Archive for April, 2018

I can almost write a book on a tech company named Longfin (LFIN), but given their unbelievably crazy trading history and corporate antics, I’m sure someone like Michael Lewis (of “The Big Short” fame) is already beating me to the punch.

Yes, this really is a Hollywood kinda story!

Sorry in advance for the long post… you shouldn’t actually read this unless you like stock stuff.  :)

Simply put, in an investment industry that’s decades and centuries old, this tech company Longfin seems to be in unchartered waters… every professional that I’ve spoken with at Schwab, Nasdaq, and even the Options Clearing Corporation (OCC) all have said they’ve never seen anything like this.

Longfin went public on Dec 13, 2017 under the ticker symbol LFIN.  The shares were priced at $5, giving it a market capitalization about $350 million, supported by an unaudited $28 million in revenues realized through the private acquisition of Stampede Tradex Pte Ltd in June of 2017.  Of note, one of the major partners in Stampede was the Longfin’s CEO, Venkat Meenavalli, an entrepreneur from India.  In all my history of reviewing offer documents, I’ve never read any CEO describe themselves as “a financial wizard” …already I’m wondering who’s advising these folks.

Longfin proudly touted itself as the first FinTech company to go public using abbreviated Nasdaq rules, a so-called “Reg A+” filing, created by the 2012 JOBS act.  Essentially, it allows smaller companies easier access to the public markets.  Reg A+ companies can also raise capital from any investor — not just accredited investors — just like bigger, more established companies.  One of the hopes is Reg A+ companies grow up to provide lots of American jobs.

Two days after Longfin went public, it acquired a cryptocurrency firm.  Smack-dab in the middle of the full-blown crypto craze, LFIN stock went crazy… from an already richly-priced $5 a share to over $140 in just a few days… a $10 billion valuation!

And, just a few months later, LFIN is headed to $0.

Here’s how we got from there to here:

*  The very first thing you notice about Longfin is buzzwords abound in all of their materials… so much so that even tech savvy folks have been scratching their heads wondering what the company really does.  The simplest description I could find was: “US-based, global FinTech company powered by Artificial Intelligence (AI) and Machine Learning.”  Best translation of that I have is that they’re mostly a commodities trading platform.

*  But there’s a problem already:  When people tried to find their U.S. office, all they found were three empty desks in an incubator space.

*  LFIN’s original accountants quit after just one month on the job (February 2017), leaving the company to operate the entire rest of the year — and go public! — with unaudited financials (that’s what first attracted my attention).

*  That may be one of the reasons why I believe they are way overstating revenue… if they are, in fact, just a trading platform, then they should recognize trading fees as revs… yet, for some reason, they’re booking the sales transaction as revenue.  This is material… it’s the difference between recognizing $66.6m in physical commodity revenues vs. $1.6m in trading fee revenues.

(I know you might be thinking, “well, then, this is obviously a scam…” and it may very well turn out to be one… but that’s what makes this story so perversely fascinating… please read on!)

*  The CEO purchased another company, a nascent cryptocurrency company — with zero revenues — just two days after LFIN went public… without any mention of the possibility of this in the offering document.  But it’s not like this wasn’t contemplated… or that this company was just any company… the CEO owned 92% of this crypto company!  This, of course, is a massive conflict of interest.

*  On December 18th, CNBC interviews CEO, which should be mega-positive given LFIN’s rocket performance, but instead it turns into a public relations fiasco.  On screen throughout the entire 12-minute segment is the overlay:  “CRYPTO STOCK OR CRYPTO SCAM?”  As if that’s not bad enough, the CNBC panelists, including Brian Kelly, who’s carving himself out as an expert investor in the crypto space, act more like velociraptors cornering prey.  I really want to say, “Not helping matters is the CEO’s thick Indian accent and manic responses,” but in a very weird way, not being able to understand most of what the CEO said actually kinda worked in his favor… in that you couldn’t tell if his answers were good OR bad.  Clearly the panelists couldn’t understand him, either, because every time they moved in for the kill… and the CEO responded… they had that puzzled, “did he just answer my question??” look on their faces.

