Never ever trust online reviews of mattresses or trading services

I just read this excellent story on Casper and the world of online mattress review websites and that made me of course think of stock trading services and what happens if you try to find reviews of them. Unlike with mattresses, where a $50 affiliate commission is quite common on sales, with stock trading services commissions of 25% to 33% are common and they can go much, much higher. Also, with mattresses, even if you end up not particularly happy (as I am not that happy with my Helix Sleep mattress) at least you end up with a functional, new mattress. If you sign up for many trading services you will end up trying to learn to trade from somebody who fakes their own trades or lied about their own trading record. Even if you find a trading service that has a good track record and the person running it knows how to trade successfully, the odds still favor you losing money — because trading successfully is very hard.

Did you read the article on Casper and Sleepopolis at Fast Company yet? If not, do so now. The problem with the mattress review world (and I think this is a general problem for any product where online reviews can make or break them) is that the incentive for mattress companies is to do whatever is necessary to get to the top of rankings, no matter how. They can do that by incentivizing the reviewer with higher affiliate payouts or by giving the reviewer extra payments, such as a consulting agreement or some other payment scheme. The reviewer is incentivized to direct more people to the company giving him or her the highest payouts. The result is that the reviews for mattresses become completely untrustworthy — some review sites might be slightly biased, others might be totally biased, but it is hard to tell the difference. Of course the solution to this is to get a subscription to Consumer Reports which doesn’t have these conflicts of interest (I’m a happy subscriber and have been for a decade). Here are their mattress recommendations.

Unfortunately, Consumer Reports does not rate trading services or Twitter traders. Tim Sykes started Investimonials.com for the purpose of getting traders’ reviews of trading services but really that site never took off and never got much beyond the penny stock niche. And of course user reviews can be gamed, most obviously on Amazon.com. Even without monetary payments, a service provider can urge satisfied users to write reviews and thus increase their rating. Still, there is useful information in user reviews sites like Investimonials (or Yelp) — the user just needs to expect a positive bias and seek out both positive and negative reviews and read them in detail. If there are no negative reviews then that is a red flag — even the best businesses leave some customers unhappy.

And of course, this is just talking about half the problem — service providers offering reviewers inducements for positive reviews. They can also threaten libel lawsuits to eliminate negative reviews. Or they can pay the review website to remove negative reviews. This is quite possibly a worse problem and will cause the most negative reviews to tend to disappear from the internet. It is impossible to know how big of a problem this is.

Of course, one way to get around the problem of fake or gamed user reviews and the threat of lawsuits is to have a convicted felon with a huge judgment hanging over his head that he can never hope to pay write trading website reviews. But such a site (which exists, but I won’t link to it for reasons I explain below) can still suffer from the tendency to give positive reviews to services that then advertise with it. And the specific website I’m thinking of, while doing a pretty good job of identifying many frauds, seems to think that some legitimate (in my eyes) services are complete frauds. For that reason I won’t link to or even name Emmett’s website.

Why don’t I write reviews of various trading services? I learned a bunch from Tim Sykes and a couple other trading services and I obviously wouldn’t be able to be bias free. That is why I have not reviewed trading services that I have tried; the only times I have written about trading services is when I recommended them (at some point), or had some other reason to write about them (such as when a trading service was owned by stock promoters).

What can you, an aspiring trader, do? First, never trust claims of good performance. Anybody can claim that they turned $3,000 into $10 million. Ask to see some sort of real proof. Even more, look at a person’s trades and verify that they were possible and weren’t in illiquid stocks. No matter how positive your initial impression of a trading service, search out negative opinions (luckily, there are plenty of those on Twitter about everyone) and weigh those against the positive opinions you see. There are plenty of invalid criticisms as well as valid criticisms out there.

Unfortunately, there are so many people looking to get rich through trading that you likely will have no luck if you ask for account statements or tax returns to prove a guru’s performance (but I have some). Even after looking at a number of trades, it can be hard to tell if someone is a good trader — particularly over a short period of time a trader can be successful just because of the niche they are in. In a crazy bull market most swing traders will look great. Caveat emptor and do your own research. Most importantly, never blindly follow another trader — no matter what guru you follow, even if he or she is talented, you are likely to lose money just due to slippage.

