I’m an investor in Reviva Pharmaceuticals (NASDAQ – RVPH). I’ve built positions in RVPH via their common shares and their warrants. I’m going to elaborate on why I’m buying the warrants, (I also have been buying the common shares), as well as the risks and rewards associated with being a warrant holder.
I wrote about Reviva back on March 25, 2022. I’m still long and strong on the company. More so now than ever.
For the purposes of this blogpost, I’m going to assume the reader understands the basics of owning publicly traded common shares. So let’s move right to the good stuff.
A warrant is an option to buy a share of a business at a predetermined price, within a specific timeframe. A warrant expires on a specific date in the future and hence, becomes worthless if not exercised.
RVPH has warrants (NASDAQ – RVPHW) that give the holder the right to buy 1 share per warrant at a cost of $11.50 USD up until 23 of August, 2025 (according to my brokerage – interestingly, SEC filings indicate the actual expiration date is 23 of Dec 2025). I’ve gotta check that out – I’m working with the August date.
As RVPH’s stock price is currently 71 cents USD, the warrant is clearly ‘out of the money’ (completely worthless). So why buy it? There is no intrinsic value.
Valuing out of the money warrants is based on volatility – ie. how much the darn price may go up or down. Time factors into the equation as well, that is how long is it until the warrant expires and becomes useless. Simply put, the more volatile a stock is, and the longer the duration until expiry, the higher the value of the warrant may be. There is more time for the warrant to be volatile and move to the upside.
Now lets throw in a bit of venture investing reality – The stocks and warrants of venture companies, thinly traded and lightly followed, are more likely to be mis priced.
So I ask a question: Do I think the odds are in favor of the share price significantly increasing? Yes! So all things being considered, the warrant price will increase relative to the increase of the SP, adjusted by the time to expiration of said warrant. Longer time to expiration lowers any price discount that could impact the warrant. So they are like buying the stock in many ways.
The question is all about that proportion. It’s called gearing. Say the stock is trading at 80 cents. And that you can buy the warrant at 20 cents, 1/4 of the stock value. The gearing would be 4.
Why does this matter? What if the gearing on a warrant vs the stock is 8 (1/8 the price)? 10 (1/10 the price)? 16 (1/16 the price)? And what if the stock has the potential to be highly volatile (if especially good news occurs). And what if it is a long time until the warrant expires?
Look at it this way 1) You think the stock is going to rise, potentially a lot. It is mis priced relative to the opportunity. 2) There is a long period of time before the warrant expires 3) The warrant’s gearing ratio has broken its correlation from the Share price – and is now super cheap – relative to the time left until expiry and the potential share price appreciation. It is also mispriced relative to the share price. ie – Warrants can go on sale, not just relative to the investment opportunity but relative to the Share Price it is based on. Double the discount!
For a company like RVPH, it is possible that very positive news is delivered over the next 12 months that fundamentally changes the future for the company (for the better). If the historical gearing of the share price to warrant price is say 4, but trading volatility creates a spread to 6 or 8 or more, the warrant suddenly is a much more attractive investment. It won’t double if the share price doubles. It will triple or quintuple.
So that’s what I’ve been doing. Not only acquiring the shares of RVPH but also buying the warrants opportunistically, based on the prospects of the investment but also based on the gearing ratio. It is another way to play a bullish investment thesis, but not for the faint of heart. Then again, neither is venture investing.
GLTA!
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