After Self-Described “Trading Bubble” Longfin Has Little Cash to Show from Bond Sale, Raising Solvency Questions
In the months after its December IPO, Longfin (ticker: LFIN) appealed to speculators seeking a lofty bet on the future of cryptocurrencies. But a peek at the company’s balance sheet reveals more pressing concerns at hand.
Shares of the financial technology company rocketed from an IPO price of $5 a share to over $142 a share in December after it announced it had bought a cryptocurrency company called Ziddu.com. The idea was to use Ziddu to help companies structure everyday agreements like commodity trades using tokens rather than bank financing. Transactions with the Ziddu tokens would be settled on the Ethereum Blockchain – a ledger similar to Bitcoin and well-known in the crypto-community.
For a while, Longfin shares seemed to behave normally – at least by crypto-standards. While the company’s valuation looked extremely elevated at several billion dollars on modest revenue, it traded in tandem with cryptocurrencies like Ethereum. In the first two months of 2018, Longfin shares had a 52% correlation with prices of Ethereum, according to calculations by Sentieo.
But in the last 10 days, the shares have fallen about 80%. There were several triggers: A number of prominent short sellers made public attacks on Longfin; the company’s shares were added and then days later removed from the Russell 2000 Index; and on Monday the company said the SEC was conducting an investigation called In the Matter of Trading in the Securities of Longfin, which hasn’t resulted in any conclusions.
More worrying than any of that: The company has yet to collect much of the cash from its $52.7 million financing deal announced in January. That deal, which includes a large amount of convertible bonds, was critical given the company had just $2.1 million of cash left on its balance sheet at the end of 2017.
What’s wrong? Longfin said in its annual report that it has collected just $3.7 million even though the company “completed” the financing deal on February 13. The apparent issue is that it cannot collect any more cash until the shares underlying the convertible notes from the financing have been registered and approved by the SEC.
The clock is ticking. According to a filing from February 14, that the registration must happen within 60 days, or April 14, and be approved by the SEC within 90 days, or May 14. The company is also subject to penalties payable to the investor in the event it breaches this part of the agreement.
It’s hard to tell what has held the company back from registering the shares. An SEC investigation in itself doesn’t preclude a company from filing a share registration or getting it approved, according to securities lawyers. One issue could be the dramatic drop in the company’s share price below $15, which indicates “price failure” that can interfere with conversion, according to debt documents.
Longfin said the CEO was unavailable for comment because he was “on an airplane” while the SEC didn’t respond to a request for comment and Nasdaq declined to comment.
The only information on the registration delay comes from the company itself, with the annual report saying the absence of cash from the financing is a factor “not within the Company’s control” that raises “substantial doubt regarding” its “ability to continue as a going concern.” The other factor the company cites as a source of doubt is “the attainment of profitable operations.”
Indeed, the company looks a long way from sustained profitability. Ziddu had no revenue at the time of acquisition in December. There’s no indication in company filings that it has earned any revenue since.
The company booked $75 million in revenue in 2017, mostly from the sale of physical commodities. But it had an operating loss of $25.6 million, thanks in part to $26 million of stock-based compensation, most of which went to the CEO.
As if those problems weren’t enough, Longfin also said it has identified material weaknesses in its internal controls over financial reporting. That means there could be more serious problems yet to be uncovered.
Amazingly, the stock is still the best performer among Reg A listings, up 132% from its IPO price. That’s despite the company itself describing it as a “trading bubble” in its annual report.
The moral of the Longfin story is that the stock was far from a proxy for the success of cryptocurrencies. Unfortunately, the company has never addressed its shortcomings openly but instead buried them in SEC filings that most retail investors will never read. As always, anyone investing in Reg A stocks needs to do their homework.