Archive for the ‘Business’ Category

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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Mark Zuckerberg, CEO and chairman of Facebook, just posted a good piece about this whole “data scandal.”

Not only does it appear that Facebook plugged up holes in their system years ago — as in, Facebook is not asleep-at-the-wheel…

… but Cambridge Analytica, the company accused of abusing the data, is categorically denying that any data was even used.

So it will be nice to find out the real story here.

With this said, the market is all about valuing in today what it thinks will happen tomorrow.

And in that regard, I think the market has overreacted about Facebook.

Because, regardless of what is actually discovered, the most likely fallout will simply be greater regulatory scrutiny… but not just affecting Facebook, but all ad platforms… and, in fact, all advertisers… which is essentially the entire business complex on the planet.

And, practically speaking, if something affects everyone, will it really affect anyone?

Businesses will still have to advertise.  Facebook will still control over 2 billion sets of eyeballs.  Unless we see a mass exodus from Facebook properties (Facebook, Instagram, WhatsApp, Oculus VR, etc), Facebook will still be raking in a lion’s share of ad dollars from advertisers desperate for any kind of targeting.

Honestly, I believe Facebook has more to fear from the changing generational preferences in sharing tools — as in, my friends use Facebook but their kids don’t — than they do from the government.

On the 31st anniversary of “Black Monday” — where the Dow dropped 23% in one day — I have to share a great “sign of the times” quote.  I can’t find the source right now, but it went something like:

     ‘When the Dow drops 23% in one day, we call it “Black Monday.”  When Bitcoin drops 23% in one day, we call it Monday.’

;)

Last week was a helluva week:

Tariffs… almost every single person in the world screaming “THEY’RE BAD!”… yet, we have more of them now*

Quitting… Gary Cohn resigns as White House chief economic advisor… something to do with the working dynamic he had with Trump

More quitting… rumors that Trump is going to “clean house” re: his staff… after such a short time in office, that doesn’t seem quite right

Meeting… Trump and Kimmy of North Korea are going to meet… then conditions to meet seem insurmountable

Scandal… given Stormy Daniels developments, looks like Trump might have some ‘splain’ to do to Melania… and the American people

Campaigning… Trump is helping out some special election in Pennsylvania… and overtly reminds us what an immature, embarrassing, divisive 4th grader we have for a President

The market should have been roiled (I love saying that :)… but we had an interesting jobs report on Friday:  More jobs… which is good… but less pay… which apparently is also good (although it sounds counter-intuitive) because it keeps inflation in check… which may keep rising interest rates in check.

All of those things should have meant “off-setting penalties” (so to speak).  But instead we rallied sharply on Friday… almost like the market said, “who cares how screwed up our politics  are?!”

Feels more manic than normal to me.

 

*Disclaimer:  If the U.S. is really getting jerked around in international trade, then I like what Trump did.  (Here and here.)  Problem is always can you really believe Trump?

Stocks were one of the things my dad and I enjoyed together.  He really got me started in trading.  I couldn’t wait for the morning paper so we could pour over — in 3-point type! — what the stocks we were following did the day before.

One of the stocks he followed — literally about 50 years ago — was Transamerica.  Probably best known for its office building (the Transamerica Pyramid in San Francisco, one of the world’s most iconic buildings), Transamerica was founded by A.P. Giannini… the guy who also founded the Bank of Italy… which turned into Bank of America… and the same guy that had his car designated as a firetruck so he could speed between business meetings.  (Now that’s intense!)

My little sister absolutely, positively believes that my dad still takes care of her from above.  She has dozens of examples of needing a bit of cash and then somehow magically finding some money in an old coat pocket, or getting a delayed commission check that she didn’t know she had coming, and so on.

I think I’m feeling a bit of that today, too.  I haven’t thought of Transamerica for a long time, and just today, I see a Transamerica ad… and, literally, I can’t remember ever seeing a Tranamerica ad… in fact, I wasn’t even sure the company was still in existence.

That, and the fact that IT’S MY DAD’S BIRTHDAY, makes me think my dad had something to do with the ADSK pop today.

Thanks, dad!  :)

 

 

Transamerica Pyramid

 

Trump is getting blasted for — all of a sudden — unilaterally — announcing he’s levying a 25% tariff on steel and 10% on aluminium.  Outside of the steel and aluminium industries, you’d be hard pressed to find anyone supporting his actions.  Heck, there are even executives within those industries that don’t support his actions.

