Warrant Holders Shorting the SharesOk Beech, I went for a walk and continued to think about this warrant+short trade. So here is what I think you are saying. Please confirm.
Investors who bought the units at around 23 cents got their 1 share and 1/2 warrant. Exercise price on the warrant is 30 cents and they expire in 5 years. They waited until the stock got to 30 cents and sold their shares, pocketing a 7 cent per share profit. They kept the warrant because the warrants are not traded on any market, so they cannot sell them. Warrant cost is free.
They also sold the shares
short at 30 cents, borrowing shares and selling them, pocketing the 30 cent proceeds. (If you execute the short sale above 30 cents then it eats into some of your profit, depending on whether the stock goes up or down ultimately, making the calculation more complicated.) So now they are long 1 warrant and short 1 share.
- If the FDA rejects the BLA, then the stock might go to zero. Then the short holder will buy the share back on the open market at, say, 1 cent, and return the borrowed share. That closes his short postion and he has a 29 cent profit. The warrant is worthless, so he lets it expire in 5 years.
- If the FDA approves the BLA then the stock goes to $1-2. The short holder sends his warrant together with a cheque for 30 cents to TST any time he wants. There is no rush. TST issues one share from the treasury and the TST bank account goes up by 30 cents. The short seller returns the borrowed share to close out his short position.
There are two interesting implications to this trade:
First, there will be no upward pressure on the stock price from the short sellers closing their positions. This is because they will use shares issued by the TST treasury, not by purchasing the shares on the open market.
Second, there is no rush to exercise the warrants once the stock price goes above 30 cents. They could wait until the stock hits $10. It would make no difference to them. They will want to wait until the FDA final decision in 2016, because that decision is the only thing that could make the stock go to zero, which is the only way for the short sale to profit.
The problem with this short-trade is the most you can make is 29 cents per share. Whereas if you hold the warrant and don't cap the upside, you could get rich for zero investment. You have to be very pessimistic to do this short trade.
You could, I suppose, do a variant of the trade, by selling short near 40 cents and buying back near 30-32 cents. You are still protected from the stock running away from you on the upside while you are short.
There are other warrants in play, exerciseable at 40 cents and expiring on Sept 26, 2015, not the 30-cent 5-year warrants. Maybe someone is doing a short trade related to those too.
All this is too complicated for me to be able to say what is really going on with the shorts. I'm not smart enough. And if the short postions total only about 1.0m shares on 160m shares issued, with trading of 200-500k shares per day, I'm not sure this is big enough to worry about.