Let’s now examine how the Lincoln Park Capital(LPC) financing arrangements are setup and my interpretation of the motives that lie behind them. On the surface when announced the deals almost sound like LPC is cutting a check for $10,000,000(size of financing commitment announced in July 2013) to Anavex Life Sciences while in reality it fronts no($0 in the most recent $50M agreement) or very little($100,000 in the July 2013 agreement) cash to the company, it only agrees to purchase new shares issued by the company at a discount to the market price that day.

In the deal inked on October 26, 2015, for $50,000,000, Anavex agrees to sell to LPC newly issued Anavex shares at the lowest price quoted that day or at the average of the 3 lowest close of last 10 trading days.

In this agreement LPC makes no commitment of holding these shares for more than 1 day, 1 hour or 1 minute.

Knowing in advance that you will be able to buy a stock at the lowest price of the day or at a certain discounted price in the future gives you incredible risk-free arbitraging opportunities, especially when one contemplates the following subtle detail of the transaction:

In the Purchase Agreement LPC expressly agrees to engage in “no short selling or hedging” of AVXL common stock, but in my opinion if one look closely, one detail of the transaction purposefully allows LPC to do exacly that.

With the execution of the “Purchase Agreement” Anavex agreed to issue LPC 179,958 newly issued shares for free. LPC can now use these free shares in their account as a “float” to sell shares in the market in advance of the shares they will purchase later at a discounted price(the lowest quoted price of the day), effectively engaging in a transaction akin to shorting the shares they will cover via purchase later, while on paper it can be claimed that LPC is transacting from a long position.

One can imagine a scenario like this, LPC starts the day with the full balance of the 179,958 free shares, during that day they sell in the open market at various price points 50,000 shares, end with a balance of 129,958 shares; at the end of the day they go to Anavex that issue them 50,000 new shares at the lowest quoted price of the day and the balance is replenished to 179,958 shares, LPC can now repeat the same transaction the next day, effectively shorting the stock with the appearance of being a long seller.

Using the same scenario example, that same day AVXL stock fluctuates between $10 and $11 and LPC manages to sell the 50,000 shares in the open market at an average price of $10.50, at the end of the day they purchase 50,000 shares directly from Anavex at $10.00 the lowest price of the day, pocketing $0.50 per share, a $25,000 completely risk-free profit and delivering $500,000 of fresh cash extracted from the marketplace to Anavex bank account, basically, in this example, a 5% commission to transfer funds from retail investors to Anavex.

In my opinion, while often characterized as a “long time investor” by the company in its PR announcements, Lincoln Park Capital is not an “investor” but acting as an intermediary between Anavex Life Sciences and retail investors, allowing for the sale to the marketplace of newly issued shares and the pass through transfer of cash directly from retail investors in the marketplace to Anavex Life Sciences bank account, for this service LPC is remunerated via the discount offered on the share purchases and the issuance of free shares.

If you look it up, you will be able to find out that Lincoln Park Capital has been involved in dozens of such “financings” with numerous small ventures listed on various exchanges, number of them also coming with numerous red flags, among them a number of “Canadian gold mining” operations(one of the most frequently used narrative to run “pump and dump” schemes). (This article from TheStreet use another biotechnology example to shed more light on LPC financing deals)

In most cases the stock price of the ventures involved in deals with LPC declines sharply in the following months likely due to the added selling pressure of Lincoln Park Capital constantly selling newly issued shares and the significant resulting dilution.

(Illustrating the dilution, change in outstanding AVXL shares as a result of various financing arrangements since 2013, number of outstanding shares:

September 30 2013: 37,237,588

September 30 2014: 47,200,237

September 15 2015: 124,503,297 a very significant dilution, one 2015 share representing less than 1/3 of the ownership in the company it did in 2013.)

Offering shares directly to the retail public demands more registration requirements which implies more due diligence and audit and the involvement of underwriters, especially for a Nasdaq listed company, all tests that, in my opinion, Anavex Life Sciences would likely never be able to pass given all the red flags. (Again it is interesting to note that this latest “financing” was inked for a very large amount $50M and a long duration 36 months, only 2 days before AVXL was uplisted to the Nasdaq, when the company still qualified as an OTC listed company where the reporting and registration requirements are much lighter).

It appears to me, that throughout its entire existence, and at an accelerated pace in the last 2 years, Anavex Life Sciences has constantly been issuing and selling new shares using similar arrangements(Purchase Agreement, Dilutive Convertible debt issuance) with the coincidental support of heavy promotional activities deemed to have been paid by “third parties”.

To date $73,000,000 have transited through Anavex Life Sciences, of that amount about $20,000,000 seem to have been extracted from the investing public via various Lincoln park Capital “financings” and other arrangements in just the last 1 year, and yet, as we have seen, the company has virtually no tangible assets.

This staggering amount of money, for such a small entity, raised throughout its existence, appears to have been extracted from the venture via various means mostly via lavish salaries and perks. One interesting fact to note is that in a filing from 2013(the last year this expense was broken down F-6) it showed that Anavex had spent more than $12,000,000 in consulting fees to date, an amount that seems in my opinion incredibly high for such a small operation.

In this current incarnation Anavex Life Sciences appears to be very generous with its management, namely the CEO, according to the company filing here, Anavex Lifesciences CEO was awarded compensation worth $2.66 million for the year 2013 and $650,000 for the year 2014, a level of compensation on par with what CEOs in the sector are paid for jobs at companies employing tens if not hundreds of employees. In any case this sounds extremely high for such a small venture or a biotech startup. As far as one can tell it appears that in 2013 and for at least part of 2014 the CEO was the only full time employee of Anavex Life Sciences, so it seems that he was extremely well compensated for the job of managing himself.

Equally at more than $2,000,000+ for the year 2014, the level of “General & Administrative Expenses” seems also incredibly high for a venture with even 5 employees, and even taking into account the fact that Anavex rents offices at a very expensive address in the famous CBS building(some ventures often like to setup shop in the most prestigious addresses and have a lot of fancy titles in the hope it will help compensate for the lack of substance). Given the fact that the company seemed to have only 1 full time employee for most of 2014, the CEO job must also come with some very enviable perks.