Stock commentary by a retail investor for retail investors. Over 20 years experience, including time working in the financial sector. Email the author at avoidthebag@gmail.com
Before I chime in on what's ahead for Resverlogix I think its worth noting what's already happened, both last week and in the recent past. Its that old saw about: "If you want to know where you're going it helps to know where you've been".
My last write up on Resverlogix was a week ago, on June 16th 2018.
After closing at $1.91 CDN Friday June 15th on the TSX, and at $1.47 USD in OTCBB trading, shares closed at $2.17 and $1.64 respectively on Friday the 22nd of June. That put gains at over 11% on both exchanges for the 5 days, and at over 13.6% just on the TSX where trading is much more robust.
The Naked Short Selling and subsequent forced covering through the "TSX Buy-In" facility seems to have petered out a bit. Although there were two trades totaling 12,000 shares on Friday at $2.39 CDN by house # 100 which is used to clear trades where the seller has failed to deliver the shares they've sold.
Here's a cut and paste of those trades along with the trades just before and after from the site for the Toronto Exchange.
That's not the whole story of the week that was, Wednesday June 19th saw the PPS spike as high as $2.75 CDN with volume of over 1.2 million across all Canadian trading platforms. On the US side the PPS went to $2.03 that day with volume of over 165,000.
Increased trading volume
Volumes have jumped significantly higher in the past couple of months, especially on the Canadian side. The catalyst seems to have been the April 17th proposed share offering and subsequent cancellation on June 8th.
From April 17th to present there hasn't been a day with less than 40,000 trading on the Canadian side, while before April 17th it wasn't unusual to see days with less than 10,000 trading across all Canadian trading platforms. In fact from May 9th to present RVX has not seen a single day of trading with overall volume of less than 100K.
Okay that's what was. So what lies ahead?
The next DSMB update
Shareholders are likely looking forward to another DSMB update on the BETonMACE Phase III trial of Apabetalone. This would be the 7th such update with the previous six all recommending that the trial continue as planned without any modifications while noting no safety of efficacy concerns. You can read the last one from Feb 26th 2018 here:
That last update is coming up on being four months old now. The fifth update came out on November 1st, meaning the interval between updates number five and six was just under 4 months, putting us "in the window" so to speak for update number seven.
DSMB stands for Data and Safety Monitoring Board. This is an independent body that reviews all available study data, Resverlogix and the Clinical Steering Committee are blinded.
More exposure for Resverlogix
Last week Seeking Alpha publisher Avisol Capital Partners did a write up on Resverlogix. This group has over 7,000 followers on that site and manages an investment group called The Total Pharma Tracker.
For the week ahead Resverlogix might be getting some play from readers of The Motley Fool with the publishing of an article listing 3 Biotech stocks that can electrify a TFSA, that's a Tax Free Savings Account for my non Canadian readers, both of them.
Resverlogix might be third on that list of three, but as PT Barnum famously noted, there's no such thing as bad advertising. Summer is now upon us, which can mean vacations, trips to the cottage or trailer, and sometimes reduced trading volumes.
Here's hoping the trading of Resverlogix keeps heating up as the temperatures get warmer.
Disclosure
I wrote this blog posting myself and received nothing in compensation for the expression of my views and opinions. I do however hold a significant position in both shares and share purchase warrants for RVX so I am obviously biased.
Investment in Resverlogix comports significant risk, please read the full disclaimer at the bottom of this blog.
For those reading because they saw the word "naked" and thought, 'ooh, this looks exciting', you're going to be disappointed. The naked story I'm referring to is about naked short selling. If the thought of Munchkins or Oompa Loompas running around a trading floor in their birthday suits excites you, then stop reading right now and get help.
Before I go on though full disclosure up front, I am a BIG BULL on Resverlogix and hold what for me represents a significant position, both in shares and share purchase warrants. So please read this with that in mind.
