pastures...
Basically Novelos traded 2,100,000 common shares
In exchange they got back 6,900,000 "warranted" shares
Their net for the deal is therefore 4,800,000 shares
But they gave up future (2011) dollars of $12,558,000 (6,900,000 shares X 1.82 exercise price = $12,558,000)
Their net of 4,800,000 shares will have to be worth $2.62 to make up for the $12.5mm future lost income.
Clearly they do not expect us to remain below $1 for very long.
This takes them one step closer to completing funding through trial end. Watch for the next shoe to fall!
Bravo Mr Palmin, Bravo!
This is a win-win deal which I really like. For nvlt, it gets the cash now without further dilution which every share holder hates, and even better, actually reduced the fully diluted shares outstanding by 4.8 mil. For the warrants holders, they get a cheaper exercise price, which is not announced in the pr, and still have the opportunity to benefit more, because they can buy from the open market at much lower price than the previous exercise price of $1.82 if they still choose to have 6.9 mil shares instead of the 2.1 mil shares they have now. Also by committing some cash now instead of waiting for the actual results to take action, the warrants holders takes more risks, so they must like the progress made by the company.
Here is the thing that confuses me. Why would someone give up a warrant that is exercisable for a share of stock at $1.82 if they thought it was going to be worth more than that in March 2011. Those holding the warrants are the big investors in NVLT, so I am stuggling with that. There may be certain contingencies tied the warrant that aren't public.
Other items of interest...the February 18th date! What do you make of this. Harry said it would take 6 weeks to compile the data after the 725th death. Would this date be somehow indirectly tied to the expected release of information? Anotherwords, could the 725th event be anticipated to be around January 4th and they don't want these shares dumped onto the market prior to the release of information. Just seems like there is more to this date behind the curtain.
I do agree the move today opens the door for the next shoe to drop and thus, my concerns on funding are all but gone.
About Novelos Therapeutics, Inc.
Novelos Therapeutics, Inc. is a biopharmaceutical company commercializing oxidized glutathione-based compounds for the treatment of cancer and hepatitis. NOV-002, the lead compound currently in Phase 3 development for lung cancer under SPA and Fast Track, acts together with chemotherapy as a chemopotentiator and a chemoprotectant. NOV-002 is also in Phase 2 development for early-stage breast cancer and chemotherapy-resistant ovarian cancer. Novelos has a partnership with Mundipharma to develop and commercialize NOV-002 in Europe and Japan. Novelos’ second compound, NOV-205, acts as a hepatoprotective agent with immunomodulating and anti-inflammatory properties. NOV-205 is in Phase 1b development for chronic hepatitis C non-responders. Both compounds have been partnered with Lee’s Pharm in China. For additional information about Novelos please visit www.novelos.com.