SMSI: Special Shareholder Report (Are The Big Sellers Gone)?

Long-time readers should note some significant changes in how I communicate in the public domain. The primary purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

Accordingly, this document should not be construed as an endorsement or recommendation of the companies or securities discussed herein. I am not an investment advisor and this is not an investment thesis. It is merely one part of the story, which I present for debate in hopes of determining all risks and upside potential. The disclosure at the end of this piece is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.

 

On Tuesday, I released a special report to investors who participated in my “SMSI ownership census”. By gathering data on how many shares are owned by well-research investors, I aimed to gain insight into the current state of supply and demand for SMSI’s shares.

The finding suggested that the selling pressure would start to abate this week.

So far, that information has paid off in spades :^)  The stock was up 13% over the next two days, with an abatement of the big 50,000-share block sells that characterized the prior week.

Today, I’m releasing most of the findings to the public (via this post). However, I’m not sharing the census data yet. That remains exclusive to participants who submit their share count.

Regardless of whether you participate or not, there’s a lot of valuable insight here, so enjoy…

 

I’ve removed census-related analysis, so please excuse any choppiness that causes in the writing:

Jumping right in, CEO Bill Smith has 4,438,166 reasons (factoring-in the full conversion of his Series B convertible stock) to maximize shareholder value. Of equal importance, he has done so many times over the past 35 years. Thus, I trust him to do his job, especially since it benefits him to do so.

FYI, I’ve updated my public SMSI Google Sheet. It now has many tabs including an updated model of SMSI’s potential earnings (like my HMNY model and many others before it, it’s based on management’s comments and industry sources). The Sheet also features an updated analysis of the Safe & Found reviews from the Google Play platform, information and analysis regarding short selling volume and total short interest, and a tab dedicated to stockholder ownership data.

 

Here are my key takeaways:

In addition to Mr. Smith’s 4,438,166 shares (factoring-in the full conversion of his Series B convertible stock), it should be noted that Smith also has 850K warrants, but they require him to pay about $2.38 to convert them into shares (so they don’t count).

He also agreed to be subjected to a lock-up agreement, along with limitations on the company’s ability to raise more money. These two gestures show that he’s confident and committed to start monetizing SMSI’s past 5-years of R&D (and its iMobileMagic acquisition) in earnest.

Total short interest as of April 30 was 1,930,153. 1.587M shares were reportedly shorted between Apr 16 and Apr 30, but short interest only rose by 659,730 during that period. So, about 927K shares must have covered during that period. I presume this was primarily tied to the Apr 19 registration statement. This ties very well to the ~1M shares of increased in short interest between Feb 28 and Apr 19 (the days leading up to SMSI’s March offering through the Apr 19 SEC registration filing).

1.434M shares have been shorted since then (thru May 14). Adding that to the 1.930M of short interest as of Apr 30 gives up 3.36M shares of total short interest. Accounting for the historical base-line short interest of 300K, short interest is currently 3.06M shares (and likely 3.2M by EOD today) above historical norms, which ties nicely back to the 3.2M shares offered on May 3.

Conclusions: Most, if not all, of the supply overhang selling has been completed. Demand should retake the lead over supply soon. 3.2M shares have yet to be registered, but the short interest and volume data suggest that enough short selling has occurred to cover that amount in its entirety.

 

Of course, I don’t believe that the May 3 offering participants shorted a share for every share they purchased in the offering. There are other potential factors at work:

1. Traders may have shorted the stock. However, I can’t see how that would be a meaningful number. Skepticism in the story is understandable, but there isn’t an a compelling short thesis relative to what has existed for the past several years.

2. 1,201,760 shares of common stock are now issuable upon conversion of SMSI’s Series B 10% Convertible Preferred Stock. Some of those shareholder could have shorted the stock to lock in their gains while they go through the process of converting their shares into common stock (presumably for sale). However, one would assume that those folks would have shorted the stock when it was $3+, not now.

3. Before someone brings it up, sellers and short sellers are separate species. Short selling data is reported to FINRA. With a seller for every buyer, the data shows that the majority of SMSI’s selling pressure has come from short selling. In other words, most shareholders have not been selling. Just arbs (and perhaps pure short sellers, but see point #1 above).

Adding it all up, the data seems to suggests that enough shorting has occurred to cover the supply overhang. Interestingly, so far today, we haven’t seen a big block knock the shares down, as has been the case since the May 3 offering was announced.

Maybe it’s wishful thinking, but the data lends credence to the idea that the sellers may finally be gone.

If so, it took a lot of effort. 7.5 million shares have traded over the past month.

 

Among the top shareholders, I found some interesting data points:

Many have made a fuss about Unterberg selling his 9.9% stake during Q1, but I don’t blame him. I was one minor mistake away from doing the same. A round of funding was coming and we all know what happens to a stock when that happens. I unwittingly signed off on an NDA and was stuck holding the stock all the way down.

Luckily, I had traded the stock around and made great money on the way up, but the ride down was not fun (though, I was ultimately thankful for the opportunity to load up again in the $1.60 range). To make a long story short, Unterberg had every reason to sell… and I don’t think it was fundamental.