I genuinely believe that if the ongoing BETonMACE Phase III Trial for patients with Diabetes Mellitus succeeds in achieving its primary end point that the sky could literally be the limit.
This event based trial is projected to be ending later this year with top line data expected sometime around December. If Apabetalone is able to show 30% or better Relative Risk Reduction (RRR) in the incidence of Major Adverse Cardiac Events (MACE) I don't think a share price of $10 CDN is unrealistic at all, in fact it may very well be incredibly conservative.
News just came out on Thursday indicating that the FDA is on board with the trial and has indicated that Apabetalone has a pathway to an NDA filing and ultimate approval if BETonMACE succeeds.
And that could be just the start in this writer's, not always so very, humble opinion.
How much could a drug like Apabetalone end up being worth?
I see massive potential, literally in at least the tens of billions of dollars (US Dollars not Loonies) for annual revenue, and possibly even more than $100 billion USD.
It is my opinion that manipulative Naked Short Selling resulting in significant delivery failures has had a substantial and negative impact on the company's PPS. And I can back that up with proof.
But before I get to the actual trading data and other documentation about the Naked Short Selling of RVX.TO I want to explain how it works and how damaging it can be.
Short selling is a legitimate and perfectly legal practice of borrowing shares from shareholders and selling them back into the market in the hopes of buying them back later at a lower price and thus realizing a profit on the difference. Its the inverse of buying low and selling high. Instead shorts first sell high and then hope to buy back lower, that's called the cover. Short selling is actually beneficial, it improves liquidity and helps moderate volatility.
Naked short selling on the other hand can be incredibly manipulative because it involves selling short but not actually borrowing the shares and delivering them to buyers. The ultimate result of a Naked Short Sale is a 'Failure to Deliver'. In effect Naked Short Sellers are taking money for selling something that doesn't exist.
In the United States there is a Locate Requirement for going short. Those wishing to sell shares they don't own are supposed to first make a reasonable effort to ensure that the shares they are selling, that they are in fact available to be borrowed. As far as I am aware no such regulation exists in Canada.
On Canada's big board TSX there is another facility for settling delivery failures, and it is here that we find the proof that RVX.TO has been the subject of repeated, substantial and on-going delivery failures for some time now.
"TSX Buy-Ins" transacts sales through trading house number 100 at a 10% premium to the market price each day around 3PM. You can read about it by clicking on the link in the over sized words TSX Buy-Ins above.
When TSX listed stocks have been subject to delivery failures a trade that locates alternative sellers capable of delivering the security in question takes place, thus allowing the CDS to clear the failed position.
The premium is 10% over the last price before the 3PM time.
NOW THE PROOF
Here is a cut and paste of all the TSX Buy-Ins done through this broker #100 to satisfy delivery failures over the past month, I can only generate one month's trading at a time.
Broker Positions for C:RVX Broker #100 from 20180515 to 20180615
Obviously it is with more recent trading that these trades to satisfy delivery failures have been taking place, for the past 15 days in a row inclusive to this past Fridays trading of June 15th 2018.
Notice that this Broker #100 only buys and never sells. That's because the sole purpose of these trades is to satisfy delivery failures, where sellers have sold shares that did not exist. Its is to rectify Naked Short Selling in other words.
I must at this point give credit to a message board poster at Agoracom who's user name is GolfYeti. It was this individual's sharp eye that noticed these trades taking place at a 10% premium and brought it to the hub's and my attention. I have since expended my OCD energy in researching it.
If you go to the following link you can click to see an Excel Spread sheet which lists stocks trading on Canada's Venture and TSX exchanges that are on the buy in report. The quantity for the report dated June 15th 2018 is 673,600 while yesterday it was at 1,100,900 That's a lot of Naked Short selling obviously.
Take note, that this is not regular short selling that's being reported here, but Naked Short selling where the market players involved failed to deliver the shares they sold. Regular short selling is reported twice a month on the 15th and last day of each month with the actual numbers coming out three days later. That number up to May 31st 2018 was 1,655,332 according to stockwatch.com
Why did this happen and why is it important?
