NOTE - Hello again everyone. This was something I was trying to get published the evening of the S-3 filing. Unfortunately again the editorial process took too long and thankfully many people realized the truth of the S-3 filing and the PPS did not take a big hit. The relavence therefore for much of the article was taken away but still wanted to place it forward for anyone who needed a little more confidence behind their investment. I think I'm starting to realize that my tendency to make a lot of run on sentences by putting in as much info as possible and my lack of brevity will forever prevent my ability to publish something on a timely manner. I will therefore blog most of my commentary and DD on iBio going forward. Anyone wishing to utilize any of the information I have placed forward in their own articles if they have the brevity and writter's ability to get things moved forward is free to reference or use my material. I just ask that you message me to let me know in case I am still working on an article utilizing my stuff. I recognize exposure is important and my blogging has limitations in exposure since it is not a regular article. That's why I am willing to let go of my rights to my DD for the good of the company itself to allow this information to go out on a broader scale rather than try to hold on to it for the measily $35 dollar/article plus viewer compensation.
*Aspire Capital funding has been criticized by the bears as a source of massive dilution at a price which is a fraction of the current price per share.
*Aspire Capital by their own words is invested in the potential success of iBio. The current extent of fulfillment of the agreement is very bullish for long-term investors.
*iBio's filing of an S-3 suggesting the possible massive dilution of the stock is fuel for the fire for would-be bears and a fear stoking catalyst in long investors.
Lately there has been much scrutiny of iBio (NSYE: IBIO) in the ways they have recently been raising capital and the timing or speculative meaning of SEC filings. The bear thesis has utilized the potential dilution caused by Aspire Capital stock purchase agreement along with the selling of shares by Carl Desantis (a >10% stock holder) before and after this agreement as an indicator of negativity surrounding the ongoing business of iBio.
The filing of the recent S-3 has set the retail investment community into high speculation. There seems to be two extreme arguments between the bear and bull camps. The bears are stating that there is going to be massive dilution of shares in the near term by almost 140% by going from the current 72 million shares outstanding to ~172 million based on the current PPS. Bulls believe that it indicates a high likelihood of a significant catalyst right around the corner. I myself am very bullish on the stock but am also realistic. I caution investors not to place more meaning into these filings then they are meant to hold. In this article I am going to address these concerns utilizing the companies published SEC filings as well as other sources explaining the nature of mixed-shelf registrations.
Aspire Capital stock purchase agreement and an positive indicator based on recent fulfillment
iBio entered into a common stock purchase agreement with Aspire Capital on August 25, 2014 which was publically announced the following day. Many bears have chastised the company by saying their willingness to do the agreement at 0.44 cents/share is an indicator of companies perspective of self worth. The future is never a gaurauntee. The valuation due to the potential involvement in the Ebola response may be much higher than the company could have predicted they could have in the short term. In fact before the Ebola crisis took the price per share to heights not seen in years the company was trading around 0.80 just on the nature of its current business. If one wonders if Aspire Capital has funded iBio with the intent to quickly flip the stock then please refer to their own website where their leading pitch is, "When you succeed, so do we. That's why we're invested in your success". One can take away from that, that in general they are patient with their investments. Now of course if there is a massive run-up they will lock in profits appropriately like anyone else would but I believe based on recent action they see a brighter future ahead.
Based on the agreement, as described in the recent 10-Q, Aspire Capital is to purchase up to an aggregate of $10.0 million shares of the company. In the creation of the agreement the company received 681,818 shares as a commitment fee. They also purchased 1,136,354 shares of common stock at 0.44 for $500,000. This left $9.5 million left in the purchase agreement. They have 24 months to purchase shares as iBio allows them to make purchases. On a given day that iBio allows Aspire to purchase stock they are limited to a maximum 150,000 shares provided the shares aggregate price does not exceed $500,000. Based on this arrangement the fulfillment of the agreement occurs quicker and causes less dilution the higher the price per share at time of purchase is. Therefore the argument by bears that this agreement was the issuance of a mountain of shares with 23 million dilution loses traction when you consider Aspire Capital has already fulfilled over half of their agreed purchase. Per the recent 10Q on 11/14 Aspire Capital purchased 2,858,400 shares of the stock for ~$4.7 million. In aggregate they have purchased $5.2 million shares in just under 3 months of the start of the agreement.
