From my view, shorting is as natural as going long: it helps to maintain the balance between enthusiasm and realism. If a stock gets too far extended without sufficient financial results to justify the rise, the stock becomes susceptible to forces pulling it back to a more reasonable valuation. I often equate this to a natural forest: left unchecked a forest will grow to the point where it chokes itself out. Often times Mother Nature will answer this excessive growth with a forest fire. And while the fire is painful and destructive, in the end, it helps to restore the natural balance of the forest. And while I realize this may be a little metaphorical for stock trading, I believe it helps to describe the state of trading in NVIV for the last 2 weeks. It would be hard to imagine that any person with a long position in this stock can justify the recent valuations of six dollars per share. The only way the stock got to that price was riding on the coattails of hype, excessive enthusiasm, and hope. None of these are good justification for a stock price increase. While it’s true the stock has a lot going for it (I will talk about that the next section), the current environment was ripe for a significant retracement. I’ve read on the blogs that people thought the analysts lied, misled, misrepresented etc. This may or may not be true, but in the end the analysts gave nothing more than their opinion and as such it has to be taken with a grain of salt. The gentleman who gave the negative review of the stock clearly stated at the end of the article that he was shorting the stock. I cannot agree with his conclusions nor his assessments of time, but I clearly understand where he is coming from and what his objectives are. The bottom line is this: the stock’s value was excessive given the underlying facts and when the opportunity presented itself, the shorts hit it and hit it hard. Reason and logic gave way to fear and a significant number of the longs closed their positions.
The stock had justified $6 per share on the specific hype, enthusiasm, and hope that three specific promised milestones would occur in the timeframes the ex-CEO confidently projected:
1. Uplisting "pretty confident we will be uplisted within 60 days" of MAY 23.
2. Patient implants of the scaffold were projected to begin "by July 4" and preliminary results "by the end of the year" with final results to FDA by "end of 2014". And commercialization in 2015, shortcut to approval with no PMA study.
3. Hydrogel application to FDA by Q3 2013.
These were tangible, concrete statements which were put into InVivo timelines and explicitly stated to investors. No. 1 is not gonna happen for an indefinite period, although by itself not too major.
No. 2 is. REALLY, REALLY big deal, not a simple matter of enthusiasm getting ahead of the stock. Instead, the combination of multiple timeline projection errors and lies has caused the future value of present shares held to be worth FAR LESS than previously estimated, WHOLY attributable to the delay to commercialization and profits on the scaffold having now been more accurately estimated as 2019, not 2015. That amounts to FOUR YEARS of future cash burn over the timeframe when the company is not yet earning any profits or more than trivial profits. THAT is why the stock is worth so much less.
And if hydrogel timeline is pushed back further, there will be additional cash needed for hydrogel development costs above and beyond their current burn rate.
You cannot gloss over this and characterize the problem as investors had overvalued the stock. No, the problem is that, as of right now, the stock REALLY is worth much less than it was because of the anticipated base case involving at least $38-$45M of dilution needed to bring their first product to commercializatoon
"The stock had justified $6 per share on the specific hype, enthusiasm, and hope that three specific promised milestones would occur in the timeframes the ex-CEO confidently projected: "
Well, it justified the $6 prior to those three promised milestones. Had those milestones taken place do you think it would have stayed at $6? Obviously it would be even higher.
Right now Jason's pricing makes sense per the scenarios he provided. With further news like hydrogel, it can only become better.