Cleveland On $NGEN: Are Nervgen's Books Really Squeaky Clean?
[Editor’s foreword: Late in the summer of 2017, Contributing Editor Cleveland and I were site-visiting a relatively new biotech firm on the west coast. I’d introduced myself to management, which now turned its attention to Cleveland. He told them of his background as an analyst and inveterate trader, and explained he now loves nit-picky analyses of the capital structures and fiscal health of small-cap biotechs.
He held up a legal pad. “For example,” Cleveland said, “I’ve noted down all the instances in which this company has raised capital over the years.”
“Lemme see that,” said the CEO. He scanned Cleveland’s notes and his jaw fell, leaving his mouth slightly agape. “Sh*t,” he said. “Even I’d forgotten many of those! How did you come by that?”
Cleveland responded simply. “I’m a good finance researcher…and I love detail.” By “good” he means he leaves no stone unturned and kneads databases you and I neither know exist nor have access to. Cleveland is meticulous. He loves lists of facts in unimpeachably clear order. Though he’s worked in ethereal financial settings, Cleveland is candid about his blue-collar origin and his permanent sympathies with and advocacy for the “common man,” the retail investor.
Cleveland’s core thesis in biotech investing is this. Biotech is costly to execute, but MUST create shareholder value that keeps pace with sums of capital invested. He thinks in terms of “the Cleveland ratio,” which is market cap (present company valuation: total share count multiplied by share price) divided by total capital raised. Companies that have Cleveland ratios of 1 of above are on remarkably good footing. But as the Cleveland ratio drops below 0.5, we lapse into a worry zone where a company is burning capital more quickly that it is creating shareholder value. Cleveland contends this is a rut, a dive from which most companies never quite re-emerge. Sure, a big buyer could come along and invoke largesse to simply pay off early investors but if you contemplate things, you realize how unlikely that is to happen. A company whose market cap cannot keep up with capital invested isn’t creating shareholder value because it’s not impressing anyone. We think big pharma pick over these kinds of companies and move on.
In a prior year, many Pubsters and I grew interested in Windtree Therapeutics and stood poised to invest. Cleveland came along and pointed out that this microcap was essentially concealing hundreds of millions in early dilutive placements and financings…and that pragmatically it could thus never reach viability. His analysis has proven correct. The chart ($WINT) is of a stock going ever-downhill straight. I long since vacated my position in it, and Cleveland’s analysis saved me tens of thousands of dollars.
He now turns his critical utensils and cognitive laser beam to NervGen, a company whose IPO was offered to BioPub because of founder organization admiration for this publication. Our analysis of NervGen found it to be a highly favorable investment. Is it still? And does Cleveland agree with your formulation?–KSS]
NervGen Pharma Corp. to the Rescue?
In the summer of 1979 my good friend Darrell was riding his motorcycle in the Tucson desert. Puttering down a desolate dirt road at a leisurely pace, he went over a small hill and somehow lost control of the bike in a freak accident. He was paralyzed from the neck down because of spinal cord injury.
He was 27 and newly married. Within a few months he was divorced and in excruciating pain. Over the ensuing years because of the pain he attempted suicide several times. I remember telling him that science would create a cure, and to hang on. But he never made it for the cure: Darrell succumbed to complications at 39. Ugh…. life is fragile.
It is very rare to have the opportunity to be on the ground floor of any IPO. This is truly on the ground floor. NervGen is less than a year old and had only raised C$ 3.8 million prior to the March 2019 IPO event. Thanks to Doc and Allan Lee, this opportunity became available to BioPub readers.
My purpose is to review the financial buildup of NervGen to the IPO. NervGen is following the exact template that Cohbar ($CWBR) followed in 2015:
“On January 6, 2015 of 11,250,000 units at a price of US$1.00 per unit, providing gross proceeds of US$11,250,000. The initial public offering was conducted in Canada and registered in the United States pursuant to a registration statement filed with the U.S. Securities and Exchange Commission. CohBar has 32,265,343 shares of common stock issued and outstanding after completion of these financings.”
CohBar did its IPO in January 2015 and we became interested in in the company in late 2017. Investing in NervGen today is like investing in CohBar in January 2015.
For NervGen everything about the capital structure and capital buildup to the IPO is extremely simple and clean. No warrants. As far as employee stock options 1,050,000 (75% of total outstanding) are being priced at C$ 1.00 the IPO price. Many companies would have tried pricing the employee options at a lower exercise price.