Unfortunately, the only way to decide with high confidence if a trading service is worthwhile is to subscribe to it for months and assiduously track the trades of the guru to confirm that they are realistic and that they are consistently profitable. I even subscribed to Anthony Davian’s trading service for two months before concluding that he likely knew less than I did. In addition to that, you need to analyze their trading strategy to determine that it makes sense and that you could conceivably implement it yourself.

 

Disclaimer: I have a long and deep business relationship with Tim Sykes; see my full disclosure. I own a Helix Sleep mattress and subscribe to Consumer Reports. I have left a number of reviews on Investimonials but haven’t written any in years. No position in any stock mentioned and I have no relationship with anyone else mentioned in this post. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

 

Drone Guarder $DRNG now pumped for two weeks via landing page

Starting on May 30th, Drone Guarder (DRNG) started trading with good volume. It is being promoted via emails and a landing page at wallstreetblaze.com/drng/index.html There are 30 million unrestricted shares that can potentially be dumped into this stock promotion while 102 million shares are restricted (data from OTCMarkets.com). This is starting to look pretty interesting as a potential short although the stock looks tightly controlled / manipulated.

Under the company’s previous ticker VOPA it was first promoted back in November 2016.

As of the company’s most recent 10-Q, filed on June 8, 2017, the company reported total assets of $40,111 and no revenues for the most recent quarter.

Disclosed budget: $300,000
Promoter:  Wall Street Blaze
Paying party: Optimal Access Pte LTD
Shares outstanding: 26,805,270
Previous closing price: $1.19
Market capitalization: $158 million

Disclaimer (emphasis added by me):

Disclaimer: DO NOT BASE ANY INVESTMENT DECISIONS UPON ANY MATERIAL FOUND IN THIS REPORT. This publication is distributed free of charge and does not purport to provide an analysis of a company’s financial position. The information contained herein has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company, including Drone Guarder (DRNG). DRNG’s financial position and all other information regarding DRNG should be verified with the company. An individual should not invest in the securities of DRNG based solely on information contained in this advertisement. Information about many publicly traded companies, including DRNG and other investor resources can be found at the Securities and Exchange Commission’s website: www.sec.gov. Investing in securities is highly speculative and carries significant risk. It is recommended that any investment in any security should be made only after consulting with your investment advisor and only after reviewing all publicly available information, including the statements of the company. This mailing piece is not intended to be, nor should it be construed as, an offer to sell or a solicitation of an offer to buy securities, nor should it be construed as the provision of any investment related advice or services tailored to any particular individual’s financial situation or investment objective(s). Wall Street Blaze is a publisher of general and regular circulations offering impersonalized investment-related research to readers and/or prospective readers and is not an investment advisor or broker/dealer registered with either the U.S Securities and Exchange Commission (SEC) or with any state securities regulatory authorities. Wall Street Blaze is neither licensed nor qualified to provide financial advice. As such, it relies upon the “publisher’s exclusion” as provided under Section 202(a)(11) of the Investment Advisors Act of 1940 and corresponding state securities laws. Investing in companies like DRNG carries a high degree of risk. Do not invest in this company unless you can afford to possibly lose your entire investment. The “Company” featured herein appears as paid advertising, paid by a third party (Optimal Access Pte LTD) to provide public awareness for DRNG. The publisher, Wall Street Blaze, understands that in an effort to enhance public awareness of DRNG and its securities through the distribution of this mail and online advertisement, Optimal Access Pte LTD paid all of the costs associated with creating and distribution of this advertisement. The publisher was paid the sum of five thousand dollars for its contributions. The marketing vendors will be managing a total budget of three hundred thousand dollars, provided by Optimal Access Pte LTD for all online advertising and marketing efforts and will retain any amounts over and above the cost of production, copywriting services, mailing and other distribution expenses, as a fee for its services. If successful, the advertisement will increase investor and market awareness, which may result in increased numbers of shareholders owning and trading the common stock of DRNG, increase trading volumes, and possibly increased share price of the common stock of DRNG. The publisher has not undertaken to determine if Optimal Access Pte LTD is, or intends to be, directly or indirectly, a shareholder of DRNG. This publication is based exclusively on information generally available to the public and does not contain any material, non-public information. The information on which it is based is believed to be reliable; nevertheless, the publisher cannot guarantee the accuracy or completeness of the information. The information contained herein contain forward-looking information within the meaning of section 27a of the Securities Act and section 21e of the Securities Exchange Act including statements regarding expected growth of The Company. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act, the publisher notes that statements contained herein that look forward in time, which include everything other than historical information, involve risks and uncertainties that may affect the Company’s actual results of operations. Factors that could cause actual results to differ include, but are not limited to, the size and growth of the market for the company’s products and services, the company’s ability to fund its capital requirements in the near term and long term, pricing pressures and other risks detailed in the company’s filed reports with SEC. To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided herein, or for any direct, indirect, consequential, incidental special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information.