If you calculate the average PPS of the purchases since 9/30/2014 alone which was right before the potential for ZMAPP response involvement came into play you come to an average value around $1.65. If you include the stock purchased up front the average comes to $1.30. If you include the free commitment shares that average is brought down to ~$1.11. As you can see Aspire Capital has fulfilled over half of their obligation of the purchase agreement only 12% of the way into the 24 month agreement. An astute investor would then realize that this may mean that Aspire thinks the likelihood of significant price decline over the course of 24 months is low in comparison to price appreciation if their motto about investing in success holds true. If the bears are right about the stock cratering back to subdollar range why then would Aspire not wait for this to occur as a patient investor who is invested in iBio and not just a day-trading company. I do not know if they are considered insiders but one would think not given the percentage shares that they own. They however would have had a discussion with the company about their prospects going forward prior to the agreement being made. This means they believe the future for iBio is bright and the current market price of $1.05 which is below their current average would be a reasonable entry point for new investors.
At this point Aspire Capital holds about 4.7 million shares. If the current price remains at $1.05 then they can purchase a maximum 5.04 million more shares. This would bring the total to 9.74 million shares which is less than half of the mountain of shares the bears suggested this agreement would create. That total would have been far less had there not been so much downward price pressure placed by short-sellers and some long investors divesting due to being swayed by admittedly short oriented articles.
The importance, or lack thereof, behind the S-3 filing ormixed-securities shelf registration
The S-3 filing or mixed shelf registration does not mean they are going to dilute 100 million shares tomorrow, the next day, or ever. It actually does not mean they will ever materially need to finance all $100 million filed in the shelf. An S3 is a document that is utilized as a part of shelf registration that allows a company to publish one prospectus for all future offerings over the next few years rather than for each offering. This allows for companies in good standing to more quickly file secondary offerings when the market and price per share is favorable for the company and investors.
This S-3, in drawn out legal jargon, states for whatever time period the S-3 is active (usually 3 years per the above reference which goes back to 2011 when the company last did the filing) the company may finance up to $100,000,000 through share offerings. It does not stipulate the number of shares offered going forward, that is dependent on the price per share at the time of the offering. Bears are crying out that there is a definite 100 million shares hiting the market. This however would only occur if the price stays at $1.
In all likelihood, dilution will occur in the near future but no telling what the PPS will be at that time. For instance, $100 million at $1 is 100 million shares. However, at $3.50, which was slightly over the recent peak, a total $100 million finance at one time would be 28.5 million shares. Not even close to the fears the bears are trying to create.
The timing of the S-3 may very well align with potential big catalyst upcoming. Again the S-3 allows for multiple secondaries to occur quicker utilizing one prospectus. Them publishing it now could mean a positive catalyst is around the corner but of course not a gaurantee. The company and ourselves as investors would benefit more if the PPS is higher at the time of an offering. Remember the S-3 is not an actual offering. It is an announcement in conglomerate of future offerings that may or may not take place.
An S-3 filing in a small cap biotech is a necessity as they need to finance their research and product development through investors and hence stock offerings. S-3 filing is not as important for major companies with big revenues because they do less secondary offerings since they can fund themselves through product revenue. In small market cap companies with a high beta and therefore price volatility as well as more debt to equity it is beneficial to have an S-3 filing if the company is in good enough standing to file one.
Also, I am not quite certain if this equates to a prior announcement of the S-3 but the company announced the potential possibility of 175 million share float back in December of 2013 when the float was around 71 million. This was a theoretical max and if at the current PPS a max offering would be 100million shares does that mean this is the equivalent of announcing the potential S-3 back then? This was in the 10Q from May 2014. Look at section 8 titled stockholder's equity. If this is the equivalent of announcing the S-3 almost a year ago then this was before the Ebola crisis so has no bearing on the current condition of the company nor does it implicate they are financing for recent litigation as I have seen some say on investor boards.
Keep in mind as well that the companies current cash on hand of $3.5 million and the Aspire agreement is expected to support the company's activities through September 30, 2015 per their 10Q on 11/14/2014. If there is a strategic timing aspect behind this S-3 filing that would mean that the company has a new venture that may need more cash on hand such as being involved in ZMAPP production. However, I believe that it was a necessity to publish due to expiration of a prior shelf registration in 2011 and does not equate to a positive or negative event the company knows is coming. For those who are long iBio I would consider utilizing this chance to increase holdings if the price drops since the bears are assuredly going to utilize the S-3 filing to attempt to push the price down.
Disclosure: The author is long IBIO.