Yes, you read that right….$3.25 per share
Constellation Alpha Capital Corp. (CNAC) announced this afternoon that they have signed a definitive agreement with DermTech Inc., a molecular genomics company with an initial focus on skin cancer. However, that’s not really the eye-catching headline. What does stand out is the $20 million PIPE that was also announced as part of this transaction that will be done at a price of $3.25 per share. And no, CNAC will not be adjusting the warrant strike price. Consequently, expect warrant holders to be singing love songs about the Crescent Term for the foreseeable future.
However, let’s back it up a bit because there’s a bit of a back story to this transaction. Last August, CNAC announced a definitive agreement with Medall Healthcare, a combination that was ultimately terminated back in December 2018. However, at that time, CNAC was also about to run out the clock on their 18-months, but because CNAC had signed a definitive agreement with a target (Medall) they were able to qualify for a three-month extension. It was a bit of a technicality because the Medall transaction had already been terminated, but nevertheless, they got their extra three months (without a contribution to trust).
Flash forward to March of this year, when their time was about to run out once more, and CNAC needed to extend again. However this time, they would need to extend via a shareholder vote. Now, typically, a SPAC needs to contribute additional funds to trust when an extension is tied with a shareholder vote so that the SPAC can protect the cash in trust. If they don’t contribute, they run the risk of significant redemptions. However, CNAC decided not to contribute funds at their March vote. At the time, I posited that CNAC was strategically trying to reduce their trust value so the transaction with their announced LOI (Dermtech) made more sense. CNAC had approximately $147 million in trust at the time and while we didn’t have any documents filed on DermTech, it seemed reasonable given what little information we had, that $147 million was going to be a bit bloated and may even run into problems with the 80% rule for SPACs. Therefore, it seemed reasonable that they WANTED redemptions and the easiest way to make that happen is to not offer additional funds to SPAC investors for asking them to stick around another six months.
And sure enough, CNAC had a ton of redemptions in March. Hence, post-vote there was only approximately $12.3 million left in trust. There really aren’t many CNAC shareholders left at this point and given that CNAC announced a new PIPE at $3.25 per share, you can bet any remaining shareholders are not sticking around any longer than they need to. However, CNAC does still have 14,375,000 warrants outstanding to purchase 1/2 an ordinary share (or 7,187,500 warrants). And those warrants have an exercise price of $11.50. That means, warrant holders are now looking at being $8.25 out-of-the-money, not $1.50. Ouch.
However, there are two more things to consider. One, CNAC’s unit has Rights. So, while a company facing a nearly complete redemption of the trust would normally have a basically non-existent float post-closing, CNAC/Dermtech will have approximately 1,457,500 Rights shares hitting accounts shortly thereafter. That’s still not a huge float, but it’s not zero either. Two, Dermtech is a “medtech” company and as such, certain news announcements such as gaining insurance coverage, etc., have the potential to create volatility in companies in the life sciences sectors. Therefore, at least some float and the potential for share volatility is slightly more helpful to warrant holders. To be sure, it’s still not great and warrant holders will not be happy, but if you’ve got a 5-year warrant, CNAC/DermTech’s situation is a little bit better than if this were an oil & gas company with zero float. Having said that, look for the share price to crumble once those Rights shares hit accounts and the sell-off begins.
This deal is getting done, but it ain’t pretty.
Additional info: this transaction has a pro-forma enterprise value of $61.6 million (assuming a $3.25 share price) and CNAC’s sponsors will be forfeiting 2,699,799 of their founders shares. The sponsors will be left with 893,971 founders shares and will be keeping all of their private placement warrants and private placement rights (561,250 each). Furthermore, there is a minimum cash closing condition of at least $15 million, of which, the $20 million PIPE will satisfy. You can review the filed presentation HERE.