After announcing disappointing Phase III results from the HEAT trial, Celsion (NASDAQ:CLSN) shares plummeted more than 80% yesterday. Today, Celsion management is adding insult to injury by filing a prospectus for a $25 million "At the Market" financing arrangement with Cantor Fitzgerald. By filing to raise money now, after a catastrophic collapse in stock price, management is effectively expressing a view that CLSN at $1.51 is overvalued. We believe that investors would do well to heed management's actions and move on to better opportunities.
Management Recklessness and Damage to Shareholder Value
In a previous article, we presented a simple model to determine fair-value for CLSN ahead of the binary event of the HEAT trial data release. Our conclusion in that article was that, at $8.18 the stock was too richly priced for new investors to consider a long position and that, should investors wish to speculate with options, such a trade should be viewed as a "lotto ticket" and not as a serious investment. Naturally this conclusion led to some criticism from high-conviction longs who had "proven" to themselves (and unfortunately to others who believed them) that the HEAT trial was a guaranteed success. Monday morning quarterbacking aside, here is what we noted about Celsion's management in that article:
it is interesting that the company has not taken advantage of the recent run-up in share price from under $2 in June to just over $9 last week, to raise capital despite having a $75 million Shelf Offering on file. Management is either really confident in the outcome of the HEAT trial, or they are simply being reckless by not raising capital when the financing window is open.
It is now clear that Celsion's management was being VERY reckless. Up until a few days ago, CLSN stock had a market capitalization well in excess of $250 million. Had the company moved to raise $25 million at that time, the dilution to shareholders would have been in the range of 10% to 15%. Instead, management proudly boasted that they have a "cure" for liver cancer and promised NOT to raise capital prior to the data release. Today, with CLSN's market capitalization at just $52 million, the $25 million facility represents a potential 50% dilution.
Already lawfirms have annouced investigations into potential class action lawsuits aginst the company due to the dramatic drop in share price. This potential dilutive financing adds fodder to these investigations.
Capital Adequacy
Yesterday during the conference call discussing the trial results management stated that:
"Celsion ended 2012 with a strong balance sheet that provides us with the opportunity to evaluate all future development plans. The Company projects that it's unaudited cash and investment balance to be approximately $23 million as of December 31, 2012 and approximately $27 million as of January 31 2013."
Since Hisun paid Celsion $5 million in January, the $27 million cash balance suggests that the company burned $1 million during the month. If this burn rate is representative of the rest of the year, then $27 million in cash would last well beyond 2013. Management may be putting the ATM facility in place to minimize future concerns over viability, but clearly, this ATM facility should have been entered when the company filed its $75 million shelf registration last September.
Regarding the use of proceeds, the current prospectus says:
We currently intend to use the net proceeds from this offering, if any, for general corporate purposes, including research and development activities, capital expenditures and working capital. Pending the application of the net proceeds, we intend to invest the net proceeds in short-term, investment grade, interest-bearing securities.
As of the date of this prospectus supplement, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering, if any. As a result, our management will have broad discretion regarding the timing and application of the net proceeds from this offering.
Shareholders Need To Speak Up
As shareholders in a company, investors are the owners of the firm. Good owners of any business have a responsibility to fire bad employees. By not raising funds when CLSN was trading at $8 to $9 per share, Celsion's management has acted against the best interests of shareholders. Regardless of how confident they may have been in Thermodox, prudent cash management requires raising funds when market sentiment is favorable. Once management has shown that they have failed so colossally in their fiduciary duties to shareholders, we believe that they do not deserve "broad discretion regarding the timing and application" of capital. To be clear, it is not the failure of the therapy that we take issue with. Failure is part of the process of innovation in biotechnology and more therapies will fail than will succeed. However, failure to manage the business properly, given the risks, falls squarely on management's shoulders.
We found it quite telling yesterday that, at one point during the conference call, management stated that they were "conscious of our obligations to the scientific community and the medical community". Notably absent from that statement was an acknowledgement that they are conscious of their obligations to the investor community.
Going forward, whenever CLSN stock rises, investors need to be aware that the company may be betting against them by selling into any price increases. "At-The-Market" facilities are a terrible financing mechanism from a shareholder perspective because, once the prospectus is filed, no further disclosure regarding the timing and amount of sales are required. After destroying shareholder value through a failed trial, management is willing to bet against the best interests of shareholders by selling into any future potential increases in stock price. You can review the actual "controlled Equity offering" sales agreement for yourself. While there is some verbiage about the company having discretion to tell Cantor Fitzgerald how many shares to sell and the minimum price below which sales cannot be made, in reality, these are pretty much meaningless. Management will most likely raise when the cash starts running out and they are unable to pay themselves.
We believe that Investors, through communications with the board of directors, should demand that top management be fired at Celsion for this gross mismanagement of shareholders' interests.
Conclusion
Biotech binary event investing is a difficult and risky business. Properly assessing risks ahead of major events that can change the value of a stock is a prerequisite. No one is ever 100% correct and losing money is never fun. But when a company's management makes several bad decisions regarding cash balances and dilution, these actions have nothing to do with whether or not an experimental therapy will work. Investors should have no tolerance for reckless decisions regarding the balance sheet. Ultimately, management works FOR shareholders and their job is, first and foremost, to protect shareholder value, and to allocate capital in such a way that shareholder equity increases over time. In the case of Celsion, management has failed miserably, not because the trial failed, but because they did not protect shareholder interests while the stock increased nearly 400% from June of last year through January 30th.
Given that Celsion's institutional ownership is just 13.7%, the stock is largely held by retail investors. Therefore, it is unlikely that a large holder of the stock will take an activist role. If retail investors want to send a message to public company managers that working against their best interests will not be tolerated, a grass-roots effort to force Celsion's board to act would need to take place. Our view is that investors who still hold out hope that management is looking out for their best interests are in for further disappointment.
