Posts Tagged ‘Royal Blog’

I can almost write a book on Longfin (LFIN), but given their unbelievably crazy trading history and company antics, I’m sure it will prove too irresistible to Hollywood and a more seasoned author like Michael Lewis (of “The Big Short” fame).

Yes, this story kinda rivals that one!

Sorry in advance for financially geeking out here.  :)

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

LFIN, a “FinTech” company, went public on Nasdaq via a newly-simplified “Reg A+” offering last December.  Two days after it went public, it acquired a cryptocurrency firm.  Smack-dab in the middle of the full-blown crypto craze, LFIN stock rocketed from an already richly-priced $5 a share to over $140 in just a few days… that’s a $10 billion valuation!

And, just a few months after issue, LFIN was — is — headed to $0.

It would take far too long to go through their entire drama.  Suffice it to say:

*  LFIN didn’t have the correct requirements to go public, even on the easier “Reg A+” path.

*  There’s a question whether they’re even a U.S. based company (which they have to be to trade on Nasdaq).  People have swung by their New York “headquarters” to find three empty desks in an incubator space.

(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!)

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

*  That may be one of the reasons why I believe they are waaay overstating revenue… they’re a trading platform, so 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 of recognizing $66.6m in physical commodity trading revenues vs. $1.6m in fees.

*  The CEO purchased a nascent cryptocurrency company two days after they went public… without any mention of the possibility of this in the offering document.  But it’s not like this wasn’t contemplated… or just any company… he owned this crypto company!  This, of course, is a massive conflict of interest.

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

*  The company entered into one of the worst financing agreements ever with Hudson Bay Capital.  In the best of circumstances, they would have given away most of the company to get the financing.  But, as you can guess, there’s nothing about LFIN — save its meteoric stock price — that is the best of circumstances.

*  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 press release that it is removing Longfin from their index due to “insufficient free-floating shares”.  In other words, they simply didn’t have enough public shares and should never have been included in the first place.

*  Intelligent investors (i.e., not “pump & dump” traders) start waking up to just how feeble the company is.  Short-interest builds to epic proportions because, well, we all believe this may be the SHORT  OF THE CENTURY!

*  CNBC interviews the CEO for a second time on April 4th.  The first time was a disaster.  Unbelievably, the second interview was worse.

*  On April 5th their second accounting firms 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, stops stock trading with a dreaded “T12” halt (the worst halt Nasdaq can issue).

*  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.

*  As if all of the above isn’t bad enough, on April 13th, LFIN triggers their loan covenant with Hudson Bay (i.e., not trading for five consecutive days).  They received an initial payment of $5 million and, subjected to registering a bunch more stock (for the expected massive shareholder dilution), they would then receive the next big traunch of money, about $42 million or so.  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 $5 million, the horrible financing agreement LFIN signed gives Hudson Bay the rights to call the entire first traunch, $33.6 MILLION, money they haven’t even received yet!  Payment is due on Friday, April 20th.

*  LFIN has no money.  It appears they’ve spent their IPO funds.  And the $5 million in initial financing from Hudson Bay (with $1.3 million of it going away immediately in “deal fees”).  So the only way they can pay this back is to get new financing, which won’t happen (and even if it did it would completely wash out all shareholders), OR renegotiate with Hudson Bay, which can only mean, again, completely washing out all shareholders.

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 completely washed out… 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?

BUT, unbelievably, there’s more.  Now we get to 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 wash everyone out OR bankrupt the company.

But, because of the EPIC short position, there are some people that think that 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 out their short positions.

I know, I know, crazy but true… the very real possibility that this bankrupt company could be worth billions — or tens of billions — again, 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 profit.

To be SO RIGHT… and yet LOSE EVERYTHING!

But even that isn’t so easy to totally comprehend.  Normally, option holders could simply exercise their options (and pay a hefty margin fee for the right to do so)… but since the stock was halted, there was no way to exercise… well, until the OCC issued a memo yesterday saying it would offer a “delayed settlement,” which essentially said, “we’ll let you exercise and it won’t count until the stock begins trading again.”

That sounds like good news, 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.

So is the stock going to sky-rocket due to a massive, massive short squeeze and maybe even a feeding-frenzy of momentum players?  If it does, PUT holders may be screwed (depending on expiration and how long the frenzy lasts).  Or will LFIN plummet because the company is essentially washed-out/bankrupt?  If it does, CALL holders will never see the last marked trading price of $28.19 ever again.

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

 

 

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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.

I’m still trying to figure out all this Facebook stuff.

Seems like everyone’s trying to figure out if whatever happened really did sway elections and destroy the democratic process as we know it.

Well, if it did, I guess no one cared when Obama and the democrats used Facebook data to help them win elections.

I’m just sayin’.

P.S.  If Putin did try to use social media to sway our elections, I wonder how he’s feeling about that now?  My guess is he’s probably thinking Hillary would have been a lot more predictable than Trump.  Good luck, Emperor Putin, trying to negotiate with a 4th grader!