2-2-21 Cytodyn Update
But after a deep dive on the company’s financial statements and SEC filings, a picture emerges of company management working with a “toxic lender” to funnel severely discounted shares to the lender regularly. An investment in Cytodyn is a purely speculative bet on my part, and if the expected upward price movement does not occur after results in the company’s phase 2b/3 trial for severe-to-critical COVID-19, I will exit the investment.
f the company’s drug does in fact reliably save lives in severe-to-critical COVID19 patients, then a groundswell of investor support could push the company into new, higher-grade relationships, which would allow for the redemption of debentures and elimination of reliance on fly-by-night financings such as those described below.
Cytodyn’s sole focus is developing therapies based on a monoclonal antibody called “leronlimab”, technically described as “humanized IgG4, monoclonal antibody (mAb) to the C-C chemokine receptor type 5 (CCR5)”. This engineered antibody was purchased from Progenics Pharmaceuticals as “PRO 140”, a recently-acquired subsidiary of Lantheus Holdings Inc (NASDAQ:LNTH), back in 2012.
Total cost of acquisition amounts to $10 million plus a 5% net royalty on commercial sales.
The drug was acquired on its early promise as an HIV treatment, for which continued development and research by Cytodyn has demonstrated the ability to reduce daily drug cocktails with myriad pills into a single monthly injection, in some cases, with zero side effects. To date, the FDA has denied Cytodyn’s Biologics License Application (BLA)
Since then, Cytodyn’s scientific team has found the antibody’s effect on the CCR5 receptor has extremely positive therapeutic implications for everything from certain solid tumours to NASH (Non-alcoholic steatohepatitis), the liver function ailment that afflicts up to 12 percent of the US population, and up to 26% globally.
But the real emergent and potentially transformational application for leronlimab, as stated at the beginning, (which is now being branded as Virylogix by Cytodyn), is for the Acute Respiratory Distress Syndrome (ARDS) caused by COVID-19 that precludes the Sequential Organ Failure in fatal instances of COVID infections.
Leronlimab apparently blocks the CCR5 receptor from over-responding to the virus and launching the now household-word “cytokine storm”. Some proportion of patients apparently return from the brink after 2 treatments (and in some cases, 1 treatment) of leronlimab, even if intubated.
The company completed enrollment of a phase 2b/3 trial on December 15 to “evaluate the efficacy and safety of leronlimab for patients with severe-to-critical COVID-19 indications is a two-arm, randomized, double blind, placebo controlled, adaptive design multicenter study,” according to the company’s press release.
This trial period concluded on January 12-ish, and if the results are positive, this will make leronlimab a top treatment for ARDS.
While the vaccines that are currently circulating are definitely lending hope for a normalization of society by mid-2021, the surging global rates of infection mean the immediate future is already overwhelming health care systems around the world as more and more people require access to Intensive Care Unit hospitalization.
During my first interview with Dr. Nader Pourhassan back in March of 2020, his extreme enthusiasm for the prospects of this drug’s effectiveness was evident.
This was before the now raging second wave had gathered steam, and he was then seeing patients who were receiving leronlimab under the FDA’s Emergency Investigative New Drug exemption.
At the time, though, this small independent biotech with no major funding and a decidedly unfortunate public listing on the naked short-sellers’ dream OTC marketplace was getting ready to apply for a listing on NASDAQ, and the deck was stacked against it.
Full Disclosure: I own 10,000 shares at an average cost of $6.23
While the world focuses breathlessly on the hope for a new vaccine to regain their social liberties, the 10-ish percentage of COVID infectees who descend into the cytokine storm-driven ARDS literally have their lives saved by this apparently versatile drug. For them, a vaccine is literally pointless.
This drug has “blockbuster potential” written all over it.
With 394 patients enrolled in the Phase 2b/3 trial as of December 16, and first data expected this week, any demonstrable consistency in the data is going to capture the world’s attention in the most profound way. Short sellers could be swept aside (at least temporarily) as the company’s new share price levels qualify it for NASDAQ listing.
Cytodyn management says it has 700,000 doses ready for sale now, with an additional 2.5 million ordered for each of 2021 and 2022 in a manufacturing agreement with Samsung, according to its CEO.
So if leronlimab/PRO 140/Virylogix is so great, how come the stock’s been stuck in sub-$5 penny stock purgatory for so long?
The quick answer is “OTC”.
Besides struggling with a share price under $3, the company has not been able to meet and maintain certain other quantitative requirements, like positive shareholders’ equity of at least $5 million.
But in the NASDAQ world, there are non-quantifiable behaviours by companies that cause delays to NASDAQ listings. Overtly promotional communications are among such criteria that will never result in a refusal letter...nor a NASDAQ listing.
