Science isn’t cheap. Overhead for scientific based companies is usually sky high for a reason. It’s not just keeping the lights on, or making sure everyone from the CEO to the janitorial staff get paid on time, although that’s part of it. It’s revolving costs in equipment, other forms of capital—like human capital—the average science PhD has a mountain of debt to pay off, and the best in their field are considerably more. It’s also the cost of regulatory processes—the preclinical and clinical trial gauntlet, and after that, marketing, distribution, et cetera.
You get the idea. Science isn’t cheap.
Science is generally done either through three different conduits: private business, public (non-outsourced government based) or a mix, like through a university. It’s arguable which one’s the best. Each have their pros and cons. For example, universities come with deep coffers but can be subject to external ideological bias, governments dip into our tax dollars but can be stabbed in the neck politically from too many angles to count, and private companies generally have to incur debt, which shareholders reasonably tend to shy away from, but may have the most freedom.
But debt is a natural part of modern life. Odds are good you’re in debt. If you’re a responsible steward of your own life, then your debt’s manageable and incurred for a reason that’s not only feasible but necessary. Now let’s talk about Bioasis Technologies (BTI.V). They signed a convertible funding arrangement a New York institutional investment firm, Lind Global Macro Fund, today for $10 million.
Whenever a company takes on debt you have to wonder why. Why do they need it? What they using it for? These are important questions. Debt taken for the wrong reasons can cause a death spiral, and there are predatory lenders out there actively looking to latch onto companies on the way down and drain them dry rather than help them thrive. But Bioasis isn’t some weed company with frat-boy CEO’s with supervoting shares lighting a fuse before they bail out in golden parachutes.
They’re a biopharma company developing a platform that delivers chemicals across the blood-brain barrier, and treats disorders effecting the central nervous system, including brain cancers and neurodegenerative diseases. A few examples of neurodegenerative diseases you may have heard of have names like Alzheimers, Huntingdons and Parkinsons.
“This significant financing will enable Bioasis to fully focus on the execution of its business strategy. Importantly, Bioasis now has the means to leverage its existing research in lysosomal dysfunction, neurodegeneration and neuroinflammation, and to generate robust licensing packages for potential partners. Whilst there have been challenges in completing certain studies this year, due to constraints at our contract research organizations, these have been overcome, and the company is well placed to accomplish its [research and development], and partnering objectives,” said Dr. Deborah Rathjen, executive chair of Bioasis.
Science isn’t cheap but it is necessary.
The problem with convertibles
A convertible bond, note or debt, is a type of bond that the holder can convert into shares of the debt-bearing company’s stock, or cash. It’s a hybrid security with debt and equity-like features, and often issued at interest rates reflective of highway robbery. There are some debt bearing instruments with low(ish)-interest rates and a reasonable repayment schedule—which the closest retail comparison would be a low-rate revolving line of credit from a bank. Then there’s convertibles—which are the functional equivalent of payday loans.
Sometimes this is necessary, but it’s best to get out from under them as soon as humanly possible.
The Who:
The Lind Partners, the parent company behind the Lind Global Macro Fund, provides growth capital to small and mid-cap publicly-traded companies in the US, Canada, Australia and the UK. Their investment range is from $1 million to $30 million. Their portfolio includes 100 direct investments totalling over USD$1 billion with a reputation of being a flexible and supportive capital partner.
The What:
Lind’s original investment will be CAD$3 million, minus a commitment fee of $90,000, in exchange for a convertible security worth $3.6 million, broken down into a principle of $3 million and a pre-paid interest amount of $600,000.
Six months post-closing, Bioasis will start to repay the first convertible security in $125,000 instalments, with $20,000 of that per month in interest. That’s roughly 16%.
Lind will also get the option to convert pre-paid interest into shares at 90% of the market closing price on the day after conversion.
If there’s a bright spot it’s this:
Lind will not be allowed to sell any Bioasis shares from the First Convertible Security for four months and a day after they’re issued, and won’t be allowed to sell Bioasis’ shares short during the term, either. This kind of behaviour is usually what causes the death spiral we talked about earlier. They avoided it, though. Good.
After the first four month period, Lind will get the right to convert their portion of the principle into common shares at $0.31 a share. The agreement also gives Bioasis the option to get up to $7 million in additional investments, in exchange for another convertible security with similar terms.
And Bioasis can buy back their outstanding convertibles at any time in cash with no penalty, but if they do choose to exercise the buy back option, Lind will then get the option to convert up to 33.3% of their principle at the conversation price, and then any of the accrued pre-paid interest into shares.
Here’s what else they’re getting into:
“As part of the First Convertible Security financing, Bioasis will issue Lind 4,839,048 warrants exercisable for a term of 30 months at an exercise price of C$0.41 per share. Bioasis will have the right to accelerate the expiry date of a certain number of warrants, subject to certain conditions, including that no event of default has occurred, as follows: (i) if Bioasis’ shares trade above C$1.27 for 30 consecutive trading days, it can accelerate the expiry date of 50% of the warrants; and (ii) if Bioasis’ shares trade above C$1.80 for 30 consecutive trading days and the First Convertible Security then outstanding (along with all outstanding accrued pre-paid interest) has been fully repaid or converted, then Bioasis can accelerate the expiry of all of Lind’s remaining warrants. Any warrant exercise proceeds will be applied to the outstanding Principal Amount of the First Convertible Security.”
That’s unfortunate, because it promises more share dilution and downward price pressure should the company start doing well, but like we said in the opening: science isn’t cheap, and sometimes situations like the above are the price of doing good business.
The first convertible security is expected to happen approximately June 25, 2021.
—Joseph Morton
Full disclosure: Bioasis Technologies is an equity guru marketing client.
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