After a couple weeks of relative optimism, including a string of recent low-float IPOs that ran hard on positive press releases, last Friday’s abominable CPI data sent the market into yet another tailspin that has slammed shut the door on any prospective mainstream IPOs for the near future, and even managed to put the breaks on a few low-float IPOs that were slated for this week.
While any IPO brave enough to debut in this market is going to raise suspicion for a possible Stealth debut, last week’s debacle of a debut with PEV demonstrates the importance of gauging the pre-debut imbalance for confirmation of a potential string of halts to the upside, and we were able to avoid catastrophe by recognizing the symptoms of a broken IPO in advance of the debut: high volume on the opening print, debut price below the IPO price, and a sell-side imbalance.
This week brings us two IPOs, one of which has not appeared on any IPO calendars and has me thinking we might see a potential stealth setup: the other from an underwriter whose brought us a ripping IPO that produced one of the more dramatic multi-day LPX runs we’ve seen in a while (yes, I’m talking about AERC). Be sure to read through this newsletter to the upcoming LPX section provided by https://twitter.com/tradingfitgirl following the IPO breakdowns for this week for more potential runners this week.
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This Week’s IPOs:
Heart Test Laboratories (HSCS) – June 15, 2022 | 1.75M Units
Lytus (LYT) – June 15, 2022 | 3.25M Shares
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Ok, Let’s jump in:
Heart Test Laboratories (HSCS) – June 15, 2022 | 1.75M Units
Price Range: $4.50 – $5.50
Offering Size: $9M
Shares Outstanding: 8.11M
Industry: Medical Devices
Overview: This company is developing a cardiac diagnostics test with enhanced ECG functionality that incorporates artificial intelligence to analyze data and produce analysis that currently requires more invasive testing procedures to replicate. They are raising capital to bring the product through the FDA approval process, and the units contain a single share and single warrant: both of which will be tradable immediately following the IPO.
Considerations: The underwriter on this deal is The Benchmark Group – the same outfit that brought AERC to market on the day before the Thanksgiving holiday: a memorable IPO that opened for trading at $40 after pricing the IPO at $10, and proceeded to rip over $100 through a series of halts. But this offering comes with a warrant attached, and that almost never produces the kind of ripping open that we hope to spot on these debuts. The company itself is pre-revenue, and the market is clearly still recovering from the knockout blow that was delivered with last week’s CPI data, so I’m not sure there will be much enthusiasm for any IPOs simply based on the company or product being offered.
Growth Numbers: (none: pre-revenue)
Baseline Financials: (none: pre-revenue)
Notes from the S-1:
Underwriters: The Benchmark Group
IPO Classification: Low Float IPO
Recent Similar IPOs: AERC BEAT
Trading Strategy: My approach to this one is to sit back and not touch it… UNLESS it debuts with a tiny volume and a healthy debut premium. And even then, I don’t think I can justify taking a high-risk position on it.However, I will certainly be watching this one down the road for a possible LPX play… low float, with warrants and a 501(k) FDA approval catalyst on the horizon could set up an AERC-style run.
Brand Name Recognition: Low.
Debut Trade Conviction Level: Low.
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Lytus Technologies (LYT) – June 15, 2022 | 3.25M Shares
Price Range: $4.75 – $6.75
Offering Size: $17M
Shares Outstanding: 37M
Industry: Streaming/Telemedicine
Overview: We covered this Indian Company’s proposed IPO back in mid-April when it was being underwritten by Aegis Capital, and were not too thrilled with the underlying facets of the company at that time: streaming content and telemedicine offerings with relatively small customer bases compared to major competitors in each respective space.
On April 21, 2022 I wrote:
”We haven’t seen all that many Indian IPOs in US markets: perhaps because India has it’s own robust stock market, so it’s interesting that this one is going live on the NASDAQ. The company claims roughly 8M active customers for its content streaming services (which in a country of 1.4B people, is basically nothing), and is planning to provide tele-health services in America through its Global Health Services Inc company. They are actively acquiring companies in the tele-health segment, but as those of us who have followed Doximity (DOCS) since it’s IPO, most physicians are already hooked into that platform. Their growth numbers are not really worth paying much attention to, as they had limited operations in 2019 and so 2020 comparisons once they started generating revenue were obviously impressive statistically, but cannot be considered to correlate to any future growth projections. Having said that, they did generate $12.3M in gross profits on $29M in revenue in 2020 with a gross margin of 42%.”
Considerations: What’s changed since the April 2022 F-1 filing is the underwriter, the size of the deal, the removal of attached warrants to the IPO shares, and the market conditions. I don’t think anyone can argue that market conditions have materially improved since April, and removing the warrant makes this a more interesting IPO as far as retail traders buying the debut goes, but why the shift in the underwriter? We saw PEV switch out Roth/Maxim/EF Hutton for Aegis, who dumped shares on WeBull traders and the resulting IPO was a thing of horror – so I’m wondering what made this deal doable for Spartan that was unattainable for Aegis. Rumors are that the newly assigned underwriter was able to bring in a buyer that is willing to soak up a substantial piece of the pie, and that allocations to brokerage desks were fairly limited. The company itself is not really what’s going to determine whether this debut provides any upside potential to take wins off the debut: but if the dynamics behind the opening trades get manipulated, we could be looking at a potential runner.
Financials:
Growth Numbers (unaudited):
– Revenue Growth: –24% for 2021 vs 2020
– Total Comprehensive Income: +1890% for 2021 vs 2020
They did, however, post positive operating profit in 2020, along with positive net income, despite negative cash flow from operations.
But let’s be honest here – we’re not analyzing this company for a long-term investment, and any volatility in this IPO debut is not going to be based on retail interest in the fundamental business of this company.
Notes from the F-1:
– “We intend to use the net proceeds received from this offering for the following: An aggregate of $9.05 million for the acquisition of customers (ownership of approximately 1.8 million customers) and 51% of the shares in a licensed cable company.”
Underwriters: Spartan Capital Securities
IPO Classification: Low Float IPO
Recent Similar IPOs: OST AUST
Trading Strategy: I’m very suspicious that.this one could be a ‘Stealth IPO’ – given how it snuck onto the calendar and rumors about ultra-low allocations on direct brokerages. As always, I’ll be watching the pre-debut indication for a premium to the IPO price in the $11-16 range, a strong buy-side imbalance, and low volume. If I see this setup, I’ll likely take a position on the debut, remembering not to go excessively large as this will push the price up on a low-volume debut and spoil the upside potential. If I don’t get the setup I’m looking for, I’ll just walk away from it.
Day 2 runs off poor Day 1 performances have not materialized on recent low-float busts, so that play is not something I’m trying to position myself in right now.
Brand Name Recognition: Low.
Debut Trade Conviction Level: Medium
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