More importantly, Cytodyn has also not been able to access capital under conventional means, thanks to its being listed on the OTC, and therefore un-attractive on that basis alone to white shoe firms.
So, they have been reduced to accepting shareholder-hostile OID debentures with ugly conversion terms that create a short-seller’s wet dream.
In November, they borrowed 28.5 million from Streeterville Capital of which only $25 million was paid to the company; $3.4 million is the discount the Streeterville pockets, and $100k is set aside to cover the expenses. Streeterville is associated with Illiad Trading and Research, which is controlled by John Fife of Chicago Ventures Inc. Iliad has been called a “legendary so-called toxic lender”, by rival research firm Utopia Capital Research.
Under the terms of the deal, Cytodyn has to pay back $7.5 million a month. If they don’t have the cash, they pay in stock; most recently, at a conversion price of $3.40 a share.
Now just imagine if you’re an opportunistic low-rent lender and you’ve got a guaranteed 2.2 million shares coming your way in the first week of each month. Any price above the conversion price is pure profit. Remember - this guy isn’t an investor; he’s a lender.
He’s not operating on the expectation that Cytodyn stock could go parabolic if leronlimab is deemed a cure for ARDS; his business model is to limit risk and maximize upside through discounted conversion of share.
This is the short seller’s wet dream I’m talking about. Not only is the lender enticed to go short, but any short-trading bucket shop in town who can fog a mirror and read an EDGAR filing know that every month, like clockwork, there’s going to be 2 million+ shares hitting the bid down to $3.40.
The SEC is not impressed, and on September 3, 2020, filed a complaint.
The Securities and Exchange Commission today filed charges against John M. Fife of Chicago and companies he controls for acquiring and selling more than 21 billion shares of penny stock without registering as a securities dealer with the SEC.
The SEC's complaint, alleges that between 2015 and 2020, Fife, and his companies, Chicago Venture Partners, L.P., Iliad Research and Trading, L.P., St. George Investments LLC, Tonaquint, Inc., and Typenex Co-Investment, LLC, regularly engaged in the business of purchasing convertible notes from penny stock issuers, converting those notes into shares of stock at a large discount from the market price, and selling the newly issued shares into the market at a significant profit. The SEC alleges that Fife and his companies engaged in more than 250 convertible transactions with approximately 135 issuers, sold more than 21 billion newly-issued penny stock shares into the market, and obtained more than $61 million in profits.
Streeterville Capital is not mentioned as an entity in the complaint. Which suggests that it was likely used by Fife and Cytodyn to avoid detection by the SEC that this same scheme was being perpetrated on Cytodyn at the time of its complaint.
But that’s not the only reason the stock can’t maintain any upward momentum.
The company has been selling stock privately at ridiculously low prices, to the point where one wonders just who exactly are the lucky winners of what amounts to free millions of dollars?
To wit:
In addition, beginning in the month of November 2020 and for each of the following five (5) calendar months thereafter, the Company is obligated to reduce the outstanding balance of the Note by $7,500,000 per month (the “Debt Reduction Amount”). Payments the Company makes under the Prior Notes will be credited toward the payment of each monthly Debt Reduction Amount. The Debt Reduction Amount payments are not be subject to the 15% prepayment premium.
Also detracting from the company’s shine is the propensity of management for excessively promotional communications with shareholders. During an investor webcast on January 5th, the company played a series of audio testimonials from patients using PRO 140 for HIV treatment, backed by tear-jerking music, and replete with emotional language devoid of data.
Worse, the company’s phone number at the bottom of press releases includes an extension for Mike Mulholland, the CFO, and Nader Pourhassan, the CEO, but neither one is a “valid extension” according to the automated system.
That’s the kind of approach that the FDA and SEC view unfavourably, and is likely at least in part the reason for their continued underdog status at both agencies.
The company has also become unresponsive to requests for interviews, and so with the story coming out under only these ill-advised publicity stunts, shorts are attracted, and big money investors, alienated.
But think of this “management discount” as the opportunity to acquire a sizable position (should one be so inclined) in what could very well turn out to be, in a matter of weeks, as the leading treatment for severe COVID19 related illness.
I expect the data from the trial now concluded for just such an indication could launch the company into a whole new valuation altitude that will allow it to overcome these shortfalls.
Average trading volume is steady above 6 million shares a day, and before the end of this week, we’ll know just how effective leronlimab/PRO 140/Vyralogix is at saving lives from the worst of COVID 19. If the results are positive, this could be a big winner.
But if not, probably not worth holding in view of the persistent dilution.
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