I disclaimed in my previous post on this topic that I’m no expert on trade, but the more I hear about how the rest of the world treats us in trade, the more I continue to agree with Trump that it’s time to create a more balance playing field.

But now, I’m even liking the way he’s doing it.

Apparently many of the trade structures in place had their origins in the 40’s… for example, helping a war-torn Japan and Germany get back on their feet (and not repeating the mistakes of the aftermath of WWI), helping an embryonic China move into the modern world, and so on.

Huh?  That’s was about 80 years ago!  For the last decade I’ve watched — first hand — tech companies tip-toe around China… either burdened with requirements that make us non-competitive… or, worse, getting blocked altogether.

I’ve been writing about Autodesk recently.  It occurs to me that they can be, in fact, the poster child for this entire topic!

AutoCAD is the de facto standard technology tool for construction all around the world — except China.

Want proof?  While China is always a big topic in many companies’ earnings call, the word “China” wasn’t even mentioned in Autodesk’s last two earnings transcripts (here and here).

Why?  Because there’s a Chinese company called ZWCAD that makes an AutoCAD-clone product and guess which product the Chinese government wants sold in China?

A Chinese company, by the way, that was caught red-handed stealing AutoCAD intellectual property.

So I continue to be with Trump on this issue… and upon further reflection am happy he’s playing the “mad man” card and throwing it directly in their grill.

America is, after all, the world’s biggest market.  If we’re really getting taken advantage of, then it’s time we stopped getting taken advantage of.

I’m very surprised I’m about to say this — but maybe this one is within Trump’s wheelhouse:  His juvenile, bullying, play-ground antics may be the most effective way — may be the only way — to get everyone on the playground to play fair.

Autodesk (ADSK) has its earnings call next week.

Recently Caterpillar (CAT), John Deere (DE), and The Home Depot (HD) all nicely surprised to the upside.  Could these proxies bode well for ADSK, too?

While the market was down today, ADSK was actually up most of the session and only dipped as the Nasdaq took a dive toward the close.  I think this show of strength is a positive sign as well.

I get that ADSK is expensive, in transition, etc., etc. But I used to compete against AutoCAD. They own the market.  Actually, they own a few markets, including general CAD and Hollywood animation stuff.  Both construction and Hollywood are on fuego, yet more positive indicators.

I also get that ADSK stumbled after their last earnings call.  From an all-time high, the stock tumbled some 20%.

As best as I could determine, though, it was a series of items blown out of proportion that stung them.

For example:

* They announced a layoff, which always sounds bad.

But when you listened to the conference call (and subsequent CEO interview), the layoff wasn’t a, “we’re doing badly” kinda layoff, rather, it was a, “we’re changing our business model from product to subscription so that’s going to streamline our infrastructure” thing.  In other words, it sounds like good, proactive management.

* ADSK had a few less subscribers than expected, and they lowered the top end of their subscriber projections from 675K to 650K, which also sounds bad.

But people didn’t want to hear the reason why: Because they’re finding that each subscription is worth more than they thought.

I thought the CEO was very open and positive about this… he said subscriptions is a relatively new thing for ADSK so they’re still learning how to project appropriately… and he immediately followed that up with something to the effect that while they guessed subs a bit too high (in actuality off by less than 3%), they guessed a bit too low on the value of each subscription (sub revs were up over 105.6%), which the CEO (and I!) thought was a perfectly fine trade-off.

Note they kept the low end of the range (625K) intact, which I think is also a good sign (i.e., nothing is “crumbling”).

* The headlines were wrong! Investors.com said, “… delivered disappointing fiscal third-quarter results and guidance”… yet, they beat on both the top and bottom lines and revised guidance upwards. I firmly believe that — in the rush to get out news — if the starting headlines are wrong, unfortunately everyone follows suit… in these days of instant news, there simply isn’t time to properly analyze.

Of course I’m trying to read tea leaves here… but I think ADSK could see an earnings pop… maybe amplified by what I believe was an overdone (erroneous?) pounding after last earnings release.  We’ll see next week!

 

3/7/18 UPDATE:  ADSK REPORTED EARNINGS YESTERDAY AND TODAY WAS UP ALMOST 15%.  :)