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Raising Cash Via Direct Public Offering

Rand Mulford, Executive Vice President of Corporate Development, Adamis Pharmaceutical Corporation

All startup companies need capital. Bio-pharmaceutical companies need even more capital to survive the long journey through U.S. Food and Drug Administration approval to generating revenues and profits, and they need it more often.

Our company, Adamis Pharmaceutical Corporation, is no different. A Delaware corporation founded in June 2006 with no operations or revenue to date, Adamis is seeking to develop a novel technology for the prevention of viral infections, starting with avian influenza. Our strategic objective is to build a publicly held company that combines the financial stability and sales force of a specialty pharmaceutical company with the near-term development of biopharmaceutical products. We are implementing this strategy in three steps:

  • We have in-licensed a broad technology with potential to provide protection against a number of different viral infectious agents.
  • We are negotiating a merge with a rapidly growing specialty pharmaceutical company that will provide cash flow, assets, and contribute significant market value.
  • We plan to in-license or acquire the right to develop and market additional products.

While early-stage companies' need for capital has long been a given, what has changed significantly in the last four or five years are the financial markets. With fewer initial public offerings (IPOs), venture capitalists have lost their appetite for early-stage deals, resulting in much less money available.

Adamis could have gone the venture capital route. But venture capitalists pay less per share in return for the five-to-eight years they typically wait for potential return on a high-risk investment. That, in turn, would have required us to sell many more shares to get the money we need.

In the past year, this environment has led many companies, including Adamis, to explore various financing options known as alternative public offerings (APOs), such as reverse mergers. In a reverse merger scenario, we would acquire a public shell, e.g., a publicly traded company that is no longer a functioning business. This would save time and effort to register with the U.S. Securities Exchange Commission (SEC) and deliver a shareholder base and publicly tradable stock.

However, public shells are quite expensive. In addition to legal and accounting fees, people who control a "clean shell" with few liabilities generally demand ownership of five to ten percent of outstanding shares plus cash ranging from $250,000 to $750,000.

Based on our "make-versus-buy" analysis, we chose to raise public money by creating our own shell through direct registration (also known as a direct public offering) with the SEC.

Most people think of an IPO as the only way to become public and don't realize that an IPO is actually two transactions that occur simultaneously. One is registering stock with the SEC and the other is having a brokerage company undertake selling the stock to the public. In fact, as long as a company has a reasonable number of shareholders-in the range of 50 to 200-you can file with the SEC to have the stock publicly tradable but not raise money simultaneously.

Why go through all the time, trouble, and expense to do this as well as annual costs from $500,000 to $1 million, even for the smallest business, to be a public company? For two reasons: access to more funding sources than a private company and higher valuation. We believe we can appeal to a larger group of funding sources and obtain higher valuation by going public than if we remain private. And we think we can make our own shell cheaper than we can buy one.

As we proceed down the road of direct registration, which would be effective by the second quarter of 2007, we are also approaching multiple sources of funding. Doing both tasks at the same time comes with slightly more risk. If along the way, however, a potential financing source indicates a preference for funding a shell, we will have already completed most of the necessary work—producing complete financial statements, completing shareholder agreements, and conducting audits—to execute a reverse merger.

In preparation for the direct registration, we are building a shareholder base by selling shares through a private placement. In the process we hope to raise $3 million to $5 million. Subsequently, we plan to raise another $10 to $20 million in institutional money. We believe those funds will take us to the point where we have strong results from Phase I and II clinical trials, and ultimately to a secondary offering of $50 million or more.

Like many early-stage companies, we take a little funding, grow a little, and take some more. Like all good entrepreneurs, we remain flexible every step of the way.

© 2006 Ewing Marion Kauffman Foundation. All rights reserved.

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