Copy of pump landing page (PDF)

Disclaimer. I have no position in any stock mentioned above. I have no relationship with any parties mentioned above. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

An Introduction to shelf registrations

Probably the most common kind of way of issuing and registering new stocks is a shelf registration. This is filed on SEC Form S-3 (F-3 if the issuer is a foreign company). These can be used with multiple types of offerings, including most commonly PIPEs, Private Investments in Public Equities, where the shares have been sold to an investor and the shares are now being registered so that investor can sell those shares; ATMs or At the Market Offerings (PDF), where a company sells shares into the open market from time to time; and registration of shares underlying warrants or convertible bonds.

Shelf Takedowns by Greenberg Traurig (PDF)
FAQs about Shelf Offerings by Morrison Foerster (PDF)

Besides the actual shelf registration statement, the company has to file a prospectus supplement within two days of whichever comes first, the offering being priced or the shelf registration being used. Also, just because a shelf registration is filed does not mean it can be used immediately — the registration needs to be declared effective after the SEC reviews the registration. This typically takes two to three weeks from when the registration statement is filed. When a shelf registration (or another registration statement) has become effective a form EFFECT will be posted. For example, here is a shelf registration, prospectus, and EFFECT for Diana Containerships (DCIX):

 

Disclaimer. No position in any stocks mentioned and I have no relationship with anyone mentioned in this post. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Some good posts on offerings and fundamental research

These come from Auspex Research on Twitter. Follow him. He has no blog but he does occasionally post longer thoughts on Twitlonger.

A Gevo Inspired Twitlonger (10 June 2016)
When A+B = D (17 November 2016)
Realtime Analysis using Twitlonger (22 November 2016).

Disclaimer. No position in any stocks mentioned and I have no business relationship with Auspex (I don’t even know his real name). This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Catalysts in the trading of bankrupt companies and why Republic Airways $RJETQ is going to zero

The rule of thumb in bankruptcy is that 90% of the time shareholders get completely wiped out. Maybe 8% of the time shareholders get a tiny bit of equity in the new (post-bankruptcy) company or out of the money warrants to buy that equity. Only 2% of the time or less do shareholders get a large recovery. Of course, that 2% of the time is what gives hope to shareholders in the 98% of bankruptcies. General Growth Properties (GGP) is a good example from the 2008 financial crisis and American Airlines (AAMRQ at the time) is a more recent example from 2014. A current company in bankruptcy where it is possible that shareholders may get a meaningful return is Peabody Energy (BTUUQ); the current price values the equity at $250 million although the company still says that shareholders will be wiped out. Peabody has yet to file a bankruptcy plan; it has been granted an extension by the court until December 14th. [The above paragraph has been edited to specify that a meaningful return for equity holders is possible; a prior version said it was probable.]

There are a few key events in a bankruptcy proceeding that should drastically affect the stock. First, the bankruptcy filing, which almost always crushes the stock although in cases where that was expected the drop may be 30% rather than 80%. The next event is the formation of an equity committee (or rejection by the judge of an equity committee): this indicates a meaningful probability of shareholders receiving something and not getting completely wiped out. Next comes the filing of the bankruptcy plan, which lays out how much different classes of creditors and equity holders will get. For various reasons the bankruptcy plan is often changed or amended multiple times. Next comes the vote on the bankruptcy plan and approval by the judge: if the plan is approved then the bankruptcy will become ‘effective’ shortly thereafter. The effective date is usually not known more than a few days in advance and it should come a couple weeks after the plan is approved. On the effective date the bankruptcy is closed, old shares are wiped out, and new equity is distributed to creditors.