*  Half the board of directors are employees… that’s not just bad corporate governance, but irresponsible governance.

*  On January 22nd — just a month after the company went public and still supporting a hefty $3.5 billion marketcap — LFIN literally gave their company away.  They entered into what can only be described as an awful financing agreement with notorious bad-boy financier Hudson Bay Capital, a company that had previously been busted by the SEC for short-selling violations and stock manipulation.  In the best of circumstances, this meant painful dilution for existing shareholders.  In the worst of circumstances, well, keep reading.

*  On March 16th, Longfin issues a press release that it was being added to the prestigious Russell 2000 and Russell 3000 indexes.  This is a big deal because that meant that Russell ETF’s are now required to buy the stock.

*  On March 26th — just 10 days later! — the Russell Indexing organization issues a release that it is removing Longfin from their index due to “insufficient free-floating shares”.  In other words, Longfin simply didn’t sell enough shares to the public — in fact, less than 20% of what was on their offering document — so the stock should never have been included in the first place.

*  On April 2nd, LFIN turns in its tardy 10-K annual report.  There’s a little nugget in the report that doesn’t go unnoticed:  Longfin is being investigated by the SEC!

*  This is all way, way, way too much for intelligent investors (i.e., not “pump & dump” traders).  Short-interest builds to epic proportions because, well, we all believe this may actually be THE SHORT OF THE CENTURY!

*  CNBC interviews the CEO again on April 4th, this time to address the SEC allegations.  You would think someone — anyone — would have practiced with him.  But, no.  The second interview was just as awkward and illegible as the first.  There was a slight difference, though.  In the first interview the CEO was a bit more combative… and why not, his company had just zoomed to a multi-billion valuation.  In this second interview, you got the sense that he was really trying make sense of it all as well.  Trouble is, I can’t tell whether to feel empathy for someone who is just way out of his element and maybe even caught up in something beyond his control… or anger because this guy was brazen enough to try to pull the wool over our eyes right in front of our faces.  

*  On April 5th their second accounting firm quits, after being on the job only two months (Feb and Mar 2018).

*  On April 6th, Nasdaq, which has not only grown tired of waiting for required compliance material, but maybe more importantly embarrassed by this whole situation, issues a non-compliance note… with accelerated due dates (rare)… and, more significantly, HALTS THE STOCK with a dreaded “T12” designation (the worst halt Nasdaq can issue).  No one knows when a T12 stock may trade again… it could be never.

*  On April 6th the SEC lowers the boom on LFIN, charging them with “illegal distributions and sales of restricted shares” involving the company, its CEO, and three other affiliated individuals.

*  Remember bad-boy financier Hudson Bay?  They’re baaack!  April 13th was the 5th consecutive day LFIN stock was halted, triggering one of the loan covenants with Hudson Bay.  Longfin had received an initial payment of $5 million and, subject to registering a bunch more stock, LFIN would have then received the next big traunch of money.  Well, they didn’t get that stock registered (so they didn’t get any more money)… and they didn’t trade for five consecutive days (so they violated the terms of the financing)… so, guess what?  Hudson Bay called the loan on them… BUT, it’s not just for the $5 million they received, the awful financing agreement LFIN signed gives Hudson Bay the rights to call a total of $33.6 MILLION of the financing, money they haven’t even received yet!  Payment was due on Friday, April 20th.

*  LFIN has little money left.  It appears they’ve spent their IPO funds and have chewed into the $5 million in initial financing from Hudson Bay ($1.3 million of which was spent just on “deal fees”).  So the only way they can pay $33.6 million back is to get new financing, which won’t happen (and even if it did it would mean completely washing out all shareholders), OR renegotiate with Hudson Bay, which can only mean even worse shareholder dilution than the original note.

So here we sit on Saturday, April 21st.  Presumably TONS of interesting things happened behind the scenes yesterday:

—  Did LFIN and Hudson Bay renegotiate a deal by the 4/20 deadline?  It doesn’t really matter to shareholders… either they did and shareholders get significantly diluted… or they didn’t and LFIN declares bankruptcy.