First the why. The catalyst that coincides with the increase in both regular short selling and naked short selling seems pretty definitively to have been an April 17 News Release that announced a "Proposed Offering of Units". Prior to that news coming out the number of shares reported as being sold short (normal shorting not naked) was a piddly little 176,205 up to April 15th 2018.
When the next update came that included short interest up to April 30th the number of shares that had been borrowed and dumped back into the market had exploded higher to over 1 million, 1,191,433 to be precise according to the numbers I get from stockwatch. When the next update came out the short number was still at 1,147,392 up to May 15th. Which takes us up to the most recently available number of over 1.6 million up to May 30th. The next update should be out next week either Wednesday or Thursday when we'll know how many were short up to this past Friday June 15th.
Why is it important? For a development stage company, especially one in the biotech field trying to develop a drug for the treatment of Cardiovascular disease, having a healthy share price makes accessing much needed capital easier. Some would call taking money for something that is not delivered, they would call it fraud. Apabetalone isn't some flashy but ultimately useless tech gadget.
So why would shorts attack RVX after the Proposed Share Offering?
In my opinion its simple, shorts were thinking they could turn a quick buck. Resverlogix did a share offering last June that resulted in almost the exact same situation. An offering was proposed and then carried out involving the sale of shares and warrants, and short interest spiked. Those participating in that financing, in my opinion they went short and turned a quick buck, selling both the shares from the financing, the warrants and additional shares that were borrowed short and dumped.
RVX tanked and they were able to cover and make bank, bully for them.
I am no boy scout and I don't believe those who have gone short on RVX both with borrowed shares and naked with shares that don't exist, I don't think they're choir boys either. Its all about turning a buck, making bank, kaching kaching.
What's the difference between some Street Players and the guy who holds up a gas station? The guys on Bay and Wall Streets wear suits and ties, either way they're mercenaries in my eyes. That's not a value judgement for me, its simply a recognition of reality.
The public markets are full of companies doing everything they can to get noticed in order to sell shares to the public, prop up their share prices and earn company execs a nice living often 7 figures. Emailing chop shops, stock promoters, writers and analysts, IR firms that specialize in getting the attention of the investing herd, all part of the market machinery.
All is fair in love and war, I'm dollars to donuts certain that Sharks on The Street see Resverlogix as little different from some bogus Cannabis company with a greenhouse somewhere in Podunk Arkansas that's hyping itself as the next big thing in medical Mary Jane.
There are too many public companies out there for the pros to invest the time, effort and money in doing genuine research, scalping is easier and more cost effective.
I think Resverlogix is different, but that's based on countless hours of research and due diligence.
Even still, I know that it could ultimately fail, that the BETonMACE trial might not achieve its primary end point. Its a risk I'm willing to take because if they do succeed I'm of the opinion that my shares could ultimately be worth not just $10s but perhaps $100s of dollars in the years to come.
Were it not for persistent short selling, both regular and naked I think they might have already achieved a MC of perhaps $1 billion CDN. But it is what it is, you can't change the past.
I sincerely hope Apabetalone is a raging success, not just for the sake of my bank account, but because of the good it could do. Diseases like diabetes are insidious, my late great father suffered from it and was on insulin. Diabetics often end up progressing to Kidney Failure, and then to Cardio-Vascular disease. The "gunk" that builds up in our veins, calcification and the like....its like the top of a waterfall cascading downwards into various pools, into all manner of different areas and conditions.
An epigenetic drug like Apabetalone, able to selectively zero in on a specific bromodomain and recruit proteins to turn a diseased gene from the off position to on? WoW!!! I hope it works.
If you've signed up for those emails that promise winning picks, that shamelessly talk about sharing prosperity because its their duty or other similar such fluff, well you're not going to find any of them hyping this small Canadian biotech I don't believe.
