Celsion corporation (NASDAQ:CLSN) announced today that the company "has received commitments from institutional investors to purchase an aggregate of $15 million of the Company's securities in an at-the-market registered direct offering, led by a dedicated health care fund." The proper way to read this announcement is "we have decided to dilute existing shareholders by 50% after badly mismanaging our cash position and balance sheet over the last 3 quarters of operations." We believe that this offering is not a favorable outcome for holders of the common and we reiterate our position that investors would do well to heed management's signals that they are not working in the best interests of shareholders.
ATM Facility Already Tapped
One aspect of today's announcement that may have gone unnoticed by some is that the recently announced "At-The-Market" facility has likely already been used by the company. Today's press release indicates that:
The estimated net proceeds to the Company from the offering are expected to be approximately $13.8 million. With the net proceeds from this offering, the Company projects to have an unaudited cash and investment balance of approximately $47 million. The Company intends to use the net proceeds from this offering for general corporate purposes.
When CLSN announced the failure of the HEAT trial, management stated that, on an unaudited basis, the company had a cash balance of $23 million as of December 31, 2012 and of $27 million as of January 31, 2013. Adding to this the $13.8 million expected from this offering, and subtracting $1 million for operations in February, the company should have cash on hand of $39.8 million. While unaudited cash balances are not as reliable as audited statements, if the difference were attributed to this alone, it would suggest that management cannot track existing cash to within 15%. We believe the more likely situation is that the company may have sold up to $7.2 million worth of stock via their ATM facility during the month of February.
50% Dilution
Celsion had approximately 35 million shares outstanding as of their Q3 2012 quarterly report. The current offering of 12 million shares and 6 million warrants represents 51.4% dilution to existing shareholders. One mistake inexperienced investors often make is to ignore preferred shares and warrants in their calculations of a company's valuation. Preferred shares are indeed part of the capital structure and should be counted at the correct conversion ratio when calculating market capitalization. Warrants that are in-the-money should also be counted as if exercised in order to do a proper valuation. A look at popular sites such as Yahoo Finance will show only the 35 million or so shares of common stock under "shares outstanding" for Celsion. Investors need to properly check the company's quarterly and annual reports to get the correct number of fully-diluted shares outstanding. Failing to do so will lead to unpleasant surprises when the stock does not behave the way one expects.
True Deal Pricing
While the optics of this deal look favorable, in reality, the deal was priced at a steep discount to the current share price. For $1.18 investors participating in the registered direct offering are getting 1 share of common stock priced at 5% above yesterday's closing price, plus half a share of warrants priced at par with a 5-year expiration date. Based on a simple Black-Scholes model with the $1.18 exercise price, yesterday's stock closing price of $1.18, and using the implied volatility for the longest dated at-the-money CLSN options (72%) and a 5-year risk-free rate of 0.88% (based on the 5-year treasury rate) the warrants are worth $0.694 each. This represents 34.7 cents of value for every $1.18 invested via the deal. Subtracting out the 6.25 cent premium of the preferred shares over yesterday's price, the final discount in the deal is 28.45 cents per share or 24%. Effectively, the deal sold shares to investors at 89.55 cents per share. Since the stock price only dropped by 1 cent today (0.84%), investors made 23% just by buying into the deal.
Conclusion
In our last Red Acre Insight about Celsion we made the case that management is not working in the interests of CLSN shareholders due to their gross mismanagement of the balance sheet during the run-up of CLSN from $2 last June to $9 this past January, and subsequent 50% dilution represented by the ATM facility. As discussed above it is quite likely that management used the ATM facility to raise cash this month, and the current deal represents another signal that management sees no problem with diluting existing shareholders by 50% - again. While raising cash ostensibly removes bankruptcy risk, it does NOT turn a worthless platform into one of value. Celsion shareholders who continue to believe that management is acting in their best interests are in for further disappointment in our view. We have NO POSITION in Celsion and we recommend that readers have none either.