—  4/20 was also the earliest part of the Nasdaq’s response window for the original non-compliance, so did Nasdaq accept LFIN’s original non-compliance plan OR decide to proceed with delisting — essentially kicking LFIN off the Nasdaq exchange and subjecting it to the dregs of the “Pink Sheets” where only of little consequence companies — also known as “Penny Stocks” — trade?

— Was it just a coincidence that Hudson Bay’s 4/20 deadline corresponded exactly with a major options expiration date?  Will we find out that perhaps Hudson Bay is up to their old antics by playing both the long and short sides of the aisle?

Thanks for your patience thus far!  We’re now at the subject of this post.

Even if this company was stellar — which it isn’t — Longfin is still hosed because Hudson Bay Capital is either going to dilute everyone OR bankrupt the company.

But, because of the EPIC short position, there are some people that think if the company ever trades again — even on the Pink Sheets — we could see the MOTHER OF ALL SHORT SQUEEZES… given everyone has to BUY shares to close their short positions.

I know, I know, crazy but true… there’s a possibility that this halted, SEC sanctioned, all-but-bankrupt company could still be worth billions again — or tens of billions — even if for only a short period of time!

And, what about option holders?  Options have expiration dates… but the stock is halted… which means those positions can’t be closed out.  Such an expiration date — 4/20 — was yesterday, wiping out MILLIONS AND MILLIONS in trading profit.

To be SO RIGHT… and yet LOSE EVERYTHING!

But even that doesn’t tell the whole story.  Normally, option holders have the right exercise their options (and pay a hefty margin fee for the pleasure to do so)… but remember the stock is halted… and remember the extremely low number of shares in the public’s hands (that’s why the Russell index gave them the boot)… and finally remember the extreme short position in the stock… all of that means brokerage houses simply can’t get their hands on ANY shares.

Enter the OCC, the organization responsible for option fulfillment.  On 4/20 the OCC issued a memo saying it would offer brokerage houses “delayed settlement,” which essentially said, “we’ll let you exercise and it won’t count until the stock begins trading again.”

That sounds like the OCC has just rode in on a big, white steed and saved the day, right?  Uhm, maybe not.

First, not all brokers took the OCC up on their offer.  TD Ameritrade and Interactive Brokers did.  Schwab didn’t.

Second, you won’t really have a choice when to close out your position because participating brokers will buy-in or sell-out during the first trades possible.  And that’s going to be incredibly dangerous because the ONLY thing we know is that NO ONE knows what the heck LFIN will do when it resumes trading again.

SUMMARY:

LFIN turns a lot of what we know about investing on its head:

*  LFIN is essentially a washed out and/or bankrupt company that, through — and because of — absolutely normal investing mechanisms, could still be worth billions.

*  Investors that did the research and made the exact right investment call may lose everything.

Questions:

So now we’re all eagerly awaiting answers to some very specific questions:

—  How long will LFIN stay halted and will this wipe out even more options positions via expiration and/or the inability to exercise and/or the uncertainty of where the stock will open?

—  If it ever trades again, will the stock sky-rocket due to a massive, massive short squeeze and maybe even ignite a new feeding frenzy of momentum players?

—  Or will LFIN plummet because the company is essentially washed-out or bankrupt?

As the tagline of that famous tabloid magazine goes, “Inquiring minds want to know!”

(Whew!  If you stayed with me this long, bravo, you now have a front seat to a history-making trade!)

5/24/18 UPDATE:  After a long absence, LFIN started trading today… first on the grey sheets (where there is no market makers or bid/ask)… and later in the day on the pink sheets.

The answer to all the speculative questions above?  LFIN closed on April 6th at $28.19.  It opened today, May 24th, at $5.05.  I’d say that’s a big crash.

But, true to form, there just had to be some drama.

Since tickers report gains and losses off of the previous day’s results… and since LFIN was halted yesterday… tickers used the first trade today as the baseline.  Turns out LFIN closed today at $7.15… so to all the tickers out there — and many news outlets — it looked like LFIN jumped almost +42% (from $5.05 to $7.15)… even though it actually CRASHED almost -75% (from $28.19 to $7.15).

To the average investor out there, it looks like LFIN is off & running again… ugh!

 

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