Bionano Genomics (NASDAQ:BNGO) released its Q1 earnings on May 13. It shows that the San Diego-based genome instrument company made just $3.2 million in sales. Somehow BNGO stock has a market capitalization of $1.23 billion despite losing $9.9 million in the quarter. This market value is not likely to stay this high, especially now that the company wants to issue more shares.
Here is what the company has going for it: lots of cash. Now Bionano Genomics wants to raise almost twice the cash it has. One gets the feeling that management thinks it needs to do this in order to justify its high market value.
Cash Raises and Dilution
In the past several months, Bionano Genomics has blown out its share capital in order to put $362 million on its balance sheet as of March 31. That now represents 29.4% of its market cap.
But on March 23, the company hired Cowen and Company to raise another $350 million based on its S-3 shelf registration. So far Bionano Genomics has not said how much has been raised during Q2. But if it succeeds, that would bring the cash balance to $712 million.
But what would it cost in share dilution? This could be harsh. BNGO stock is down nearly 24% in the past month to $5.24 per share (as of time of publication) and is likely to fall further if the cash-raising continues. This is especially the case since there does not seem to be any purpose for this additional money. There is no cash acquisition, capex spending or massive marketing plans that the company has announced.
Let’s assume that the additional $350 million can only be done at a significant discount, at least 25% to the present price, or $3.93. As of time of publication, the company has 278.8 million shares outstanding.
Therefore, to raise $350 million at $3.93 would result in the issuing of 89.06 million shares (i.e., $350 million / $3.93 per share = 89.06 million). This means there would be 15% more shares (i.e., 89.06 million / 278.8 million) to 319.4 million.
That could easily result in a non-virtuous cycle of further hits to BNGO stock. It would fall 15% from $5.24 to $4.45 per share. What a mess. The cost to bring in more cash would further damage the stock price for existing shareholders.
What to Do With BNGO Stock
Bionano Genomics reported a negative cash burn of $13.9 million for the quarter in its cash flow statement on page 6 of its 10-Q filing. This works out to an annual run-rate free cash flow (FCF) loss of $55.6 million. Maybe that is why the company feels it needs to raise more cash.
Or maybe it has an acquisition in mind that will bring profits to the company. But one thing is for sure, more cash on its balance sheet probably won’t lead to a higher BNGO stock price.
In fact, it will probably accelerate the stock lower so that it trades closer to the cash-per-share balance. For example, with $712 million in cash, less cash burn of $56 million over the next year, the cash balance would be $656 million. But there would now be 319.4 million shares. So the cash per share would fall to $1.85 (i.e., $712 million / 385.9 million).
That represents a potential drop to $1.85 from $5.24, or a 65% fall. This means that no one really wins with the higher cash raise. Unless, of course, the company can show why it needs the cash and how it will make the company profitable.
No Clear Guidance
But in the May 13 earnings release the company gave no guidance, no outlook for earnings and no mention of the cash raise that it announced on March 23.
Therefore, don’t expect BNGO stock to go anywhere but down. This is not a good forecast. Investors in public companies need to know why their share stakes face dilution. Otherwise, they assume the worst, that the company will spend the money on acquisitions that won’t make the company profitable.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.