At the end of May 2016, StemCells Inc (NASDAQ:STEM) announced it was winding down and going out of business. Fast forward three months to the third week August, and the company announced a pivot that will see it merge with a private Israeli biotech called Microbot Medical Ltd. The announcement sent the company’s share price rocketing, closing out the announcement session 600% higher than it started it. Some degree of rationality has now returned to the market, and a pullback has brought StemCells to trade just ahead of $1.8 a share.
The thing is, none of this matters anymore, and that people are still holding on to their StemCells exposure is nonsensical. There seems to be some confusion as to why this is the case, so let’s clear things up a bit.
There’s no real need to go in to the history of StemCells here, other than to say it developed a clinical candidate, took it through early stage trials, couldn’t prove its efficacy, and ran out of money. That’s the long and short of it. Now, instead of unwinding completely, it’s merging with MicroBot. The important thing here is for investors to understand why it’s merging with MicroBot. The two companies aren’t going to be collaborating on anything. StemCell’s entire workforce is likely to be pink slipped (if it hasn’t been already – 25% got the boot in January) and its operations ceased. MicroBot won’t be working to develop StemCell’s pipeline, or attempting to understand why the above mentioned clinical candidate failed. It’s in this for one reason, and that’s the NASDAQ listing.
“THE COMPANY WILL SEEK TO CHANGE THE NAME OF THE COMPANY TO “MICROBOT MEDICAL INC.” OR ANOTHER NAME DESIGNATED BY MICROBOT”
All this is a dressed up reverse merger, with Stem serving as a shell to give Microbot a quick and easy way to go public on the NASDAQ, while avoiding the standard pre-IPO procedures – audit, prospectus, costs associated, etc.
So what’s important here?
Holders may be tempted to look at Microbot’s operations, and attempt to value their shares against Microbot’s potential as a listed company. Big mistake. Here’s why:
“FOLLOWING THE CONSUMMATION OF THE MERGER, FORMER STOCKHOLDERS OF MICROBOT AND CERTAIN ADVISORS WITH RESPECT TO THE MERGER ARE EXPECTED TO OWN 95% OF THE COMBINED COMPANY AND CURRENT STOCKHOLDERS OF THE COMPANY ARE EXPECTED TO OWN 5% OF THE COMBINED COMPANY”
That’s right. The entire outstanding share base of StemCells will only account for 5% of the new company. Exactly how this will play out, and how the representative 5% valuation will be distributed, is unclear at this point. Chances are it will be on a volume holding representative basis. It doesn’t really matter. Think of this as an instant, massive dilution.
That’s the crux of this situation for holders. It may be a fun stock to dabble in on an intraday basis while markets digest the information. There’s going to be some misunderstanding-based swings over the coming few months while the terms of the deal are met and it heads towards a close. At that point, however, all shares of StemCells are going to get converted into shares of Microbot, and instantly shrink in representative value by a crippling factor.
The CEO is out. The CFO is out. Three directors have resigned. The C-suite is taking home some pretty big severances on their departure, which is great for them, but certainly not for shareholders.
“THE TERMS OF THE LETTER AGREEMENT AND SEPARATION AGREEMENT ENTITLED MR. MASSEY TO A ONE-TIME LUMP SUM PAYMENT OF $216,667.”
“THE TERMS OF THE LETTER AGREEMENT AND SEPARATION AGREEMENT ENTITLED MR. SCHIFFMAN TO A ONE-TIME LUMP SUM PAYMENT OF $187,500 AND COBRA PREMIUMS FOR A PERIOD OF TWELVE MONTHS FOLLOWING TERMINATION.”
Whatever you read about this one, the only pertinent bit of information is that outlined here. 100% to 5%. That’s all that matters.
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Disclosure: We have no position in STEM and have not been compensated for this article.