Friday’s announcement from Valirx (LSE:VAL), which saw it reveal that it has entered into a shockingly expensive death spiral with European High Growth Opportunities (EHGO), is downright contemptible. We appreciate that companies will always try to put a spin on negative news, but the claims from CEO Dr Satu Vainikka that “this investment” is “at a premium” are disgracefully misleading. It is so disappointing that the company’s nomad, Cairn Financial, allowed this RNS to go out, but be under no illusions. This toxic deal spells the end for shareholders (and almost certainty the company). Sell this stock while you can and never look back.
EHGO shot to prominence last year when it bailed out lying “tech entrepreneur” Joao Andrade, of Widecells (LSE:WDC) infamy. That convertible loan was a disaster. It led to an immediate 75% collapse in the Widecells share price and effectively stuck a stake through its failing business model. The clumsy execution of that convertible loan has made it extremely difficult for EHGO to extricate itself from that mess, but clearly the clever people behind the opaque Luxembourg fund are unperturbed.
They returned to us on Friday morning with a new box of tricks, no doubt believing that – as the smartest people in the room – they can foist whatever crap onto the retail market they like and mug punters will just lap it up.
Let’s hope they’re wrong.
This Valirx deal is appalling.
Let’s start with the headline terms of the so-called “investment at a premium”. Valirx claims it is going to receive three tranches of £426,000 between 01 May and 14 June, raising gross proceeds of £1,278,000 at a subscription price of 0.6p per share. Valirx’s mid price is currently 0.4p, so technically one could claim that the price of the EHGO death spiral is at a premium.
But hold on a second there…
First, Valirx has agreed to pay a £278,000 “structuring fee” to EHGO, meaning the net amount the company MIGHT receive is £1,000,000. Excuse the exaggerated emphasis of the word “might”, but you’ll soon see why it’s justified.
Scroll a bit further down the RNS and we discover:
“The Agreement stipulates that the Investor shall provide to the Company additional financing by way of Convertible Funds, subject to signature by both parties to definitive documentation by 21 June 2019.
Should definitive documentation not be signed by 21 June 2019, ValiRx shall be required to pay the investor a break fee totalling £150,000 (the “Break Fee”) plus an additional amount in the event the Company’s share price declines in the period to the date the Break Fee crystallises. This additional amount is to be calculated by multiplying the stock performance of the Company (expressed as a percentage) by £1,000,000.”
I’m honestly laughing writing this.
This is almost too outrageous for words.
If Valirx’s share price falls 50% and the company fails to execute documentation on the wider convertible loan package, it will owe EHGO an additional £650,000! (£150,000 break fee + £500,000 fee for the share price dropping 50%).
Given how likely it seems both events will happen, EHGO must think it is on to an absolute winner with Valirx.
And this is on top of the £278,000 “structuring fee” already mentioned.
Using these figures, this would mean if Valirx’s share price is at 0.26p on June 21 and the company fails to execute the wider convertible loan package it will owe EHGO an eye-watering £928,000. On an “investment” of £1,278,000.
This is the worst kind of carcass picking profiteering we see on AIM. It would be far better just to kick these walking dead companies off the Exchange.
The pretence that this accelerated death spiral has been executed at a premium is a further embarrassing sham. The deal with EHGO is a disaster for shareholders. The company must be in the most desperate of positions to have agreed to it. It is shameful that Vainikka said what she said, and it reflects poorly on Cairn that they let the statement go out.
Sell and move on. This company is finished.