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.