LFIN Target or Not, LMFA Shorts May Be Cornered

February 22, 2018 at 3:30 am Leave a comment

There have been rumors circulating over the last few days that high flying Longfin (NASDAQ: LFIN) may be about to put its highly appreciated stock to work as acquisition currency to take over LM Funding (NASDAQ: LMFA). On its face, the deal makes some degree of sense. LFIN’s stock valuation of $2.6 billion begs to be put to good use acquiring assets that could help the company generate revenue. LM Funding’s business model is attractive (see investor deck explaining how they make $3 for every $1 invested), highly replicable in markets nationwide if properly capitalized and thus Longfin’s access to capital and technology could allow the business to grow exponentially for years to come. Also, Longfin’s stock traded lower as the market traded higher yesterday and LMFA traded higher on no news and held those gains as the markets sold off later in the day. Thus, the market action for each certainly looked like what we often see with an acquiror / acquiree situation. This deal could certainly happen and there are plenty of reasons why the executives of each should consider making it happen. Is it a work in progress to be annoucned next Monday or just another rumor? We do not know.

What we do know is that LMFA is severely undervalued by at least 50% based on its core operations alone and we think this is happening due to heavy handed action by short sellers, who as of the last NASDAQ report had sold almost 50% of LMFA’s tiny 1.01 million share public float short.  It appears that short sellers have been spreading many distortions about LMFA in hopes of keeping the stock from rising back to a level that might be expected given its debt free prospects. Most recently they have been claiming that Esousa (the NYC Hedge Fund who bought all of LMFA’s long term debt and converted it to stock at $1.78 per share) has sold all of their LMFA stock and left the building. They claim that the most recent 13D/G filings give evidence, because Esousa has not filed a 13D and such a filing is required within 10 days of taking ownership of 5% of more of a company’s outstanding shares. But the reason Esousa has not filed a 13D is because their stake in LMFA could not be effected until the passing of 20 days past the mailing of notice of the issuance of the shares in accordance with NASDAQ RULE 14(c)-2(b). Given that the key “mailing date” of the written notice was January 31, 2018, the VERY EARLIEST the stock placement could be effected would be February 20th (yesterday). You can’t sell shares whose issuance has not been effected yet.  And you don’t file a 13d for 5% ownership if you don’t own those shares yet.  If the earliest possible date Esousa could take ownership of the LMFA shares was February 20 (yesterday) and the stock went up over 5% on the day, we think it is fair to say that Esousa has not sold all of its shares and it did not appear that there was any significant selling. While we can not confirm the specifics of the date that share issuance will be “effected” (in the event it was not on February 20th or 21st) but the market action alone (up over 5% on a down day for the broader markets) leads us to believe that Esousa was not selling shares yesterday.

It appears that Short sellers wanted investors to believe two things:

1) that the 1.01 million share micro-float of LMFA had tripled to over 3 million due to sales of Esousa’s LMFA stake. While a 3 million share public float would still be very small by any measure, it gives shorts much more breathing room than a jaw-droppingly small 1.01 million share public float that can attract investors who might buy it just because they know any uptick in buy side interest with such a small float can lead to very large if not exponential gains. So despite all the postings and noise from the shorts, we believe that LMFA’s public float is still 1.01 million shares.

2) Short sellers also wanted investors to believe that a highly regarded technology investor like Esousa would buy LMFA’s debt, convert it to stock and then dump it immediately. This gives the impression that once inside they took a closer look at the company and thought there was no hope for significant gains. This in turn would cause other investors to lose faith in the company and sell their shares. This is what the shorts need to happen because the float here is so small and the short position so large that they have very little room to maneuver.

The bottom line here – it appears that short sellers are getting more aggressive because they are in a pinch. We do not believe that the public float for LMFA has changed due to the Esousa stake because the filings indicate that the share issuance to Esousa could not be effected before yesterday and therefore we do not believe that they could have sold all of their stock.  Additionally, it is unlikely they would start to do so given that the stock is SO FAR BELOW THEIR CONVERSION PRICE OF $1.78 PER SHARE. Also, Esousa is quite familiar with the potential of buying a very large percentage of a tiny company’s float – see what they did with NETE, where they bought a huge stake and saw the stock go from $3 to $33+ in a very short time frame. Should we believe the short sellers when they try to tell us that Esousa did the same thing with LMFA (where Esousa took an even bigger percentage stake of s smaller company) but now they want to sell that stake at a loss?

We don’t think so. We think Esousa’s getting the stock is only the beginning of the story. We think it is no accident that LMFA recently hinted (through their last press release) of an increased focus on technology (without using the B word). And we think short sellers are insane for risking UNLIMITED LOSSES for a potential 20% takedown. But it appears that is what is happening here. And we think they may be taking on more risk than they realize.  Take a look at the number of shares that are truly available to be traded –

In summary, we think short sellers have been working overtime to try to keep LMFA trading at these levels but the ever shrinking public float may be about to put them in the corner. We think Esousa’s influence as a lead investor in blockchain technology companies could start to cause investors to reassess the potential for LMFA because we know that Esousa bought their stake with a plan to help LMFA take steps that will make their stock worth substantially more than the $1.78 per share that Esousa paid.  We believe the float is now so thin that any catalyst could cause a run on the shares and even no catalyst at all, just simply investors buying enough shares to cause the short sellers to start buying back the half of the float they have sold short.  When we start to hear rumors of buyouts (like the LFIN rumor) we think less about whether its actually going to happen and more about whether it will cause investors to start buying the stock.  With so many shares already taken, the supply of shares to meet any uptick in demand is insufficient (just a few hundred thousand) and we believe an uptick in buy-side interest for any reason could cause LMFA to move substantially higher.

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Short Sellers Knock 40% Off MARK Stock In Two Days With Bogus Claims LMFA Short Position at Record 52% of Float

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