Cryoport: (CYRX, $20.10, Buy) Announcement of Potential Convertible Offering Pressures the Stock
Cryoport’s stock at the time of the writing of this note has traded down $5.19 or 20% following the announcement that the Company will be issuing a $100 million convertible note with the green shoe potentially adding another $15 million, underwriting discounts could reduce this to $110 million or so. The cash balance at the end of the 1Q was $97 million so this could bring the cash balance to $207 million. The Company generated cash flow from operations of about $1 million in 1Q, 2020 and I would expect positive cash flow this year. The capital is not being raised to fund a burn rate. The major factor in the decision to raise cash was the expectation of as many as six new BLAs being filed this year in addition to the ten I described in my last report. The Company wanted to be sure and its customers wanted to be sure that Cryoport had the capital needed to support the potential product launches. It does. Also, in the age of Covid-19 there is no certainty on whether the capital markets will be open for raising capital at a later date. Strike when the iron is hot.
If you are a human you can never be too thin and if you are a biotechnology company you can never have too much capital. I am appalled at the degree of the selloff and this probably reflects some of the positioning going on in front of the offering. Management stated that they would have preferred to do an equity offering, but potential buyers were demanding too much of a discount and the terms of a convertible were more favorable.
There are a group of hedge funds who specialize in buying convertibles and then shorting against their positions. I have never had anyone explain to me their strategy, but I have seen the result time after time put consistent pressure on the stock price. When I raised this point, management said that they were aware of this common manipulation scheme and were careful to market the offering to long only funds. When all is said and done, I would have preferred a straight equity deal. However, I do agree with the decision to raise capital and feel that this is positive for shareholders. The stock price behavior, of course, is totally unrelated to any fundamental concerns.
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“green shoe” Is a term new to me. Could you explain.
“green shoe” is a term that refers to the extra allocation of an underwriting. So if there is an offering of 2mm shares, and the offer is oversubscribed, underwriters have the ability to fill an extra 10% of demand via the “green shoe”, say another 200,000 shares. No idea where the term originated, but it is a common feature in underwritings that is usually exercised.