Beat Billions is an investment research platform dedicated to finding small-cap stocks that could provide attractive returns. In sifting the markets to find such bets, we unearth some interesting developments that could easily miss the untrained eye. CytoDyn Inc. (CYDY) is a small-cap stock that has received lots of love from investors in the recent past. The company, on the other hand, has made some good progress in developing leronlimab as a potential cure for Covid-19. On April 30, CytoDyn announced promising results from its Covid-19 trials conducted under the emergency approval scheme introduced by the Food and Drug Administration. This is not the only good news that CYDY has delivered to investors in the last couple of months. Here’s a timeline.
- March 16 – Advancing the mid-stage study of PRO 140 for Covid-19.
- March 31 – FDA clears mid-stage leronlimab trial for mild-to-moderately ill coronavirus patients.
- April 7 – Announcing the supply of leronlimab to the United Kingdom to treat Covid-19 patients.
- April 27 – Completion of leronlimab application for HIV.
- April 30 – You already know what happened! The results of the trial that I talked about earlier.
CYDY shares benefited from these positive developments. To say CYDY stock has outperformed the market is an understatement.
So far, so good. What’s the news piece Beat Billions discovered, then?
CytoDyn CEO has exercised his stock options
Insider transactions are closely monitored by investors to gauge a measure of company prospects, rightly so, because these insiders have an information advantage over outsiders to know where a company is headed. Relying solely on insider buys and sells is, by no means, a viable strategy to generate attractive investment returns. However, ignoring them altogether could lead to unwelcome returns as well.
Nader Pourhassan, the CytoDyn CEO, has filed with the SEC an exercise of his warrants to the tune of 4.8 million-plus shares on April 30 for $15.67 million.
This was filed in a Form 144 and an investor might find it difficult to locate this document in the Edgar system. Please visit this section of the SEC website to find the document.
It seems as if everything is going right for the company. At the same time, we now see this option exercise by the CEO. There is
A form 144 is generally used to sell restricted shares that are not listed on any stock exchange. Under normal circumstances, selling restricted shares is not permitted. However, in the instances where exemptions are available, a company executive can use a Form 144 to inform the regulators of his intention to sell shares.
As one of my readers pointed out to me, this transactions is listed as a “cashless exercise” in Table 1 of the document. Does this mean that the CEO converted his options and did not sell the securities? Absolutely not! It means that the CEO did not pay the exercise price of the options. Rather, funding was arranged through a broker the same way that we do for trading shares on margin.
Under the rule 144 of the SEC, if options were exercised using cash, the recipient of the shares would likely to have to wait a certain number of years or months as specified by the company at the time of granting options to sell these shares in the open market. On the contrary, if the options are exercised as a cashless transaction, the holding period of the stock would tack back to the date options were granted, enabling an executive to sell the shares immediately given that the holding period requirements are met.
There’s reason to believe that CYDY is one of the few small biotech companies that are making some actual progress in finding a treatment for Covid-19, as opposed to some other companies that are pumping the share price artificially. However, this recent transaction by the CEO should act as a warning sign for investors who are waiting on the sidelines to pounce on CYDY when the market opens for trading on Monday, the May third.
Our take on CYDY stock
The massive run-up of the share price this year is a clear indication that most of the positive news is already factored in the share price. From here on, it would take the successful commercialization of a drug developed by CytoDyn to trigger another bull run in the share price. As much as this is a very real possibility, betting on an outcome like this in these volatile times does not seem to be the right decision.
Investors should not forget that the company is not only making losses but is not generating any revenue either. With a limited cash reserve, CytoDyn will find it difficult to remain solvent if the company fails to get approval for at least a single product in its pipeline.
Investors, in our opinion, should wait for more news on the company’s pipeline before initiating a long position at these record-high prices.
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Disclosure: The author does not have any positions (long/short) on CytoDyn shares
