On Tuesday Medicago made a big announcement about a $21M grant from DARPA and Medicago's share price promptly dropped by 15% on 2.3M traded shares. I did not expect that type of a reaction in the stock market, that is until I saw the terms of the announced financing that Medicago sneaked in between the investor's conference call and resumption of trading. If you are a retail investor you were probably miffed by the terms of the financing and by the way company timed its announcements. As it happened any excitement that the major announcement would have had on the stock was decisively deflated by the incredible selling pressure caused by the financing.

The problem with the financing are both the time it was announced and the terms of the financing. Instead of letting the DARPA news have a positive effect on the share price and then setting the terms of the financing at more favorable terms, the company had instead announced a $7M (now $7.5M) financing deal immediately before the trading resumed. Remember now that same folks that were in the $0.72 financing were going to be in this financing. Any reasonable person would expect a major gypsy swap of shares in these circumstances. The terms of the financing were extremely favorable to participants. Addition of 18M shares, no hold period, at 10% discount with a whopping 5 year 3/4 warrant at $0.50. I've seen mining exploration companies with stakes in rebel held territory get better financing terms, let alone an up and coming biotech with the best product in the multi-billion $ market. Admittedly I don't know what kind of considerations and pressures influenced management's decision, because they never talked about it, but try as I may I cannot justify this outcome.

Financing was not discussed in the investors conference call. Only the analysts were allowed to ask a few questions of the company. Posed questions did not discuss the financing details or the exceptional stock dilution the company has burdened itself with. Retail investors were silenced. Only two new items were revealed: the phase II trials would start in two months and the proposed plant would be completed in roughly 14 months.

So, what does this mean for the shareholders.  If I am being pragmatic about the whole thing this was still a very positive development.  In essence for 18,518,520 shares, priced at $0.405, and almost 14M warrants, priced at $0.50, the company got $42M + $7M. That works out to about a financing at $1.5/share. In addition to gypsy swaps there was probably some emotional selling from jaded investors so I view the stock as oversold for the moment. If the stock price breaks $0.40, and holds, it will likely mean the overhang is gone. I won't be rushing to buy any more shares personally though as the dilution is limiting the blue sky potential and I have some reservations about the way company raises and spends capital. The stock dilution does have one advantage in that it introduces liquidity and makes the stock more attractive to fund investments. I am going to hold my shares of Medicago for now and see how things pan out in the next few months.

Regards,

TB

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