I have written too much already here, but its the weekend. If you enjoyed this you're more than welcome to share. I think there's a button somewhere down below that provides that function.
Further Disclosure
I wrote this on my own, and it is an expression of my thoughts, views and opinions, it is not however investment advice, see the full disclaimer at the bottom of this blog. I am not an investment adviser but please realize that speculative stocks comport significant risk. While there is potential for rewards there is also a very real possibility of losses. I received nothing in compensation for the writing of this blog entry, its part of my OCD condition, writing is something I enjoy.
You hear it all the time on social media, especially with money losing companies that rely on dilution to fund operations. There are always bulls talking about a pending squeeze, how bears are gonna cry. With it comes exhortations to buy even more shares, to "stick to those short sellers".
And I have no doubt it works, it did on me when I first started playing the market.
Ultimately the only fundamental that really matters with public companies is the levels of supply and demand for shares. If more people are buying than selling, then the PPS will climb. If there are more shares being sold than there are buyers, then the PPS drops. Economics 101, you don't need a university degree to know the basics of supply and demand.
So is a short squeeze possible with Vuzix?
First it helps to understand the mechanics of short selling which I will explain. I know a lot of retail shareholders only understand shorting as a "bet" that a stock is going to go down in price, without really knowing what's involved.
According to Nasdaq the level of short interest in VUZI was 5,108,228 shares up to March 15th 2018. The next update is due to be published on April 10th which will give the short number current up to March 31st 2018.
What this means that on top of the 27,301,201 shares that were issued and outstanding (as per the 10K) up to March 16th 2018, there are another 5+ million that were shorted. I call it a form of artificial dilution. Vuzix has issued 27.3 million shares, and shorts have added another 5+ million to that.
How?
Let's say you bought 10,000 shares of Vuzix in January at $10 because you thought it was going to $15 or 20. At the same time a "bear" who thought the PPS was going to fall wanted to take out a short position. That "bear" can borrow the shares from a shareholders account, at a cost of course. The shareholder doesn't even know the shares have been loaned out, when you check your brokerage account you'll still see a holding of 10K shares of Vuzix. You don't actually have physical possession of a share certificate, your shares are held "in street name".
So you still own those 10,000 shares, and someone else owns them as well, hence why I call it artificial dilution.
The short seller has borrowed your 10,000 shares and sells them into the market in Janaury and gets a price of $10 per. That nets Mr Bear $100,000 but he owes you 10,000 shares. The short is betting on the prospect that he'll be able to buy them back for less than the $100,000 he got for selling them. The best case scenario for a short seller is that the stock he's short on goes to $0.00 and gets delisted, then in this example he gets to keep the entire $100,000 less fees.
So where does a squeeze come into play?
We know that VUZI is now trading for a little over $5 right now, but back in January when it was around $10 nobody could say with 100% certainity which way the PPS would go. If an analyst with CNBC had come out with a strong buy reccomendation at $10 its conceivable the PPS could have shot up to $15, $20....who knows, supply and demand.
The short seller who got $100,000 by selling the shares he borrowed doesn't get to take that money and buy a new Jaguar, it has to stay in a margin account to protect his short position, along with additional money to secure the position, typically 50%. That means that the short seller needs another $50,000 on top of the $100,000 garnered from the short sale.
If the PPS started climbing the short seller would be required to further fund his margin account. If VUZI had gone to $20, then the short seller would need $300,000 in his margin account. $20 multiplied by the 10,000 shares for $200,000 plus another 50% or $100,000 to cover the cost of covering at $20+.
And here is where the squeeze can come into effect. If the short seller is unwilling or unable to meet the margin requirments then he can be forced to cover. The broker he borrowed the shares from will simply take the money from the margin account and buy the shares back, that's the reason for the 50% extra.
Do note that I wrote, "can come into effect", I put it that way because while its possible I wouldn't count on it. And in point of fact if your entire long thesis is built on the possibility of a short squeeze, then you might want to re-consider.