It is important to note that there are other (less common) ways that a bankruptcy can end: the old equity can remain after essentially all the assets have been sold with the proceeds going to the creditors (this is what happened recently with Saratoga Resources (SARA), and in this case the equity essentially owns a shell company).

Shareholders of a bankrupt company can keep the stock price at an unrealistic level even when they are likely to get wiped out. However, the events mentioned above tend to be catalysts for sending the stock price towards its fair value.

Here is a chart of Cosi (COSIQ); the big down day is when the company declared bankruptcy.

cosiq

Next is the chart of C&J Energy (CJESQ) — November 4th in premarket the bankruptcy plan was revised to give shareholders 2/3 fewer warrants in the new equity.

The evening of November 4th the judge denied the request for formation of an official equity committee.

cjesq

 

Here is the chart of Republic Airways (RJETQ): the bankruptcy plan was filed after-hours on 11/16/2016. The plan calls for shareholders to be completely wiped out and get nothing.

rjetq

Next is the chart of Hercules Offshore (HEROQ) with the big drop on November 1st coming after the judge approved the bankruptcy plan:

The final even in bankruptcy is the effective date. As I stated above this is not known far in advance — it depends on if there are any objects or delays after the plan is confirmed. Below is the chart of Arch Coal (ACIIQ; the post-bankruptcy stock trades as ARCH). On September 30th the company filed an 8-K stating that the effectiveness date was anticipated as being October 5th. The stock promptly dropped bigly.

aciiq

Republic Airways (RJETQ) and understanding a bankruptcy plan

An official equity committee was never approved by the judge because unsecured creditors were set to lose over 50% so the likelihood of equity holders getting any recovery was very low. The evening of November 16th a bankruptcy plan was finally filed. You can see the bankruptcy court docket for free. To find free bankruptcy court dockets, just Google “[company name] bankruptcy docket”. The various corporate bankruptcy trustees all make these available. In the case of Republic Airways, docket 1089 is the bankruptcy plan and docket 1090 is the plan disclosure statement.

The most important part of the bankruptcy plan is the listing of claimant classes and what they will receive at the confirmation of the plan. Here is that list for Republic:

creditor_list

Interests in RAH include the stock of Republic; but don’t take my word for that: the first part of the plan has definitions of all the relevant terms.

From page 9:

“Interest” means any equity security within the meaning of section 101(16) of the Bankruptcy Code including, without limitation, all issued, unissued, authorized or outstanding shares of stock or other equity interests (including common and preferred), together with any warrants, options, convertible securities, liquidating preferred securities or contractual rights to 16-10429-shl Doc 1189 Filed 11/16/16 Entered 11/16/16 18:56:36 Main Document Pg 14 of 68 10 purchase or acquire any such equity interests at any time and all rights arising with respect thereto.

From page 13:

“RAH” means Republic Airways Holdings Inc., a Debtor in these Chapter 11 Cases.

Page 25 has the details of how interests in RAH will be treated (emphasis mine):

i. Interests in RAH (Class 5) i. Impairment and Voting. Class 5 is impaired under the Plan. Holders of Interests in RAH are deemed to reject the Plan under section 1126(g) of the Bankruptcy Code and are not entitled to vote on the Plan.

ii. Treatment. Upon the Effective Date, all existing Interests in RAH shall be deemed cancelled and extinguished and the holders of such Interests shall not receive or retain any property on account of such Interests under the Plan.

If that isn’t clear enough, look at page 92 of the disclosure statement (emphasis mine):

2. Consequences to Holders of Existing Interests in RAH Holders of interests in RAH, which are being cancelled under the Plan, will be entitled to claim a worthless stock deduction (assuming that the taxable year that includes the Effective Date of the Plan is the same taxable year in which such stock first became worthless and only if such holder had not previously claimed a worthless stock deduction with respect to any Interest  in RAH) in an amount equal to the holder’s adjusted basis in the Interest. If the holder held its Interest in RAH as a capital asset, the loss will be treated as a capital loss.

