On Wednesday, November 27th at around 5 pm, Organovo Holdings (NYSEMKT:ONVO) filed an 8K with the SEC announcing that it had "entered into an Equity Distribution Agreement (the "Distribution Agreement") with JMP Securities LLC (the "Sales Agent"). Pursuant to the Distribution Agreement, the Company may offer and sell up to 4,000,000 shares of its common stock (the "Shares"), from time to time through the Sales Agent." As noted, the Shares sold in the offering will be issued pursuant to the Company's effective shelf registration statement on Form S-3 (Registration No. 333-189995).
It should not be surprising that many investors missed this filing, given that it was released well after the close of markets on the night before Thanksgiving. Investors had obviously turned off their screens and begun to prepare to celebrate. In fact, it should have clearly been downright expected that releasing a filing at this time would go largely unnoticed by almost all investors.
This continues several patterns for Organovo. First, we can see that Organovo has consistently released similar filings at times when investors should be expected to not see them. In October, CEO Keith Murphy sold 100,000 shares of Organovo. The filing came on Friday, October 18th after markets were closed, such that most investors could be expected to have already logged off. Next, Organovo filed an S8 registration statement on November 8th. Again, this happened to be a Friday, and it happened to come out after the markets were closed and when investors would not be looking. As per the S8 filing,
An aggregate of 11,553,986 shares of common stock may be offered or issued pursuant to the Organovo Holdings, Inc. 2012 Equity Incentive Plan (the "Plan"), 6,553,986 of which were previously registered on Form S-8 (File No. 333-181324), and 5,000,000 of which are registered on this Form S-8.
Shortly thereafter, Mr. Murphy again sold an additional 100,000 shares. Again it was filed with the SEC on a Friday, November 15th. And again it was after markets were closed on that Friday. At the same time (also after markets were closed), Chief Strategy officer Eric David filed to disclose his sale of 16,470 shares which had occurred several days earlier. This follows after his sale of 63,000 shares in October.
Following this most recent filing on the night before Thanksgiving (and preceding a half day on the following Friday), most investors should feel that the pattern of stealthily revealing this type of filing has now been established.
Second, we can see that Organovo has been exceptionally eager to prepare itself for the ability to sell as much stock as possible, despite the apparent limited need for cash.
Back in July, I first noted my concerns about the likelihood of an Organovo equity offering along with the potential for such an offering to be priced at below $5.00. Many investors scoffed at the idea. The company already had $13 million in cash vs. an operating cash burn rate of $2.7 million per quarter. As a result, many investors concluded that a raise was not necessary. In addition, prior to my first article, the stock had risen as high as $8.50. When the stock fell to around $5.00 after my article, many investors assumed that Organovo would be unlikely to issue more stock at such a "low" price.
Instead, Organovo issued $43.3 million of stock on August 7th at a price of just $4.50. Investors should take note that Organovo issued this stock just one day after the S3 became effective, despite a falling share price and despite the $13 million on its balance sheet.
The recent insider sales of almost $3 million should come as no surprise to most observers. The share price recently doubled on the back of a series of articles, despite no major developments from the company. The only "news" had been the release of the 10-Q (which disclosed just $23,000 in revenue), along with a business update which included such things as a 2-month-old financing and the mundane change of their transfer agent. The company did disclose in October that "the company presented data demonstrating retention of key liver functions in bioprinted tissues for up to 40 days, longer than one month." However this does not identifiably change any of the timing or size of any revenue prospects, such that it should certainly not have impacted the share price.
As the insiders sold this $3 million in stock, they were then quick to file the subsequent S8 registration statement. The existing S8 already allowed insiders to issue themselves over 6 million shares (valued at nearly $60 million), but management felt the need to increase this even further to 11 million shares, just as the share price spiked. These 11 million shares now accounts for nearly 13% of the outstanding shares in Organovo, which management can now simply award to themselves.
Prior to Wednesday, Organovo already had $53 million in cash on its balance sheet, leading many investors to believe (once again) that there were minimal prospects for future dilution. Instead, Organovo was quick to file for this additional 4 million shares valued at around $36 million. Given the current share price, which values the company at $700-800 million in market cap, it is hard to blame them. At the beginning of 2013, just 11 months ago, the entire company was valued at around $150 million.
In the entire time since it has been a public company, Organovo has only realized around $2 million in revenues. But insiders have personally realized around $3 million from selling their shares.
Even the most bullish forecasts of management now only call for "tens of millions" from product sales. And again, this is just the hope, and Organovo still has no products on the market as of now. These latest clarifications from management have helped to clear up any possible confusion that Organovo might be set to actually pull in hundreds of millions in revenues from big pharma companies. It was those misconceptions of tremendous revenue potential that had propelled the share price up from $5.xx to almost $14.00 in recent weeks.
But against that "tens of millions" in hoped for sales, this latest filing allows that Organovo's total stock issuance can be around $100 million just since coming public last year. We can see that by far the largest source of cash flow for Organovo should be expected to be simply selling its shares to investors and not its actual products to pharma companies.
When Organovo first raised money in 2012, it was happy to issue 16 million shares at a price of just $1.00. CEO Keith Murphy owns nearly 7 million shares. The value of those shares has risen from just around $7 million to over $60 million, despite the fact that Organovo still has no product and no material commercial revenues. When the share price hit $13.65 last week, his shares were worth around $90 million.
And again, this hoped for "tens of millions" in revenues should also be compared to the roughly $100 million in shares that management can now simply hand themselves under the S8 registration statement. These shares are in addition to the 4 million that Organovo filed this week.
Given the excessive enrichment potential involved here, paired with the complete absence of any concrete revenue potential, it is not surprising that management would be eager to bury these filings by filing them at times when no one is looking.
This most recent prospectus covering the 4 million shares was clearly prepared after the close of business on Tuesday, November 26th - NOT on Wednesday, November 27th. This can be noted from several places in the prospectus that refer to things such as:
The last reported sale price of our common stock on the NYSE MKT on November 26, 2013 was $9.55 per share.
This information could have easily been released on Tuesday or even during the day on Wednesday when investors would have actually seen it.
But the filing was not released on that Tuesday when it was already finalized. Instead it was released a day later on Wednesday, November 27th, after markets were well closed on the night before Thanksgiving, when it was virtually guaranteed that almost no one would even see it. On Wednesday, when the filing was made with the SEC, the stock had already closed at $9.18, not $9.55 (where it had closed the previous day, Tuesday).
Organovo is a company which is held 7% by institutional investors. Institutions are simply not interested now, just as they were not interested earlier this year when the stock price was at $2.00.
Unfortunately, retail investors are much less likely to read SEC filings than are institutional investors. Beyond not even reading these filings, they are certainly less likely to receive real time SEC updates the way that professional investors do. I strongly encourage all investors to sign up for an SEC filing service such as EDGAR or secinfo.com and to also sign up for real time SEC filing alerts.
Organovo last issued a large amount of stock at just $4.50. The latest round of filings indicates that management is eager to issue millions of additional shares to themselves as well as for the company itself to raise more money. But signing up for automatic updates, investors will not miss these developments, even if they continue to be filed at times when no one is looking.