Going short is incredibly risky, and the players who work the short side....they have a lot more risk than longs. Someone who's short 10,000 shares of Vuzix, having taken out a position at $10, the most he can make is $100,000 less fees. But on the flip side there is theoretically no limit to how much he can lose, it all depends on how much money he has. While a stock cannot fall below $0.00 per share, there's no limit (theoretically) to how high it can go.
If you decide to bet against the bears know that you're going up against players with huge bankrolls, I'm talking hedge fund types who often have more than $1 billion under management. I would submit that this is the reason that there wasn't a short squeeze back in January when VUZI was topping out at $11.40 per share despite 3+ million shares being shorted already at that time.
The players behind those short sales were not forced to cover and drive the PPS higher with their buying because I assume they have a big enough bank roll to ride out any pump the PPS sees.
If shorts weren't forced to cover at $11.40 what would make anyone think they'd be squeezed at just over $5?
And remember Vuzix isn't making any money, they just reported a net loss of $19.7 million for the year 2017, up from a loss of $19.3 million in 2016 and $13.4 million in 2015. The accumulated deficit was over $96 million at the end of 2017, and is probably close to if not over $100 million by now.
Yes they had revenue of $5.5 million in 2017, but that's revenue not profit. This isn't virtual or artificial reality, in the business world a company eventually needs revenues to exceed expenses. Last year in March of 2016 they put out a PR that talked about moving toward profitability, they went in the other direction.
Good luck in any case, I doubt this miserable and pathetic blog will convince any longs to reconsider, nothing beats real world experience, even if the lesson is an expensive one. I myself am not short any shares, instead I own put options, they're a less risky way of betting on a stock's price falling.
Shares of VUZI have fallen precipitously since the company announced raising $30,000,000 via a share offering in January. After trading as high as $11.40 inter-day on January 24th (as per Yahoo Finance) the PPS has tumbled all the way down to $5.90 as of this writing, a loss of $5.50 per share or 48% from that peak.
Here's the chart:
The company filed its 10K on March 16th and the results, while probably expected, were far from stellar. The loss attributable to common stockholders came in at $21,348,436 for the year ended December 31st 2017. That was worse than 2016 when the loss was reported at $20,870,130 or in 2015 when it was $14,941,559 or 2014 at $7,868,858
Readers can verify those numbers at the following link, page 31 or just do a CTRL+F search "loss attributable to common stockholders".
Back last year in a release dated March 23rd 2017 the company wrote about a move "towards profiability". Its the last bullet point, you can check the linked PR.
I don't think you require an MBA to realize that losing more money than the previous year, over and over and over again, that is not moving toward profitability. Quite the opposite in fact.
Compounding the dilution and losses was a bearish write up that came from a site called "Mox Reports" on March 16th, about the same time as the 10K. It forecast an expected PPS of $0.50 and eventual delisting.
Also included were allegations that Vuzix engaged in an undisclosed stock promotion to inflate the share price and raise $30 million. You can read that report here.
And that wasn't the end. Next was a number of law firms issuing PRs about investigations into the claims made in the Mox Report and inviting those who've purchased shares to contact them. Here are links to some of those PRs
Three purchases by insiders totaling 11,252 shares between February 6th and March 26th.
The purchases totaled over $73,000 according to my calculator. As per Morningstar the CEO and CFO each earned in excess of $500,000 in 2016, down from the over $800,000 they earned in 2015. Numbers are not yet available enumerating executive compensation for 2017. The 10K filing says those numbers will be forthcoming within 120 days of Dec 31st 2017.
Given that Vuzix is not a profitable company, having relied on the selling of shares to finance operations, the buys were a good move in my opinion.
Salaries are not paid out of profits because there are none. If Vuzix continues losing money, and the 10K discloses that they may not achieve profitability in the future, then continuing as a going concern will require the raising of more capital.
I know that many bulls are dreaming of a short squeeze, however longs should realize that if the company never achieves profitability and eventually gets delisted, then shorts would not be required to cover the shares they borrowed.
