Notice: This post has been corrected as of 7pm 2015-10-28 — originally I averaged the past 20 trading day closing prices, rather than the past 10 days. I am sorry for the error.
There is a lot of confusion about how the $50 million funding commitment from Lincoln Park Capital Fund LLC to Anavex Life Scienes (AVXL), and whether this funding is good or bad. To see all the details on the funding, look at the S-3 filing by AVXL to register the shares they will issue. The most important part of the agreement is below:
Under the Purchase Agreement, on any business day selected by us, we may direct Lincoln Park to purchase 50,000 shares of our Common Stock on any such business day. On any day that the closing sale price of our common stock is not below $7.00 the purchase amount may be increased, at our sole discretion, to up to75,000 shares of our common stock per purchase; on any day that the closing sale price of our common stock is not below $9.00 the purchase amount may be increased, at our sole discretion, to up to 100,000 shares of our common stock per purchase and on any day that the closing sale price of our common stock is not below $11.00 the purchase amount may be increased, at our sole discretion, to up to 125,000 shares of our common stock per purchase and on any day that the closing sale price of our common stock is not below $13.00 the purchase amount may be increased, at our sole discretion, to up to 150,000 shares of our common stock per purchase. Such purchases are hereinafter referred to as “Regular Purchases”. In no event shall Lincoln Park purchase more than $2,000,000 worth of our common stock pursuant to a Regular Purchase on any single business day. The purchase price per share for each such Regular Purchase will be equal to the lower of:
- the lowest sale price for our common stock on the purchase date of such shares; or
- the arithmetic average of the three lowest closing sale prices for our common stock during the 10 consecutive business days ending on the business day immediately preceding the purchase date of such shares.
So while Anavex can decide when and how many shares to force Lincoln Park to buy (up to certain maximum amounts depending on the stock price), the shares come at a price determined by a preexisting formula. What would happen if Anavex were to sell shares to Lincoln Park today? The first price would be $8.72 (today’s low). The closing price for AVXL over the past 10 trading days are as follows:
The three lowest closing prices are $7.65, $7.87, and $8.37. The average of these prices is $7.96. This is lower than today’s low so Lincoln Park would get the shares $7.96, a 20.4% discount to the current price of $10.00. In other words, Lincoln Park would easily make lots of money selling these shares the next day with essentially no risk.
But what if the stock price is not rising? Let’s assume that the last 10 trading days were all the same and that today had the lowest prices of all of the last 10 days. So I look up the prices on October 23rd and see the low was $6.51. Assuming that day happened today, Lincoln Park would get the shares at $6.51 (and the stock closed that day at $7.65). This is a 14.9% discount to the close and would allow Lincoln Park to again make easy, low risk money by selling the next day. The worst case scenario would be for AVXL stock to slowly fall with little range, in which case Lincoln Park would be able to purchase shares at a small discount to the closing price and likely break even. If the stock has been going up or been going sideways while having a wide range they get stock at such a discount as to almost guarantee a profit.