“Are you SURE the exercise price is $3.00?” I asked.

Reply: “Yes”

“Are you SURE they are exercisable?” I asked.

Reply: “Yes”

“Do you understand that I’m buying the warrant for $4.00 and selling the common for $7.50, meaning I’m making $.50 on every share? Any idea why I can do that?” I asked.

Reply: “Yes, I understand, we’re watching it as well, and no, I have no idea why it’s like that.”

That conversation took place about 20 years ago. I was talking to the CFO of a Nasdaq listed company whose warrant and common stock I was arbing (selling short common and buying warrants). I believe I ended up making around $100,000, split between my firm and myself, in a completely riskless trade.

Those trades, putting on an arb position at a discount, are rare. And rarer today than they were 20 years ago in the public markets, due to algorithms and computerized trading. But, even with the overload of information out there, it sometimes pays, and pays big, to hunt down pricing “errors” in the market. Sorry if you’re a follower of the Efficient Market Hypothesis, it’s flat wrong.

I’m always reminded of the traders Michael Lewis talks about in The Big Short. There were two guys that made their original money by betting the options on a stock, which was involved in litigation, were mispriced. They were mispriced because if it lost the litigation the company stock should be much lower, and if it won it should be much higher.

These traders bought puts and calls on the stock (if I remember correctly) each month, and lost money each month as those options expired with no verdict in the litigation. But, it was a small amount of money to lose because the options were relatively low priced options. And, when the month finally came when the verdict arrived, the stock made a very large move (don’t remember if it was up or down) and they made a LOT of money.

That brings me to a warrant I’ve come across that I can’t quite explain, but which could provide the potential for a nice payday.

Last February Stellar Acquisition III (a SPAC) announced it would acquire Phunware.  Phunware is a mobile cloud software and blockchain company. Stellar traded under the symbols STLR for the common, and STLRW for the warrants. The company, after a reverse merger, now trades as PHUN, and the warrants trade as PHUNW.

I’ve looked at the Phunware website, I see what the company does, but this article has absolutely nothing to do with the fundamentals of Phunware and whether or not the stock, PHUN, should be trading at $500, $300, $147 (where it closed today) or $2.

Now, before I go on, I’d like to put a very large DISCLAIMER right in the middle of this article. First, I DO OWN the warrants. I don’t own a lot, and if they go to $0 I’ll never miss that money. This is NOT A RECOMMENDATION TO BUY OR SELL THE WARRANTS OR THE COMMON STOCK, I’M NOT A FINANCIAL ADVISOR, SEEK ADVICE FROM YOUR FINANCIAL ADVISOR, you know the drill.

Second, I’ve read the SEC filings, and here’s a link, you should read them yourself.

With that, here’s the deal:

1. The Stellar Acquisition III filing seems to be a standard SPAC filing, I don’t see anything unusual about the offering
2. The warrants, as listed in the Stellar prospectus, and then the Stellar/Phunware proxy/prospectus, have an exercise price of $11.50 per warrant (or, $11.50 plus one warrant gets you one share of PHUN)(Yes, if correct, that means PHUNW should be trading at around $135 if they were exercisable)
3. The warrants DO NOT have a current registration statement, and are not exercisable
4. My broker informed me on 1/14 that, the warrants do not have a current registration statement, and are not exercisable, and that no registration statement can be filed until the SEC reopens from the partial government shutdown
5. My broker also said that his reorg department (those are the guys that handle warrants) believe the warrants will be exercisable for some type of preferred stock, and NOT the PHUN stock that is trading at $147
6. I called investor relations at Phunware and was sent to voicemail. I emailed the company asking for information on the warrants and immediately received this auto reply: Thank you for your message and for your interest in Phunware.  We are currently receiving a high volume of inbound messages and are working through them just as fast as we can.  Thank you for your patience as we work through them in the order in which they were received.  We will soon be adding an FAQ to help assist all parties with additional information based on the inquiries that we are currently receiving.  In the interim, please understand that response times will be a bit longer than typical. (IF I HEAR ANYTHING BACK I”LL AMEND THIS POST)

So, what’s really going on? I have no idea. The mainstream media has picked up on the explosion in the stock, along with the unusual story of Stellar that I didn’t go into, but posted in our free Facebook group yesterday.

The SEC filings tell me that the warrant, PHUNW, should be exercisable for the common, PHUN, at a price of $11.50 per share, when the warrants are registered. I can’t find any reference on the Phunware site, or in the SEC documents, to a “preferred” that the warrants are now going to be exercisable for. But, that means the warrant, even when it’s not exercisable, should likely be trading higher than $.50.

For now, as I said above, I have a small long position in the warrant, and have my fingers crossed. As I’ve said in previous posts, in a thinly traded warrant, I ONLY use limit orders (as a former market maker, I ONLY use limit orders anytime I trade, period.)

I’ll post updates on PHUNW as I have them. If you have any info on the warrants, or if you’ve seen some SEC doc or announcement from the company that I haven’t, shoot me an email at stevenadams@stockwarrantshq.com. As always, you can ask questions or post comments in the comments below as well.

Thanks for reading!