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This morning, Amarantus Biosciences Holdings, Inc. (OTCQB:AMBS) announced some very good news. The company has entered into a definitive agreement with certain existing shareholders to exercise outstanding warrants that will deliver, at a minimum, $3 million in new capital to the company. Below are some highlights on the release and our thoughts on the exchange.
New Cash On Favorable Terms
Firstly, notice the words "existing shareholders". Amarantus was not out soliciting money from new investors. The cash that will be raised from this warrant exercise is coming from existing shareholders. They are investors already familiar with the Amarantus story, having participated in the September and October 2013 private placements at $0.04 per share, and are willing to put new money to work despite the stock nearly tripling in value over the past four months. Some of the participants in the private placement included International Infusion, Johnston Associates, Inc., Dominion Capital, Amarantus management, and members of the Amarantus Board of Directors.
Those two tranches raised Amarantus $3.0 million in cash, and put an effective floor in the stock late last year. We wrote, back in November 2013, that the improving balance sheet was a clear sign of a broader fundamental turnaround at the company. Securing additional cash from warrant exercises should further help drive this fundamental positive change at Amarantus.
The press release notes that approximately 50 million warrants have been exchanged, and that the solicitation was over-subscribed. The two tranches of investment from September and October 2013 included 83.333 million warrants. We would not be surprised to see additional warrants being exercised under this exchange solicitation prior to the expected closing of the offering on March 7, 2014. Therefore, we expect Amarantus to pull in closer to $4.0 to $5.0 million in new cash before this is completed.
The good thing is that all this new cash comes with no new shares being input into our valuation model. With the stock currently trading at $0.10 per share, well above the warrant strike price of $0.06 per share, we had already included these warrants in our fully diluted share count used in our discounted cash flow (DCF) valuation model. This is how we calculated a target price of $0.25 per share. However, we did not include the cash from the warrants in our model. We believe this is the most prudent and conservative way to value companies.
Eyeing An Uplisting to NASDAQ or NYSE
In exchange for exercising their warrants, the investors that participate in this exchange will receive warrants to purchase three shares of common stock at a price of $0.12 for every four warrants exercised. These new warrants have a call feature, where Amarantus can force exercise them if the common stock trades at or above $0.18 per share. There are two stipulations, however, for the forced exchange:
- Amarantus shares must trade above $0.18 per share for 20 consecutive trading days, and
- The shares must be listed on a national exchange, such as the NYSE or NASDAQ.
Total potential proceeds resulting from the exercise of the new warrants equal $4.5 million. Additionally, participants in the warrant exchange agreed to a "no shorting" provision. It's a common practice for hedge funds that participate in private placements to immediately flip the shares and then short the stock, using the warrants as upside protection. The fact that Amarantus was able to go back to many of the original investors from the September and October 2013 private placement is a huge plus. Many of these investors are increasing their position and have agreed to a continued "no shorting" provision. This suggests to us that the funds backing Amarantus are taking a long-term fundamental position in the company.
Some Upcoming Catalysts
Two weeks ago, we put out an update highlighting the development status of MANF, LymPro, and the newly-acquired eltoprazine. We put this update out following our face-to-face meeting with Amarantus CEO, Gerald Commissiong, and Board member, David A. Lowe. We encourage investors to view this article for a more detailed look at the three pipeline products that are driving the fundamental story at Amarantus. In this article, we noted the in-the-money warrants and the potential for a near-term cash influx. We are very pleased to see the realization of this prediction.
Over the next few months, we expect Amarantus to put this new cash to work in several places.
On MANF: Additional cash will be instrumental in helping the company complete the necessary translational medicine and preclinical toxicology work prior to filing the first U.S. investigational new drug (IND) application. We remind investors that the company is also preparing an Orphan Drug application in Retinitis Pigmentosa (RP). Feasibility work continues, with partner Renishaw looking at convection enhanced delivery (CED) of MANF for the treatment of Parkinson's Disease (PD). Finally, management may also use this new cash to help decide on filing for a second Orphan Drug designation, potentially in Wolfram Syndrome (WS).
On LymPro: Following the announcement of positive analytical performance on LymPro last October, Amarantus is pushing forward with a 7-year follow-up analysis of the 88 patients studied in the Phase 1 trial. This will be an incredibly important longitudinal analysis for the validation of LymPro and help management secure a development and commercialization partnership once completed. The next step is to establish long-term analytical performance to support commercial launch in 2015 (note: management guidance is "second half of 2014").
On Eltoprazine: We believe the majority of the new cash will be earmarked for clinical studies with the newly-acquired eltoprazine. Earlier in February, management announced positive data from a statistical review of existing data with eltoprazine in ADHD patients. We noted in our January 2014 update article that eltoprazine has significant potential in Parkinson's Disease Levodopa-Induced Dyskinesia (LID). A new clinical development pathway in ADHD also seems to offer meaningful upside. We have chosen to model eltoprazine very conservatively until the initiation of either a Phase 2b study in PD-LID or ADHD. Prior to today's news, we were questioning just how Amarantus planned to push development with eltoprazine forward. We understand the Michael J. Fox Foundation has legitimate interest in eltoprazine, so future potential grants are a definite possibility. However, Amarantus now has the free cash to fund eltoprazine in either PD-LID or ADHD, without having to wait for the MJFF or other grants or partnerships to emerge. The further along Amarantus can push this candidate alone, the larger the potential upside for investors.
Today's news is positive because Amarantus has found a way to pull in at least $3 million, but probably closer to $4-5 million, in new cash from existing shareholders without knocking the stock down through public offerings or private placements. Warrants are a double-edged sword for new investors. They often cap a stock at the strike price, because warrant holders can capture additional returns with limited risk by shorting the shares back down below the strike price. This is not the case for Amarantus, as existing warrant holders seem to be quality fundamental believers in the story.
The exchange into new warrants does present the potential for future dilution, but the stipulation that any future warrant call must be accompanied by listing on a national exchange is an enormous positive. An uplisting to the NYSE or NASDAQ would bring incredible validation to the story. We've been alerting investors to the fundamental turnaround at Amarantus since the second quarter of 2013, when the stock was $0.03 per share. Uplisting would be a major validation of our call.
However, the conclusion that investors should pull from today's press release is that Amarantus will have new cash to drive its core assets forward. These include MANF, LymPro, and eltoprazine. Ultimately, the success or failure of these three assets will determine the true value of the shares, so the fact that management can push forward with new clinical and preclinical work is an important development for the company. We look forward to the announcement of the final total amount received on or around March 7, 2014.
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 Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.