Advaxis blows up its shareholders, files amended proxy statement

The cancer immunotherapy company Advaxis (ADXS.OB) is asking its current shareholders to take one for the team, and that is putting it lightly. Ahead of the company’s annual shareholder meeting, Advaxis sent out a proxy statement on April 30^th containing a number of proposals that quite frankly wipe out current shareholders, yet reward management with an increase in number of shares under the Omnibus Incentive Plan. To rectify this egregious effrontery, the company filed an amended proxy statement yesterday “lessening” the damage to shareholder value, or does it? To understand the impact on shareholders, I will give readers a brief overview of the previous versus newly filed proxy statement. 

At present, there are approximately 536 M shares of ADXS outstanding (fully diluted). Under the previous proxy, Advaxis proposed to reduce this number to 2.68M under the maximum R/S scenario. Proposal No. 3, however, gives the company the ability to take shareholders to the woodshed. Here it is from the "amended" proxy:

"Proposal No. 3: the proposal to decrease the total number of authorized shares of common stock, to now decrease the total number of authorized shares of common stock post-reverse stock split (emphasis added) to 50,000,000 shares (in the earlier proxy, we proposed a total number of 300,000,000 shares of common stock post-reverse stock split)."

 While it is written as if its “reducing” the share count, it is actually massively increasing it via unholy levels of dilution. The trick is understanding that the proposed share count will be post-reverse split. The previous proxy thus asked shareholders to take a potential 99% dilution on their holdings in ADXS. Yes, that is right. The company is asking for a complete do-over.

If we perform the same exercise, the amended proxy only dilutes shareholders 90% under the maximum scenario. In order to have time to properly stew over this new proxy, Advaxis has moved the annual shareholder meeting to June 14^th.  

Like most investors in ADXS, I invested based on CEO Tom Moore’s statement that the company would go into licensing after successfully completing its Phase II trials with ADXS-HPV. Now that the India trial looks to be successful, I am left scratching my head wondering why there isn't a materially significant licensing deal (FusionVax?), and the company is indicating it will go into Phase III without a major partner. And now they are asking shareholders to essentially lose all of their investment for a possible uplisting to NASDAQ? That is absurd.

Over the past six months, EPE has repeatedly requested to interview management for a piece on cancer immunotherapy, and were told that management was “traveling” by Ms. Moore. Given that we receive dozens of requests by companies for interviews on a weekly basis, this response was beyond mystifying, especially for a company desperately in need of positive PR. As a final attempt at gaining some insight into the dark underbelly of ADXS, EPE contacted Mr. Moore directly via email, expressing our displeasure over the lack of transparency after Advaxis failed to notify shareholders through a proper PR of the failed CIN Phase II trial--instead choosing to bury it in a SEC filing. (To date, there still hasn’t been a PR disclosing these negative results). During the email exchange, Mr. Moore said nothing of the coming storm and simply apologized for the lack of communication with shareholders.

Looking back over the past two years, investors have watched in horror as Mr. Moore hired his daughter to head up IR (nepotism), despite zero experience in this field; misled shareholders about a proper licensing deal (sorry FusionVax is a cruel joke); and hide negative results in SEC filings. Now Advaxis is asking for our "faith" that a licensing deal is close at hand, saying that this is the correct step towards righting the ship. 

I, for one, am out of faith. If a licensing deal was imminent or even possible, why would management take such extreme measures by blowing up their current shareholders? Why not sign the deal, reward shareholders, and finance the company that way? The truth is there is no licensing deal, or at least one significant enough to fund the company in a material way. Furthermore, an uplisting is a Red Herring. Besides the fact that ADXS will still have difficulty meeting the requirements to uplist, an uplisting only benefits future shareholders, and does absolutely nothing to create value for current shareholders, especially given the request to dilute shareholders post-reverse split.

To be frank, the gauntlet has been thrown down by management. Their interests clearly lie with themselves (Omnibus Incentive Plan), and shareholders are little more than a nuisance (e.g., “amended” proxy statement). I applaud shareholders for taking a proactive stance and refusing to give into being utterly wiped out by management. Unfortunately, their reply was wholly insufficient and still wipes out our entire investment. I therefore encourage shareholders to vote no on Proposals 2-4 in the amended proxy. The company most definitely needs major changes, but these are changes shareholders can do without. 

  

Disclosures: EPE is long ADXS but this position is extremely tenuous. We are strongly considering liquidating our entire position within the next three trading sessions.