On June 25, 2018, an exclusive license was obtained from Case Western Reserve University (“CWRU”) for the consideration of US$ 25,000 cash, 601,659 shares valued at the time of issuance at C$ 169,130. The upfront consideration exchanged with CWRU for an exclusive license appears to be extremely cheap. The future obligations to CWRU for annual license fees, patent costs and milestone costs total US$ 2.1 million over five years. Appears to be very reasonable. [Editor’s note added in proof: NGEN’s technology license with CWRU required about 2 years to negotiate because of certain CWRU bureaucratic considerations as well as that university’s relative lack of experience negotiating such licenses. Compared with similar prevailing license arrangements, NGEN’s deal is inexpensive and thrifty for shareholders.]
I have been told that the royalty pertaining to the NervGen license averages under 2% during its duration. This also seems extremely reasonable. The exact royalty is subject to a non-disclosure agreement between Case Western and NervGen.
CWRU has expended substantial moneys to bring the licensed technology to its present state. It is estimated that $ 5.5 million was spent on research and development prior to the NervGen IPO. This is very similar to Cohbar-
“CohBar is capitalizing on founders scientific discoveries resulting from 15 YEARS of research and $30 million of grants on MBTs”
Shareholders derive substantial benefit from these research and development expenditures prior to going public. The public vehicle obtains the benefit of such research but does not have to use current cash capital to expend in such research previously completed.
The fact that the same people (Haywood Securities, Vancouver, BC) that funded and started Cohbar have done the same for NervGen says a lot. This group of investors is long-term-oriented and has been very successful as a group for a very long time (1990’s).
If one participates in an IPO one should focus on what is called insider and major shareholder “lock-up” provisions. By written agreement insiders and whoever else the underwriters deem important to lock-up agree not to sell their shares for the lock-up period. NervGen followed Canadian regulations and set up lock-up of NervGen shares via Escrowed Securities account. They have established NervGen Escrowed Securities totaling 8,425,000 shares mostly acquired at an average of CDN$ .054 per share in June 2018 that will be released from the lock-up at prescribed times. 842,500 or 10% will be released immediately and 15% will be released that are 6, 12, 18, 24, 30 and 36 months after the first release. The holders can decide not to sell but to continue to hold their shares once the lock-up lapses. The other lock-up pertains to 2,989,000 shares acquired at $.20 share in June 2018 in which 597,800 shares will be released immediately with the rest locked up over various time periods. So the total shares in Escrowed Securities account is 11,414,000 shares or 66% of the 17,201,659 shares before the IPO.
If you acquire your NervGen shares in Canadian Dollars you can see from this that the CDN$ is near a 10 year low to the US dollar. Any appreciation of the CDN$ at the time of sale of NervGen would be an additional benefit.
NervGen Capital Analysis
Shares C$ % of Shares
Stock to Founders $.01 6/18 7,000,000 $ 70,000
Private Placement $.20 6/18 3,975,000 $ 795,000
Consideration CWRU License 601,659 $ 169,130
Private Placement 9/18 $.50 5,625,000 $2,812,500
Total Before 3/19 IPO 17,201,659 $3,846,630 58.7%
Employee Stock Option $.88 1,400,000 $1,225,000 4.8%
Agent’s Option $1.00 700,000 $ 700,000 2.4%
Private Placement IPO $ 1.00 500,000 $ 500,000 1.7%
IPO CDN$ 1 10,000,000 $ 9,300,000 33.6%
Total 29,801,659 $ 16,271,630 100%
Average per Share C$ .55
The IPO investors have put up approximately 62% of the total NervGen capital for 34% of the total shares. Whereas all others have put up or will put up (in case of options) 38% of the total NervGen capital for 66% of the total shares.
Detailed Background Dr. Jerry Silver
Disclaimer: This has been prepared for information and illustrative purposes only for the author to summarize thoughts. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. The purpose of this discussion was to examine the financial aspects of the company.
All investments entail risks which one should always consult with qualified advisors for counsel and assistance in doing due diligence for one’s benefits. Events change circumstances daily and one should ascertain the impact of these daily events.
Copyright 2019 by Cleveland and BioPub. Edited by KSS. All rights reserved. May not be produced without permission. This column is neither advice nor solicitation regarding buying or selling $NGEN shares. The author’s source materials for this column included personal communications with $NGEN Chairman Radvak, CEO Wong and scientific founder Jerry Silver, PhD, all of whom cooperated fully with the author in preparing for publication. The author declares no position in $NGEN while KSS has a long position. Neither Cleveland nor KSS will trade in $NGEN shares for 7 business days after the column appears. Neither BioPub nor its authors and editors have a pecuniary relationship with $NGEN. BioPub and its writers and editors have no pecuniary relationship with NervGen. NervGen shares are now traded on the Toronto venture exchange, ticker $NGEN. Without advising readers to invest in NervGen, we suggest they consider these shares as a potentially appealing investment, one that could forever change clinical practice.