seeks to solve its most immediate financial problem by trading the company's common stock for a majority of its debt coming due in July.
Under a tentative agreement announced Monday, Cell Therapeutics said it plans to exchange 60 million shares of unregistered common stock for up to $30 million in debt due July 1. Cell Therapeutics has another $10 million in debt due at the same time -- or $40 million in total -- but plans to deal with the remaining debt balance were not disclosed Monday.
Cell Therapeutics said it doesn't yet know if the debt holders will agree to exchange their notes for company stock. Final terms of the stock-for-debt exchange agreements would depend on the trading price and volume of the company's stock over the 10-day course of the exchange agreements.
It's not entirely clear what incentive debt holders have in accepting Cell Therapeutics' debt exchange offer. If they refuse Cell Therapeutics' terms, the company would be forced to repay the $40 million in debt using its cash on hand.
Cell Therapeutics had about $60 million in cash at the end of April, so the money is there to repay the debt.
If debt holders agree to Cell Therapeutics' exchange offer and trade $30 million in debt for 60 million unregistered shares of Cell Therapeutics common stock, they risk losing money if the company's stock price falls below 50 cents a share, or whatever final exchange price is agreed upon.
The deal is doubly risky for note holders because the stock they would be receiving is not registered with the Securities and Exchange Commission, which means the stock cannot be sold until it is registered.
Choosing Cell Therapeutics' common stock instead of cash could be a winning play for debt holders if the company's stock price rises. If and when the exchanged stock becomes registered, debt holders could sell the stock for a profit.
. In that deal, debt holders agreed to trade their notes for approximately 15% in cash and 85% in common stock. Those debt holders lost money unless they sold their stock quickly because Cell Therapeutics' stock price has fallen from about $1.70 in June 2009 to about 50 cents today, most because the U.S. Food and Drug Administration rejected in April an approval application for the company's lymphoma drug pixantrone.
It's in Cell Therapeutics best interest to solve its debt problems using the least amount of cash as possible, but the company still faces serious financial problems even if Monday's exchange offer succeeds.
Assuming Cell Therapeutics can wriggle out from under the $40 million in debt due July 1 by paying only $10 million in cash, the company will have approximately $37 million remaining. At a current burn rate of approximately $13 million per quarter (according to Cell Therapeutics' most recent guidance) that leaves the company with about three quarters of cash remaining.
In other words, Cell Therapeutics runs out of money approximately March 2011.
Right now, the ability of Cell Therapeutics to raise more money by selling stock is very limited, if not entirely depleted, because the company is running out of stock in its corporate treasury.
At the end of April, Cell Therapeutics had 656 million shares outstanding, plus another 90 million shares held in reserve. The company currently has 810 million shares in its treasury. This means the 60 million shares to be issued for the debt exchange offer essentially taps out Cell Therapeutics' treasury of issuable stock.
Cell Therapeutics has been trying -- albeit with no success to date -- to get shareholder approval to boost its corporate stock treasury to 1.2 billion shares. Twice now, including last Friday, Cell Therapeutics has been forced to postpone and reschedule its annual shareholder meeting for lack of a quorum. The next meeting is scheduled for June 4, 2010.
In lieu of adding shares to its corporate treasury, Cell Therapeutics might be able to raise money by selling preferred stock that later converts to common stock -- a tactic the company has used before, but which is also partially responsible for its currently over-inflated share count.
-- Reported by Adam Feuerstein in Boston.
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