Crystal ball time again… Earlier this year I took a stab at predicting the direction of things, and it turned out that I was mostly correct (e.g., small IPO, sooner rather than later, reverse stock split, etc.). So let’s give this another go. Of course, the odds of me going 2 for 2 are not good. But whatever. It's all speculation.
I put the basic IPO parameters into a spreadsheet, and… I have to be honest, I don’t see this thing going through as-is. I expect significant changes. So why is that?
There are some basic constraints here that are driven by the stated goal of a NASDAQ listing. That will require something in the range of a $50 million valuation and a $4 share price, bare minimum (those are rough numbers, as I think there is some wiggle room depending on circumstances, but it doesn’t matter for this discussion). The $4 share price combined with the small IPO ($17+ million) means that they are limited to creating @4 million new shares at most – probably much less because nobody is doing an IPO on the NASDAQ for $4/share.
The challenge is, if you devalue the legacy shares too much, you end up with both a very low share count and an insufficient valuation for the NASDAQ. OTOH, if you don’t devalue them enough, you end up with a valuation that is way too high for new investors to take seriously, as well as IPO shares that don’t represent enough of the company’s valuation. Of course this would not have been as much of a challenge if they hadn’t turned the company over to Zamora, but that’s water under the bridge. The other issue is that Musick and Zamora effectively control the company, and not by a small margin. I don’t think new investors are going to be super comfortable with that situation, particularly Zamora's current equity position.
So I see a few possibilities here.
The first possibility is that they work with the S-1 as stated. They find a sweet spot with the numbers and find a few investors who find it compelling. For example, if they do a $9 IPO and a 15:1 split, that will give the IPO shares 20% of the Company, with a valuation of about $86 million and a total share count just south of 10 million. Those numbers seem like they might be doable, depending on how good a story the insiders tell about the clinical trials.
The second possibility is that the feedback to the road show is “You gotta be kidding – the current insider shares have to be part of the deal.” Meaning that Zamora and/or Musick would need to be willing to sell a lot of their shares into the IPO. So in the above example you’d probably have to increase the split to something like 20:1 and decrease the IPO price to around $7, which would still be a modest win for most legacy investors out of the gate. The new investors would then own about 41% of the Company. The valuation would be on the low side though, which might or might not fly with the NASDAQ. Musick and Zamora would each be instant multi-millionaires – which I don’t begrudge Musick at all, but geez, Zamora? Really? Unfortunately, it is what it is.
The third possibility is they low-balled the initial IPO value based on something like Possibility #1 above. When faced with demands like Possibility #2, they choose to increase the size of the IPO to something like $30,000,000, keep the IPO share price & split at $9 & 15:1, but sell the big insider shares into the IPO as described. That would improve the valuation and value to current shareholders, while still turning over 42% of the company to the IPO shares. Basically, VB’s counter-offer – “Yes, you can have 40+% of the Company and relax the grip of our insiders, but it’s going to cost you.” I'm guessing large investors would rather invest $30 million and have some power than $17 million and be fully at the mercy of two insiders.
Bottom line: I suspect the second or third possibilities is the most likely. I don’t see this IPO being attractive to institutional investors while the company is fully controlled by two insiders, one of whom has his own empire and separate agenda, and did very little as CEO. The market for these things isn’t great right now, but I’ll be an optimist and go with Door #3 – that is, they alter the IPO to both increase its value and include most or all of the shares currently held by Musick & Zamora.
This is 100% pure conjecture, and most likely 100% wrong. As always, you get what you pay for.