Republic stock gapped down after that bankruptcy plan was filed but thankfully bounced enough for me to short over $0.50. Considering that the company stated in a press release then that it expects to emerge from bankruptcy in the first quarter of 2017 and that the borrow rate on RJETQ at Interactive Brokers is under 4% APR (effectively 12% because that is calculated on short collateral), I continue to believe that RJETQ is a good short. I expect the stock to slowly fade over the coming two months and drop under $0.10 once the plan is confirmed.

Disclaimer. I am short RJETQ and may add to or cover my short at any time. I have traded all the other stocks mentioned but currently have no positions in them. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Get SMART: Customizing Interactive Brokers’ smart routing

Interactive Brokers has been one of my main brokers since 2007. Yet I didn’t realize until today that you can customize the smart routing of orders. I was trying to figure out how to set a hotkey to set a market/ECN destination (route) and stumbled across the smart routing configuration which is even better than what I was looking for. Read IB’s description of how it works.

The simple explanation is that you can set the smart router to prioritize execution (in various ways) or prioritize ECN rebates. This only affects orders where you are adding liquidity (when you are taking liquidity the smart routing always prioritizes execution). For someone who trades a lot of low-priced stocks, ECN fees and IB’s per share commissions add up fast. By setting my smart routing to always go to the highest rebate venue I will dramatically lower my trading fees on low-priced stocks. Simply put, I should have looked into this long ago and saved thousands of dollars in commissions.

For the record, for adding liquidity on Nasdaq stocks under $1, the best route is NSX, which offers a rebate of 0.25% of the trade value.

Here is a screenshot of how I have my smart routing configured now:

SMART

Disclaimer: No position in any stock stock mentioned above. I have no relationship with any parties mentioned above except that Interactive Brokers is one of my brokers. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Great new technologies, horrid investments: Does this describe Editas $EDIT?

One thing growth investors and stock promoters love is a brand new industry that is growing quickly and revolutionizing our lives. The problem is most of the time much of the companies end up losing money and even going bankrupt even as the new industry blossoms because of fierce competition. This happened with railroad companies in Britain in the mid 1800s, electronics companies in the US in the 1960s, computer companies in the 1980s, internet companies during the tech bubble in 1999, and has happened over the last few years in LEDs and solar panels. In most of these cases most companies did poorly and there were only a few companies that came to dominate the industry or if there were no good barriers to entry or many competing technologies, cutthroat competition has continued. Most of these stories have been told before and better than I could tell. So I will concentrate on the LED industry which is one I know well and has not been well followed by most people.

Light emitting diodes (LEDs) have been around for decades but only in the last decade have there been improvements in the technology such that they could be used in normal lighting situations rather than just as indicator lights. The first LED light bulb I bought back in 2008 produced 200 lumens of bluish-white light (~7000k). For comparison, 800 lumens is what a standard 60-watt incandescent bulb produces. That bulb was made by Lighting Science Group Corp (LSCG) and cost about $50. The most recent LED bulbs I bought (made by GE and sold at Home Depot) cost $3.13 each and produce 760 lumens or warm white light (2700k).

I just finished converting my house entirely to LEDs. The light quality is as good as incandescent bulbs, they use much less electricity, and they stay cool (which means less chance of fires and lower air conditioner usage). They also on average last far longer. The problem for manufacturers of LEDs is that no manufacturers have technology that is vastly superior to the others or patents on essential technologies. So while LEDs are high-tech, producing them is a brutal business. There are a handful of large manufacturers of the actual LEDs (e.g., Seoul Semiconductor, Epistar, Cree, Philips, Osram, and others) while there are thousands of companies putting those LEDs together with the electronics to drive them in bulbs. The large producers make a normal profit but most of the producers of LED bulbs make little.

Here is a chart of CREE, one of the ‘winners’:

cree

Cree has done well but the company’s stock is where it was essentially a decade ago.

Here is the chart of one of the losers, Lighting Science Group (LSCG):

lscg

Lighting Science of course was my most profitable short ever back in 2008. Even though the company did go on to successfully market its products, they have not been profitable because of lower-cost competition.

