Lincoln Park Financial set up a $55 million line of vulture financing for Galena Biopharma (GALE) last week, the scandal-ridden bio-tech company still under active SEC investigation for paying outside firms to promote its stock while insiders made millions of dollars selling company shares.
Lincoln Park's involvement here is interesting in that these are the guys willing to throw a cash lifeline to companies unable to raise money via a traditional stock offering. Galena, according to a source familiar with the company's funding shortfall, was unable to muster sufficient interest from institutional investors. So, Galena has apparently turned to Lincoln Park, which has a reputation for financing troubled biotech companies -- but at great cost.
Galena tried its best to spin the Lincoln Park arrangement positive, but the onerous deal terms are detailed in the company's regulatory filing with the SEC.
Under terms of the agreement, Lincoln Park is buying an initial $5 million in Galena stock at $2 per share. Galena, in its press release, claimed the purchase price was 9% above the stock's closing price of $1.84 on Nov. 18. Galena failed to mention publicly that Lincoln Park was given 631,221 free shares of company stock in order to make the financing happen. Add those free shares into the calculations and Lincoln Park's $5 million initial investment in Galena is valued at $1.59 per share, or a 14% discount to the market price at the time the deal was signed.
Over the next three years, Galena can put blocks of its stock to Lincoln Financial for purchase, up to $50 million. Left unsaid by Galena is that Lincoln Park gets to buy this stock at best price, if not a discount, to the market. According to the deal terms described in the SEC filings, the purchase price of the Galena stock will be the the lower of two scenarios: 1) the lowest sale price of the common stock on the date of purchase; or 2) the average of the three lowest closing sale prices for the common stock during the 10 consecutive business days preceding the purchase date.
What does Lincoln Park do with the Galena stock it buys from the company at a discount? The firm re-sells the stock right back into the market, making a profit on the difference in price. Galena describes Lincoln Park as an "institutional investor," implying the firm is investing in the company as a long-term shareholder. That's not how Lincoln Park operates.
Galena' press release claims Lincoln Financial is prohibited from shorting the company's stock, but the fine print of the deal disclosed in the SEC filings only says Lincoln Park is restricted from having a "net short" position. That's a subtle difference but important because it allows Lincoln Park to make additional money off Galena by arbitraging, or selling, shares it expects to receive.
The initial reaction to the Lincoln Park deal from Galena's largely retail investors shareholder base has been positive, illustrated quite well by the tweet below: