Home Blockchain Longfin Corp. – The Blockchain Falling Knife

Longfin Corp. – The Blockchain Falling Knife

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Longfin Corp, a company which provides foreign exchange hedging solutions, rose to blockchain fame in December when it announced the acquisition of Ziddu.com. The timing of the acquisition was a mere two days after Longfin’s December 13th initial public offering and on the news of the acquisition, Longfin’s stock started an upward trajectory from it’s $5 IPO price to ultimately reach a high of $142.82.

The sharp rise in buzzword-heavy Longfin’s stock was certainly sparked by the announced acquisition during the market hype surrounding blockchain – hype which has since waned. Additionally, Longfin’s adjunct low float helped to drive the share price into the stratosphere. While Longfin hasn’t disclosed the size of the float, CNBC contacted the company after its IPO and was told there were 44 million shares outstanding. With the CEO disclosing that he owned 55% of the company and another company with which the CEO was affiliated owning an additional 37%, it’s clear Longfin’s float was at most 3.5M shares. Such a low float in the midst of the blockchain craze created a supply/demand imbalance with investors which rivaled Christmas shoppers scoping out the last two hoverboards in a store on Black Friday.

The acquisition of Ziddu.com itself is a bit suspect. Longfin CEO, Venkat Meenavalli, who owns 55% of Longfin, had Longfin purchase Ziddu from Meridian Enterprises. Meridian Enterprises is a company which Mr. Meenavalli also controls through his 95% ownership. The acquisition was done for a total consideration of 2.5M shares of Longfin and just before announcing the acquisition, Longfin was still trading at $5. If Ziddu were to be valued at the value of the shares given in consideration for the acquisition, Ziddu would have been worth $12.5M, or $0.28 per share of Longfin. In reality, the value is very hard to judge given the related party transaction and given that the consideration was paid in shares.

To Mr. Meenavalli’s credit, he did mention in his interview on CNBC that Longfin’s share price explosion wasn’t warranted. However the timing was odd as the CEO did specifically execute the non-arm’s-length acquisition right after Longfin’s IPO. Further, given his control of both companies, there’s no synergy between Ziddu and Longfin which couldn’t have been easily accomplished through contracts or otherwise. Looking from the outside in, there doesn’t appear to be any other reason for the acquisition other than for the CEO to try to capitalize on the blockchain craze.

Recent Financing

If Longfin’s nebulous value proposition isn’t enough, Longfin recently entered into a $52.7M financing with a fund only described as a “multibillion dollar fund.” Summarizing the terms of the financing, Longfin will pay back the convertible note in eighteen monthly installments with the first installment starting approximately three months after the financing is closed. At the option of Longfin, the monthly installments can be paid back in cash at a 5% premium or in common shares of Longfin. If paid back in shares, the conversion price will be at 88% of the lowest volume-weighted average price of the shares, either that of the average of the two lowest days out of the ten trading days leading up the the payment or that of the previous one day. The details and nuances of the convertible note can be found in the SEC filing.

It seems unlikely the company would opt to pay back the convertible note back that quickly in cash if that cash was actually needed for operations so the obverse is that the payments will likely be made in common shares. If the share float doesn’t increase before early May which is when the payments will likely start, those payments in shares will make Longfin’s share float grow very quickly and will likely pressure the stock.

Conclusion

Right now there is too little which is publicly known about Longfin’s operations and the quasi-toxic financing adds significantly more risk. Even if an investor believes in the company’s prospects, it’s arguably better to step to the sidelines and wait for the dust to settle. At the current time, it’s hard to find any optimistic reason to own the stock.

Disclosure: I am/we are short LFIN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.





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