Firechief,
You posted the following:
"The $30M is labelled as "debt" but it's de facto not debt. PPHM doesn't have the "cashflow" to repay it, nor the "net asset coverage" to repay it. It's taking the market a while to figure out the implication, IMO. The $30M is a pseudo institutional equity investment, of material magnitude. Disclosure: I've added significantly."
I have to take the opposite side of this argument. This "certainly" is debt and "certainly" PPHM has the free cash flow to pay it down. In addition, Avid alone is an asset that IMO has at least 2x debt to value coverage.
Why would anybody risk 30mm to acquire a de minimus amount of wts for "equity"??? This is absurd on its face.
Oxford is a very sophisticated lender and IMO certainly believes they will get their loan repaid with interest and a warrant equity kicker and probably with prepayment penalty points to boot.
IMO PPHM got the better of the deal and I give mgmt an "A" for the way they negotiated this transaction. I would have given them an "A Plus" except for the following points:
1. I would have taken down the full 30mm in one tranche. When borrowing it always pays to borrow a little more than you need and conversely, when lending it always pays to lend a little more than your client needs. Pay the extra $2 in interest. This is called insurance.
2. By taking the loan in one tranche I would have tried to improve the wt strike price. There is no law that says wts have to be struck at market. They could have been struck for example at 2x market. Oxford clearly believes PPHM unltimate value is going to be several magnitudes higher or they wouldn't have made the loan. In such a scenario, a couple of pts higher to strike would not have made a material difference.
3. By taking the whole 30mm upfront , I would have tried to remove the "going concern" letter from PPHMs' own accountants. This odious letter affects your market value. Ultimately, PPHM will achieve this goal. It will just take a while longer.
4. As people know who read my posts, I would have come to the "debt vs ATM" decision much quicker. I think this same deal could have been structured a year to a year and a half earlier at a savings of 30mm shares of ATM dilution.
In spite of the points above, I think PPHM did an excellent job and executed the debt beautifully with a very sophisticated lender.
The following should not go unnoticed:
One of the reasons mgmt was loathe to place debt on PPHM IMO was they were afraid to risk the other assets of the company should their lead IP not measure up to expectations. Not being really sure on a "gut level" of the real value of their own IP they preferred to finance via ATM for a prolonged period.
Somewhere, IMO , along the 2nd line NSCLC clinical curve mgmt really got it on a "gut level" that the IP is gold. If you are going to convince the investment world writ large of your value you first have to convince yourself.
PPHM management is finally acting like they know not only on a surface intellectual level but also on a real "gut level" that their IP is gold. THEY HAVE STOPPED SELLING EQUITY AND STOPPED DILUTING.
This is a sea change within PPHMs' own house.
Very best regards,
IMO only
RRdog
AI