Micro to Mid-Caps

With the recent editorial restrictions on covering microcaps at Seeking Alpha and Motley Fool, we have decided to change focus at EPE to pick up the slack so to speak. Specifically, our company blog will now focus exclusively on micro to mid-cap healthcare and technology stocks.

As avid investors in microcap tech stocks, we believe there is considerable value in this asset class, as well as substantial risk. That said, we will only cover stocks that are 100% legitimate businesses, not "pump and dump" scams. To ensure this is the case, our team will thoroughly evaluate each company prior to publishing an article. At the same time, we also intend to inform investors of microcaps with a poor record in terms of transparency, business ethics, and generally poor management. In this way, we aim to bring investors only the best of the microcap world, as well as help them to avoid potential pitfalls.

On a final note, we believe it is important for investors to consider microcaps as part of their overall portfolio because many of these companies are indeed viable start-ups that hold tremendous promise for early investors. Moreover, companies in revolutionary new industries such as stem cells, nanotechnology, and robotics frankly rely on venture capitalists to bring these technologies to fruition. Without access to the markets, most (if not all) of these companies would go bankrupt.

So while it is important to understand the considerable risks associated with microcaps in general, it's also important to remember that tech giants like Apple and Microsoft were both once "penny stocks"on the verge of bankruptcy. In hindsight, these two former microcaps have literally transformed society at large, and the lives of early investors like theoretical physicist Antony Garrett Lisi.In sum, we understand the need to protect investors that rely on Seeking Alpha and Motley Fool, but, at the same time, investors need access to information on this segment of the market. We accept that challenge at EPE, and hope to bring investors many intriguing insights on micro to mid-cap companies in the near future.

Sincerely,

EPE

Public Stem Cell Companies with a Market Cap > 20M

Company	Ticker	Stem Cell Type	Primary Indication(s)	Most Advanced Trial
Mesoblast	MSB.AX	Mesenchymal	Cardiovascular	Phase II
Osiris Therapeutics, Inc	OSIR	Mesenchymal	GVHD, Crohn's Disease	3-Phase III
Invivo Therapeutics, Inc	NVIV.OB	Neural	Spinal cord injuries	N/A
Pluristem Therapeutics, Inc	PSTI	Placental	Cardiovascular	Phase I/II
Cytori Therapeutics, Inc	CYTX	Adipose-derived	Cardiovascular/Soft Tissue	Phase II
Advanced Cell Technology	ACTC.OB	Embryonic	Retinal disease	Phase I/II
TiGenix NV	TIG.BR	Adipose-derived	Cartilage Regeneration	EMA Approved
Neostem	NBS	Bone marrow-derived	Cardiovascular	Phase II
Athersys	ATHX	Bone marrow-derived	Cardiovascular, IBS	Phase II
Fibrocell Science, Inc.	FCSC.OB	Fibroblasts	Aesthetic Dermatology	Phase II
EpiStem	EHP.L	Epithelial	Oncology and IBD	Pre-clinical
Neuralstem, Inc.	CUR	Neural	ALS	Phase II
StemCells, Inc.	STEM	Neural	CNS Disorders	Phase I/II
Cytomedix, Inc.	CMXI.OB	Bone marrow-derived	Stoke	Phase I
Brainstorm Cell Therapeutics Inc.	BCLI.OB	Bone marrow-derived	ALS	Phase II(a)
Aastrom Biosciences, Inc.	ASTM	Bone marrow-derived	Critical limb ischemia	Phase III
International Stem Cell Corp.	ISCO	Unfertilized eggs	Brain, Liver, Cornea	Pre-clinical
RegenoCell Therapeutics, Inc	RCLL.OB	Hematopoietic	Cardiovascular	Pre-clinical

World's Inc: The next big patent play

Worlds Inc. (WDDD.OB) is suing Activision Blizzard (ATVI) for patent infringement in the U.S. District Court for the District of Massachusetts. The lawsuit alleges that two of Blizzard Inc.'s massively multiplayer online role-playing games (MMORPG), World of Warcraft and Call of Duty, are directly infringing on a suite of patents (6,219,045; 7,181,690; 7,493,558; 7,945,856; 8,082,501; 8,145,998 & 8,161,385) owned by World Inc.'s collectively known as "System and Method for Enabling Users to Interact in a Virtual Space." These patents describe how to generate a virtual three-dimensional space designed to enable multiple users to interact in real time. Furthermore, the lawsuit claims that these patents describe the exact same virtual architecture utilized by Massive Multi-Player Online Games (MMORPG) in general. Worlds counsel is the renowned Houston-based Lawyer, Max L. Tribble, who agreed to take the case on a staged, contingency basis.