It wouldn't be the first time that a company with what seemed like great potential failed to succeed, back in the dot bomb tech era it happened all the time, and many shareholders rode stocks all the way down to nothing.
How bad is it? Pretty bad to my eyes, which is why I own put options.
As all my regular readers know, yes I mean both of you, on Sundays I sometimes like to comment on the things that daze and amaze, astound and confound, the market games that both thrill and send chills down the spines of retail investors.
The 'Great Financial Crisis' of 2007/2008 is now 10 years in the rear view mirror. There are players in the market who were still in high school, or even elementary school when it happened. And that wasn't the first or only time we've seen a recession obviously. There was the 2000/2002 market crash that came when the 'Dot Com Bubble' finally burst. Before that the early 1990s saw interest rates explode into the high teens and low twenties. The world economy teetered during what was called 'The Great Recession', and some pundits suggested we were headed for another depression.
Boom then bust, boom then bust, boom then bust. That's the way the market works.
The broader markets have been on a tear, but obviously the bull will get tired at some point and the bear will come out of hibernation and take over for a while. Some think that we already hit that point in January of this year, when the market started dropping. The Dow went from over 26,000 to less than 24,000, it currently sits around 25,000
I don't think we're in a bear market yet. Even if I'm right though, one is coming at some point, and I think it could be starting as early as this summer.
The tax changes that were brought in this year by the Trump administration, I believe they will have a huge impact when companies start reporting their first quarter results for 2018. If I'm right I expect that stock valuations will explode higher as companies report record earnings. And if I'm also right on this count, then I expect that media talking heads to start proclaiming that the market is poised to go on a huge bull run.
If that happens, in my opinion caution is warranted. In fact, if it does play out this way I will be afraid. Contrarian investment strategy at its core means to be bold when the herd is afraid, and afraid when the herd is bold. Smart money players sell high while the sheep buys high. Why do the sheep get fooled? Because they listen to the news and follow the advice of market "experts". But that's the way it has to be, we all can't be buying and selling at the same time.
Not much more to say than that, happy Sunday everybody.
The biography on the website is of one Richard Pearson which says he has a degree in finance from USC. The allegations are that Vuzix engaged in a stock promotion scheme involving dozens of mainstream media outlets to artificially pump the PPS which allowed the company to raise $30 million via a dilutive share offering in January of 2018.
As of this writing it does not appear that Vuzix has responded in any way to the allegations.
This isn't the first time a publicly traded firm has been accused of being engaged in fraudulent activity. Just off the top of my head I can recall numerous claims being made over the past 20 odd years: Enron, Nortel, Sino Forest Cynk Communications...its a long list, Warning Model Management, Adzone Research, Worldcom....I'm sure loyal fans of this miserable and pathetic little blog, (both of them) can think of a few dozen others.
I will leave readers to go over the Mox Report article themselves and instead focus on the bottom line results as reported in the company's just released 10K for the year 2017. I have written before that while the AR/VR space is certainly exciting, in the real world a company needs to have revenues eventually exceed expenses in order to be viable.
Vuzix has been around for over 20 years now, so let's see how they did. Here's the link to the filing:
For the year ended Dec. 31st 2017 the loss attributable to common shareholders came in at over $21.3 million. That compares to the previous year when the loss was over $20.8 million.
There will be a conference call on Monday, and just like last year I expect there will be talk about this being a pivotal year with all the usual forward looking and safe harbor protected hyperbole.
There's not much more to say here obviously, the business is performing as it has in the past, losing money by the bucket full. At the end of 2017 the accumulated deficit was at $96.4 million, assuming they've continued losing about $2 million per month that number is already over $100 million.
If it weren't for the money generated from printing and selling shares into the market.....
Good luck in any case, maybe some more media outlets will write some nice things and help pump the price up again.
Disclosure. As mentioned in previous posts, I own VUZI put options.