 

LED lights are pretty awesome and within a decade 90% of new fixtures will use them. In two decades’ time LEDs will have 99%+ market share in general lighting for home and industry. Besides their aforementioned advantages, their unique properties also have made it possible for many of the poorest in the world to use a small solar cell and battery to power LED lights and charge phones, reducing the use of kerosene lamps and resulting in cleaner air and better health.

Why bring this up now? I am really excited about CRISPR-Cas9 and have publicly said that I would love to invest in any company in that space. Editas (EDIT) just filed an S-1 prospectus to go public. Anyone who is in awe of the possibilities of this gene editing technique including myself would do well to consider the similarities to past highly-hyped new industries. That is not even considering the legal morass that CRISPR is in right now with multiple groups having filed competing patents.

 

Disclaimer: No positions in any stocks mentioned. I have no relationship with any other parties mentioned above. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

 

(By the way, if you are looking to get a large number of non-standard LED lights (such as T-8 lights), I recommend Chong Ming LED — I found them through Alibaba and purchased 180 T-8 tube lights for an LED retrofit at the daycare run by my church. I also highly recommend Hyperikon, which has a large selection of bulbs available on Amazon.)

 

How to be dead wrong about Kalobios Pharmaceuticals $KBIO

Needless to say, my previous post on KaloBios Pharmaceuticals was dead wrong. Martin Shkreli and friends bought up the majority of the company over the past couple days (at under $2 per share on average) and their SEC Form 4s after the close yesterday caused a massive short squeeze that sent the stock up to $24 in premarket today. The one thing I did not account for was the possibility that someone would see value in the company’s drugs and rescue the company. That is essentially what Shkreli is doing, as he explained to Fierce Biotech. In the future I will avoid any such overnight shorts on companies with substantial intellectual property even if I think it has little value, particularly if the market cap of the stock is low. Even a small risk of a catastrophic loss on a trade is too much.

I apologize for completely failing in my analysis. Luckily I had set up an alert for SEC filings on KBIO so I was able to cover my short for a small loss (around $4,000 net) at $2.0833. Hopefully my readers also avoided catastrophic losses. If you look at my trades on Profit.ly you will see a large loss at IB but a slightly smaller large gain at CenterPoint Securities. It is quicker for me to trade at CenterPoint so I just bought there at first to get flat.

Below is a screenshot of my posts in TimAlerts chat mentioning my cover and the news:

KBIO_chat

See all my posts here.

Disclaimer: I have no position in KBIO but I will likely trade it after posting this article. I have a close business relationship with Tim Sykes (see Terms of Use for details). I have no relationship with any other parties mentioned above. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

A short analysis of Kalobios Pharmaceuticals $KBIO liquidation value

Disclosure: I am short KBIO and I intend to actively trade the stock after this post is published. See full disclaimer below.

Here is my back of the envelope calculation of the value of Kalobios Pharmaceuticals (KBIO). This was first posted in the TimAlerts chat, where I am and have been a moderator for years.

Nov 16, 2:37 PM MichaelGoode okay here is my analysis of KBIO — using very optimistic assumptions (as a short, to make the analysis more conservative for shorting): $10m in net quick assets as of June 30th. Assume cash [burn] until today equal to same rate as last quarter. […] They burned $5.8m in Q2. So that is $1.93m per month. Four full months since then and one half month so estimated cash burn of $8.7m. Even assuming no extra shutdown expenses that would leave them with $1.3m to distribute to shareholder

Nov 16, 2:37 PM MichaelGoode KBIO With 4.12m shares outstanding that equates to a liquidation value per share of $0.32 per share

Nov 16, 2:39 PM MichaelGoode KBIO caveats — this assumes no costs after today, no fees to the liquidator and no severance fees to employees. However, this also assumes the same compensation expense each month up until now and the company has laid off workers prior to today

Nov 16, 2:43 PM MichaelGoode KBIO and another caveat (this is negative for the stock) – the PR Friday mentions “As a part of its wind down and handing over management of the wind down to The Brenner Group, the company expects to phase out the remaining employees over the next thirty to sixty days.” — so there will be significant compensation expense over the next two months (no clue how large).