With shares of WDDD set to soar on a positive Markman hearing set for June 27th, 2013, EPE recently sat down with Worlds CEO Thom Kidrin. In this article, I give the key takeaways from this interview, and an assessment of the risks vs. rewards of this speculative tech stock.

One of EPE's primary concerns with Worlds was the company's financial statements, which read as if the company is teetering on bankruptcy. Mr. Kidrin conveyed to us that the Worlds is financially viable going forward, with access to capital from a number of private investors on an "as needed" basis. Even so, Worlds has not needed to access this type of capital, nor has it needed to resort to debt financing. Instead, Mr. Kidrin has put his own money into the company when needed. Overall, Worlds should thus have adequate capital to see the lawsuit through to fruition, although it may require some form of dilution.

In regards to the logistics of the lawsuit, we asked Mr. Kidrin about the District of Massachusetts scheduling process, especially in regards to a trial, if needed. He thought the case would likely see trial, if needed, within 8 months after the Markman hearing, based on the Court's history with patent infringement cases. This would place the trial date somewhere around the 1st Quarter of 2014. That said, a positive Markman hearing would probably doom any chance for an Activision Blizzard win at trial due to the large number of claims being brought in the suit. For investors new to the patent infringement scene, a plaintiff only needs to show infringement on a single claim. As such, the odds clearly favor plaintiffs that claim infringement on a large number of claims across several patents. Worlds is claiming infringement on a total of seven patents, giving them an excellent chance of winning at trial.

While the expert damage reports are a long way off, Mr. Kidrin did inform us that they are seeking an award that would compensate them for both past and future damages based on the U.S. revenues for the two infringing gaming systems. Moreover, future damages would likely come in the form of a Running Royalty. Another important point is that Worlds is seeking treble damages for willful infringement, as they claim to have substantial evidence that Activision Blizzard was fully aware of these patents during the creation and marketing of these two gaming systems. Unfortunately, Activision Blizzard has made it extremely difficult to get a handle on the U.S. revenues for these two gaming systems, so even a rough estimate of the damages cannot be given at this time. Nevertheless, the number of virtual worlds users in the broad sense continues to nearly double year after year (see figure below); so it's hard to imagine that a base award for damages wouldn't be at least in the hundreds of millions.



Given that these patents clearly describe literally any variation on multi-user interaction in virtual space, we were interested in the possibility of other future patent infringement suits in sectors other than gaming. Mr. Kidrin was forthcoming about this issue, and stated that he believes the major social networking sites are also infringing on some or all of these patents. Simply put, more lawsuits are coming down the road, adding further value to WDDD.

Conclusion
Our take on Worlds Inc is that the stock is a strong speculative buy. Mr. Kidrin has access to enough capital to keep the company afloat through the duration of the Activision Blizzard suit, and the suit appears to have merit in my lay opinion. Indeed, I highly doubt Mr. Tribble would be taking the case on a staged contingency basis if it wasn't a strong case. Overall, there are too many claims for Activision Blizzard to dodge them all in my opinion, and the patents appear to outline the exact same virtual architecture used by these two gaming systems. Moreover, unlike the Vringo (VRNG) vs. Google (GOOG) case where treble damages weren't initially claimed, Worlds is claiming willful infringement, and is a practicing entity in the online gaming space. So Worlds would be entitled to an injunction against the infringing systems if they prevailed at trial, thus increasing the risks of a trial for Activision Blizzard.

In addition to a settlement or a win at trial, Worlds offers a third opportunity for investors to walk away with substantial gains. With a paltry market cap of only $17M, I would imagine that a positive Markman hearing should spark buyout interest in Worlds by other patent holding companies (PHC's). I believe this scenario is likely because these patents clearly extend beyond gaming systems, and therefore offer opportunities for licensing deals or other lawsuits against major social networking sites such as Facebook (FB), LinkedIn (LNKD), amongst others. Indeed, EPE has already received "unconfirmed" info that the PHC Vringo is interested in the Worlds' patent portfolio, pending a positive Markman hearing. Interestingly enough, when we attempted to confirm this lead, we were informed that it cannot be discussed at the current time. Overall, Worlds tiny market cap could present an interesting buying opportunity for another PHC looking to increase their own patent portfolios.

In sum, our take on WDDD is that it is a strong speculative buy at current levels, and offers investors numerous avenues to win with limited downside risk. The biggest risk with Worlds' would appear to be its ability to remain financially solvent, and the worst case scenario appears to be a rapid acquisition by another patent holding company.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WDDD.OB over the next 72 hours.