If you’re skeptical of that, you can offsetting that skepticism via Anson Management and Empery Asset Management.

Anson registered 714K shares of common stock and 714K warrants on April 19th. However, they just reported holding 1.2M shares of common stock last night (on May 14). Meanwhile, Empery reported having 1,204,220 shares of common stock and 1,394,285 warrants on May 8… but they only had ~714,000 of each registered on April 19th!

These two now combine for 11.3% ownership per their SEC filings (or 14% using the current registered share count of 18.2M), dwarfing what Unterberg held.

See the Google Sheet for more shareholder details, but here’s the bottom line: a lot of the currently registered shares outstanding are now in “strong” hands. Individually, Bill Smith is the largest with 9% and he’s not selling. In fact, he’s been a consistent buyer since 2016, raising his stake from 7.4% in Feb 2016 to 13.6% in Feb 2017 to 28.3% in Feb 2018.

In other words, his greatest monetary incentive is to enable a rise in the share price… and, other than money, what else would spur him to increase his stake in each of the past two years?

Netting everything out, I’m only unable to account for a few million shares, making SMSI’s effective float quite low (finally).

I have a lot of new research queued up, so stay tuned. Cheers.

 

More Research:

 

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Disclosures / Disclaimers: I am long SMSI. However, this is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.

I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.

I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter.  Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.

I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

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22 thoughts on “SMSI: Special Shareholder Report (Are The Big Sellers Gone)?

          1. Generally speaking since it shows us at 10% above William Smith, Jr. one concludes we own the same amount or more than him. For someone that didn’t receive the census info they will know that we are at least at that level when they could have imagined that 5% was our holding. It is no big deal. Only reason for me bringing it up was just to make sure.

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  1. After watching the action yesterday, I’m inclined to believe the selling is done. The bids kept moving up and then the afternoon selloff was another ~200k shares but went right into the bid, could have dropped us further. Hardly anything on the ask today either. The price also crossed the 200dma, 50dma and 21dma in the past two days.

    Now we need some catalysts and good coverage (in addition to your awesome work) to march us up! Thanks Mark.

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  2. My opinion is even though we are going up the selling is not done as there is still too much volume for the amount of shares outstanding. The ask just went to 2.11 and a big block came in for sale knocking the price down slightly. Obviously more buying than selling but someone is still there. Just my opinion.

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  3. Hello Mark,

    I’m hoping to get your opinion on overall market sentiment. More specifically, I’m interested in hearing about your experience investing through 2000 and 2008, when we had our most recent major market crashes.

    I know you mentioned through some of your earlier posts that you were heavily short during the 2008 crisis, and that you were actually able to profit throughout the ordeal as compared to millions of people who I’m sure lost more than half of their portfolio balances during this time.

    My question is: What were the indicators that led to you taking a bearish stance on the market and acting on it?
    As well, what is your take on the market sentiment this year? Obviously, just from the minor market downturns we’ve faced in February and some aspects of March – April, the general market sentiment isn’t as strongly bullish as it was compared to 2016 or 2017. What kind of events or markers are red flags for you to shift your perception of the overall market sentiment? As well, how do you adjust your portfolio holdings to account for this? I am aware you wrote of a post in how by trading in market corrections it’s best to trade up and remove less valuable holdings for more valuable ones, but I’m just wondering if there is anything you haven’t specifically mentioned there that you would be able to share with some of us?

    The reason I’m asking this is because I think it would be foolish to continue investing as if things were the same as before when the past few months have shown us that things can change at a moment’s notice, and I’d rather be prepared to face the storm than live with some pre-conceived notion that I can do exactly the same as I was before and get burned as a result of that.

    Looking forward to your thoughts.

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    1. I don’t see a wipeout on the horizon (yet). However, two key things that concern me right now are 1) interest rates and 2) the collapsing condominium market.

      The first is the important one to watch. If rates keep rising or the yield curve inverts (Google it if you don’t know) it’s going to be a rough summer for stocks.

      Other than that, I don’t see a 2000 / 2008 disaster on horizon (yet). However, I am watching individual stock charts closely and using hedges (shorts / writing calls) to lessen my risk exposure.

      Hope that helps. Cheers.

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      1. Mark, where are you seeing condo sales slowing down? Here in San Diego people are still in bidding wars. However, once things turn, and turn they will, we can all pile into triple inverse plays like SRS. During the 2008 crisis, I don’t believe there were many triple short plays. When things get ugly, the downside.

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  4. I sent you my share count Wednesday, doesn’t that entitle me to a gift of some kind? I’ve checked my inbox like every 15 minutes, it like the last spot on a scratcher, did I win? Have a great weekend

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    1. Have you gotten ANY reports yet? I’ll be sending a new batch in about an hour. If you don’t get anything by 5 PM, check your spam folder. If there’s nothing there, hit me again. 👍🏼

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      1. Mark;

        Thanks for the continual updates! Agree that the stock overhang has diminished or is gone. Tried to pick up a last 1000 shs. under $2 but wasn’t successful. Looking forward to all the coming catalysts .

        Like

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