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The Small Retail Biotech Investor Usually Suffers Most In Toxic Financings

|Includes: ADXS, AMBS, CBAI, Genetic Technologies Limited (GENE), MEIP, PBIO, PSID, ROSG-OLD, SVFC-OLD, ULUR

Most often on Wall Street, the small retail investor is left holding the bag, despite even some of the best efforts by the management teams of emerging small-cap companies to keep their firms funded and alive.

As one financial publication pointed out so eloquently, "Most small cap companies succumb to toxic financing as a way to stay alive, which can include below-market pricing, warrants and adverse 'ratcheting' provisions. The investors in these deals often try to push down the companies' shares in order to lower their warrant acquisition costs and maximize their profits at the expense of other shareholders."

While it is not clear, at this point, whether the institutional investing group known as Ironridge Global IV, Ltd. was actually involved in trying to "push down the shares" of the companies they invested in by using "black-hat" trading tactics, is well beyond our scope or opinion. Still, the track record of deals proudly displayed on their own website leaves one to wonder how so many financings could have turned so sour and resulted in so many lawsuits along the way.

While I did attempt to reach the firm for comments for this commentary, I was unsuccessful. The firm's own description of its business model describes Ironridge as "an institutional investor making direct equity investments in micro-cap public companies." According to the description at the bottom of various press releases, "The fund has entered into more than 50 equity financing transactions in the last three years, ranging from under a quarter million to $25 million each. Ironridge Global seeks to be a long-term financial partner, assisting public companies in financing growth and expansion by supplying innovative funding solutions and flexible capital."

An interesting YouTube video featuring John C. Kirkland, the Managing Director of Ironridge Global Partners being interviewed by Sully Sullivan on his Big Biz Show shows Mr. Kirkland explaining his firm's business. When deciding which companies to invest in, Kirkland explains: "We do a mix of technical and fundamental. Technical means 'what is the stock doing and fundamental means what is the company doing?' If the technicals are horrible, then the fundamentals better be fantastic. Usually it's right in the middle, you know? You've got to have decent technicals and potential… It makes Vegas look safe."

But based purely on the gambling analogy, it's hard to see where Ironridge ever lost on a deal they invested in. I'm sure any retail investor would love to gamble with those kind of odds.

In the biotechnology sector, which I follow most closely, it's nearly impossible to find a deal that didn't mostly benefit Mr. Kirkland's fund above most other investors, including founders and management. Those firms who took the largest sums from Ironridge, via financings of one form or another, appear to have been hurt by massive dilutions the most. Other which took small financings, appeared to have figured out ways in which to salvage the damage or at least stop the bleeding, but almost always at the expense of the common shareholder.

One Chartered Financial Analyst who contributes to Seeking Alpha Writer described taking money from IronRidge as the equivalent of having danced with the devil. "Keep in mind, they are buying with a lot of protection - they aren't investing at the market price. They make money even if other shareholders don't," wrote Alan Brochstein, C.F.A. Brochstein, who worked in the securities industry since 1986, primarily with the responsibility for managing investments in institutional environments warned his readers at the time that AVT, Inc. (OTC Markets: AVTC), which had been struggling to raise money, may have subjected themselves and their shareholders to several negative implications. "The press release makes it sound great, (but) the filing is the reality: Issuing shares at a 20% discount and subjecting themselves to price risk on their common stock," wrote Brochstein.

Therein lays the problem. While most small retail investors are led to believe that many of these proudly announced financings are positive developments which will provide much needed capital and help push products and pipelines forward, most don't have the qualifications or knowledge to understand that the companies they believe in are, in more and more cases, being sent into "toxic financings" and "death spirals."

In their defense, earlier this year, Ironridge announced that they had successfully concluded that same financing transaction with that automated retailing company which Brochstein warned his readers about. According to Ironridge's own news release, since the deal was entered into on July 2, 2013, AVT stock had doubled in price to $5.00 per share on January 8, 2014, the date when the transaction concluded.

While there are certainly many other deals, the biotech and healthcare sector features numerous historic deals listed between Ironridge and companies like Genetic Technologies (NASDAQ:GENE), Rosetta Genomics (NASDAQ:ROSG), MEI Pharma Inc(NASDAQ:MEIP), Advaxis, Inc.(NASDAQ:ADXS), Amarantus Bioscience (OTCMKTS:AMBS), Pressure Biosciences (OTCMKTS:PBIO), Uluru Inc. (OTCMKTS:ULUR), PositiveID Corporation (OTCMKTS:PSID), Cord Blood America Inc.(OTCMKTS:CBAI) and IntelliCell BioSciences, Inc. (OTCMKTS:SVFC).

Many of those companies are big board listed and thriving despite having taken unfavorable financing deals along the way, but others are now trading at sub-penny levels after suffering mass dilutions followed by nearly insurmountable selling pressure. In multiple instances, Ironridge has attempted to foreclose on the companies they had lent money to; just as they felt it had the legal right to do.

The CEO of one such firm, IntelliCell BioSciences, has made no secret of his unpleasant experience with Ironridge. Dr. Steven Victor sued and successfully got a favorable ruling against Ironridge earlier this year.

Following that ruling, Victor stated: "We maintained from the very beginning that we would vigorously defend ourselves against all of John Kirkland's and Ironridge's claims for additional monetary damages and today the Company feels vindicated and is happy for its shareholders."

Unfortunately, many of IntelliCell's early investors lost a small fortune along the way.

Reached for specific comments for this article, Dr. Victor said simply: "There are good guys in the space and there are bad guys in the space, like anything else."

Having survived, Dr. Victor says his regenerative medicine firm is now focused on making a comeback with a real technology and products that will generate revenues.

"Anyone who wants to know what really happened and how much frustration the management team went through, can simply read through our filings. It's all there."

Other publicly traded companies, like Amarantus Biosciences, settled serious loan and financing debts by issuing Ironridge tens of millions of shares of common stock.

Ironridge is not alone in their business model. There are at many other institutional investment firms which are in the business of "coming to the rescue" of desperate small cap companies who have little choice but to take money however they can, under whatever predatory terms they agree to. Those firms and their terms may not be fair but they are also not illegal.

In recent days, the U.S. Securities and Exchange Commission is rumored to be closing in on some of the more egregious offenders who may be manipulating prices in order to force more debt. But the weight of proving such manipulation and other illegal trading tactics often proves to be difficult; particularly since most of those activities take place using off-shore broker dealers and other entities.

What has happened to Ironridge lately is also somewhat of a mystery. When cross checked via LinkedIN, the names of the individuals on the management team that appear at, seem to indicate that most have moved on to other firms very recently.

While some on Wall Street believe that Ironridge has seen its final days or may have simply disbanded, an oddly timed officially shared link on the firm's Facebook page appears to state otherwise. That link which was posted just days ago on August 6th, points to a file that displays a Certificate of Good Standing for Ironridge Global Partners, LLC from the Secretary of State of the State of Delaware.

The lesson for "the little guy" retail investors here is simple. Learn to read the terms of the financings your portfolio companies agree to. There are two dance partners in every transaction. The lender and the management team which agreed to do the deal. Hold each one accountable by choosing to be an investor or taking your chips off the table as quickly as possible following an unfavorable financing.