🔒Following the SPAC IPO frenzy of 2020-21, some CT companies struggle to find their footing

The years 2020 and 2021 will forever be remembered for the COVID-19 pandemic, but investors will recall them for a different reason: How much they lost on investing in SPAC IPOs.

So-called Special Purpose Acquisition Companies — also known as “blank-check companies” — are created to conduct an initial public offering that raises capital for acquiring or merging with another company.

Prior to 2020 and 2021, SPAC IPOs were generally limited in number, but they exploded in those two years to levels not seen before nor since.

Unfortunately for investors, and some of the businesses involved, the results haven’t been great so far. Companies that went public through SPAC IPOs during the pandemic had lost more than $100 billion in market value as of May, according to the Wall Street Journal.

Connecticut experienced its own SPAC IPO frenzy in 2021, with at least four companies going public. Combined, they raised more than $5.1 billion from investors. Since then, their stock prices have struggled, with three posting a more than 90% decline, while the fourth has fallen more than 80%.

To protect investors, the U.S. Securities and Exchange Commission in January adopted new rules to more tightly regulate SPACs. What the future holds, though, for the Connecticut companies that did them remains an open question.

Boom and bust

According to spacanalytics.com, from 2003 through 2019, there were never more than 66 SPAC IPOs in one year, with their combined proceeds never exceeding $13.6 billion.

In fact, over that 17-year span, the average number of SPAC IPOs per year was 23, while the average combined proceeds totaled just under $4.1 billion.

Then came 2020 and 2021. In 2020, there were 248 SPAC IPOs, representing 55% of the 450 total IPOs in the U.S. By comparison, the percentage of SPAC IPOs vs. all IPOs had never been higher than 36% in the previous 17 years.

The SPAC IPOs in 2020 had combined total proceeds of $83.4 billion, spacanalytics.com said.

In 2021, the number of SPAC IPOs spiked to 613, or 63% of total IPOs, with combined proceeds of $162.5 billion.

And then, as suddenly as the SPAC boom arrived, it dissipated just as quickly. There were only 86 SPAC IPOs in 2022, and 31 last year.

“In my view, the SPAC market is pretty much kind of over; that wave kind of crested out of vogue,” said David Hirsch, a partner with law firm Hinckley Allen, which has an office in Hartford.

Hirsch provided legal counsel to Watertown-based Theraplant when it and three other marijuana producers were acquired by the New York-based SPAC Greenrose Acquisition Corp. in 2021.

That deal did not go well for Theraplant, as Greenrose later ran into financial difficulties in Arizona. Theraplant eventually filed for bankruptcy protection and its ownership was transferred to its lender, Delaware-based DXR Finance HoldCo, last year.

Hirsch said many SPACs run into financial problems.

“There’s just an economics problem with a public company anyway, because it’s so expensive to be one,” he said. “There’s a lot of compliance, there’s a lot of regulatory oversight, there are a lot of accounting fees. And the bigger you are, the smaller those line items are on a relative basis, so you can absorb it easier.”

“By and large,” he added, “when you have a SPAC, you should be buying a company that is successful. Then you’re bringing it to market to put money into it from the capital markets and continue that growth. And it seems like just most of these (deals) didn’t happen that way.”

Products with weight

Connecticut SPAC IPOs from 2020-21 included Sema4, the genomics-testing provider that later renamed itself GeneDx; Butterfly Network, which makes a pocket-sized ultrasound machine; Quantum-Si, which developed a protein-sequencing platform used to diagnose and treat cancer and other diseases; and Hyperfine, which makes an inexpensive, portable MRI system.

While GeneDx’s stock price is trading in the low $30-per-share range, it is down more than 90% since the company went public in 2021.

GeneDx laid off hundreds of workers and closed its Connecticut lab operations in 2022 and 2023, and changed its name from Sema4 in January 2023.

On July 30, however, GeneDx said in its second-quarter earnings report that it expects "to reach profitability in the next several quarters" and increased its guidance to deliver revenue between $255 million and $265 million for fiscal 2024. While the company still reported an adjusted net loss of $2.7 million for the quarter, that was a 93% improvement from a year earlier. The company also noted that it's market capitalization recently topped $1 billion.

The other three companies were all founded by Jonathan Rothberg, a scientist, Yale professor and pioneer in speedier DNA sequencing who is perhaps Connecticut’s most prolific scientist-entrepreneur.

His three SPAC IPO companies — Butterfly Network, Quantum-Si and Hyperfine — all have seen their stocks struggle in the three years since going public.

Butterfly Network, which is traded on the New York Stock Exchange, has fared the best, yet its stock in early September was down about 83% from its debut, trading recently around $1.66 per share.

Quantum-Si’s stock, traded on the Nasdaq exchange, recently was hovering around 91 cents per share, down more than 90%, while Hyperfine’s stock, also traded on the Nasdaq, was trading around 89 cents per share, down nearly 91%.

None of that, however, discourages Rothberg, who says that while the stocks aren’t performing well, the companies are producing results.

“So, I think you have to go back to (Ben) Graham, who was (Warren) Buffett’s mentor,” Rothberg said. “In the short term, the stock market is a voting machine, and it’s voted the class of 2021 and 2022 SPACs down 90%. But then you have to go to the other part of it, which is, in the long term, it’s a weighing machine.”

In Rothberg’s view, each of his companies are producing products with weight.

Butterfly Network

Butterfly is producing the “best-selling portable ultrasound in the world,” he said, adding it is now used in the “majority of the top 100 medical centers,” and is being distributed “to medical students and many medical schools.”

It also has more than 600 patents.

Rothberg said Butterfly recently “had its best quarter ever,” reporting record revenue of nearly $21.5 million in the period that ended June 30. The company, which has moved its headquarters from Connecticut to Burlington, Mass., reported an overall $15.7 million loss in the quarter (an improvement from a $28.7 million loss in the year-ago period), and 225 employees as of Jan. 31, 2024.

Hyperfine

Hyperfine, Rothberg said, offers the “only portable MRI in the world. We’re now in the top 10 of any medical company for AI-approved applications by the Food and Drug Administration.”

He added that its MRI is “penetrating major hospitals literally around the globe,” and is now used to examine astronauts when they return to Earth.

Like Butterfly, Hyperfine also posted its best quarter for revenue, with $3.6 million for the period that ended June 30. The Guilford-based company reported an overall $10.2 million loss in the quarter.

In an annual report published in March, Hyperfine disclosed it completed an organizational restructuring in the first quarter of 2023 that led to a 13% reduction in its global workforce. As of Feb. 15, 2024, the company said it employed 131 people.

Quantum-Si

As for Branford-based Quantum-Si, “it just invented protein sequencing. It will absolutely win Nobel Prizes, and it will save the life of somebody you love,” Rothberg said.

The company has said protein sequencing “will advance drug discovery and diagnostics and bring transformative health and disease insights to the world.”

Quantum reported record revenue of $622,000 for the three months ended June 30. It also reported a $23.1 million loss in the quarter (an improvement from a $25.6 million loss a year earlier), and 159 employees at the end of 2023.

Returning to the voting machine vs. weighing machine analogy, Rothberg said it takes time to go from one to the other, and his three companies are showing promise with improving sales.

“Amazon was down 90% in 1999 or 2000, but the people that bought it (eventually) made 100 or 1,000 times their money,” he said.

“At the end of the day,” Rothberg added, “the SPACs are a great thing, I promise you, because somebody you love, their life will be saved because of one of our devices … or protein sequencing that developed the drug or diagnostic. … The money is saving lives.”

“Yes, I’m optimistic,” he continued. “Yes, it’s raining today, but tomorrow will be sunny.”