Shares of small molecular diagnostics company Biocept, Inc. (NASDAQ:BIOC) are plummeting today, down 21.5% as of 11:53 a.m. EDT, following its announcement of a proposed rights offering. The decline marked a quick change of direction after Biocept's share price more than doubled on Wednesday.
Biocept stated that stockholders and warrant holders of record as of July 23, 2018, will receive one subscription right for each share of common stock owned or each warrant owned. Each subscription right allows the holder to purchase one unit at a price tag of $1,000 per unit. Each unit consists of one share of Series A convertible preferred stock (which could be immediately converted into Biocept stock at a price of $4.53 per share) and 220 warrants to buy additional Biocept shares at $4.53 per share.
If all this sounds complicated, it's because it is pretty complicated. Rights offerings are one of several ways for companies to raise cash. However, they're not used as nearly as frequently as stock offerings. A key advantage of a rights offering compared to a stock offering is that it doesn't cause dilution of the value in existing shares.
One negative about Biocept's rights offering is that the subscription rights are non-transferable, which means that investors can't sell their rights to someone else. There's also a tight window for when the rights can be exercised -- between July 24, 2018, and Aug. 8, 2018.
Biocept needed to do something to raise cash, though -- and fast. The company had less than $9.3 million in cash as of March 31, 2018. Biocept continues to lose at least $5.6 million each quarter. The rights offering provided a way to generate some additional cash in a hurry.
Current Biocept shareholders will have to soon decide what to do with their subscription rights. They can exercise them, which means shelling out more money to buy Biocept preferred stock. The other option is to let the rights expire. Which step should be taken depends on your view of the company's prospects.
I don't think Biocept's prospects look very good. The company is hemorrhaging cash with no clear path to profitability. It operates in a highly competitive genetic testing market with much larger rivals. I believe Biocept is a stock to avoid right now.
Editor's note: A previous version of this article included an incorrect amount of cash on hand for Biocept as of March 31, 2018. The Fool regrets the error.