I looked up the company’s restructuring / termination expenses and at least for the first series of layoffs:

The Company expects to substantially complete the restructuring efforts in, and related charges will be incurred through, the fourth quarter of 2015. The Company estimates that it will incur total restructuring charges consisting of cash expenses for one-time termination benefits of between $400,000 and $500,000.

The above is from the November 9th 8-K filing. It would be reasonable to estimate another $300,000 in one-time payments to the remainder of the workforce.

I welcome feedback on my analysis. The relevant news can be found here:

Kalobios to wind down operations (November 13)
KaloBios to Reduce Workforce, Explore Strategic Alternatives (November 5)
10-Q for quarter ended June 30th

 

Disclaimer: I am short KBIO and I intend to trade this stock frequently after this is posted. I have a close business relationship with Tim Sykes (see Terms of Use for details). I have no relationship with any other parties mentioned above. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

 

 

 

 

 

Anavex Life Sciences $AVXL and the Lincoln Park ATM

Notice: This post has been corrected as of 7pm 2015-10-28 — originally I averaged the past 20 trading day closing prices, rather than the past 10 days. I am sorry for the error.

There is a lot of confusion about how the $50 million funding commitment from Lincoln Park Capital Fund LLC to Anavex Life Scienes (AVXL), and whether this funding is good or bad. To see all the details on the funding, look at the S-3 filing by AVXL to register the shares they will issue. The most important part of the agreement is below:

Under the Purchase Agreement, on any business day selected by us, we may direct Lincoln Park to purchase 50,000 shares of our Common Stock on any such business day. On any day that the closing sale price of our common stock is not below $7.00 the purchase amount may be increased, at our sole discretion, to up to75,000 shares of our common stock per purchase; on any day that the closing sale price of our common stock is not below $9.00 the purchase amount may be increased, at our sole discretion, to up to 100,000 shares of our common stock per purchase and on any day that the closing sale price of our common stock is not below $11.00 the purchase amount may be increased, at our sole discretion, to up to 125,000 shares of our common stock per purchase and on any day that the closing sale price of our common stock is not below $13.00 the purchase amount may be increased, at our sole discretion, to up to 150,000 shares of our common stock per purchase. Such purchases are hereinafter referred to as “Regular Purchases”. In no event shall Lincoln Park purchase more than $2,000,000 worth of our common stock pursuant to a Regular Purchase on any single business day. The purchase price per share for each such Regular Purchase will be equal to the lower of:

  • the lowest sale price for our common stock on the purchase date of such shares; or
  • the arithmetic average of the three lowest closing sale prices for our common stock during the 10 consecutive business days ending on the business day immediately preceding the purchase date of such shares.

So while Anavex can decide when and how many shares to force Lincoln Park to buy (up to certain maximum amounts depending on the stock price), the shares come at a price determined by a preexisting formula. What would happen if Anavex were to sell shares to Lincoln Park today? The first price would be $8.72 (today’s low). The closing price for AVXL over the past 10 trading days are as follows:

9.10
8.37
7.65
7.87
8.94
9.02
9.14
8.98
8.40
8.49

The three lowest closing prices are $7.65, $7.87, and $8.37. The average of these prices is $5.71. This is lower than today’s low so Lincoln Park would get the shares $7.96, a 20.4% discount to the current price of $10.00. In other words, Lincoln Park would easily make lots of money selling these shares the next day with essentially no risk.

But what if the stock price is not rising? Let’s assume that the last 10 trading days were all the same and that today had the lowest prices of all of the last 10 days. So I look up the prices on October 23rd and see the low was $6.51. Assuming that day happened today, Lincoln Park would get the shares at $6.51 (and the stock closed that day at $7.65). This is a 14.9% discount to the close and would allow Lincoln Park to again make easy, low risk money by selling the next day. The worst case scenario would be for AVXL stock to slowly fall with little range, in which case Lincoln Park would be able to purchase shares at a small discount to the closing price and likely break even. If the stock has been going up or been going sideways while having a wide range they get stock at such a discount as to almost guarantee a profit.

Disclaimer: No position in any stock mentioned although I will likely trade AVXL after this post is published and I will not update this disclaimer when I do that. I have no relationship with any parties mentioned above. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.