I just can't square what we know with what we see -- it's as if I can't believe my eyes.
What we know is that Elysium announced that it had received $40M in new funding.
We also know that on November 12 CDXC closed at $2.83, but today, less than two months later, it closed at $4.69, up about 65% on not much news. I initially assumed that the big jump up resulted from short sellers covering, but the best we can tell from NASDAQ's periodic reports, short interest has actually risen slightly during this period (4.2M on November 15, and 4.5M on December 13 -- next report for 12/31 on Friday).
And when ChromaDex has gone up, it's been in relatively large chunks (see especially December 13), as if large investors were getting on board, rather than a steady drift.
The thing I can't believe is that anyone would invest $40M in Elysium with three major lawsuits pending. I'm not the biggest fan of venture capitalists, but I don't think they are stupid, and I do think they are seriously into hedging their risks.
AND I think ChromaDex is almost certainly going to win a substantial judgment in at least one of the three big lawsuits -- maybe all three.
Perhaps I am overconfident -- irrationally, crazily overconfident. But you'd have to be even MORE irrational and crazy to think that Elysium was CERTAIN to avoid liability in all three lawsuits. Who would bet $40M on that?
Nobody.
And yet it appears that somebody did, and that somebody is someone who I think is smart and seriously into hedging their risks.
So my immediate thought was that the litigation must have settled.
If there was some sort of global settlement of the litigation, you'd expect to see ChromaDex's stock go up, and you'd expect to see Elysium raise more funds (if Elysium was short on cash, as we have supposed).
So it looks for all the world as if the litigation has settled...unless you look at the litigation itself, which does not appear to have settled.
Not only are we not seeing a joint stipulation to dismiss with prejudice, but the attorneys are furiously litigating. Both sides are angry in California about discovery rulings, and they look like they are getting ready to appeal those. The lawyers are definitely not in "pencils down" mode, which frequently happens when a settlement is close.
So why would the attorneys be litigating a settled matter, and why would investors be making big bets on Elysium if the risk of handing most or all of that money over to ChromaDex had not been reduced to zero?
I'll be the first to say that I don't know.
But there IS a thing called a "High-Low Settlement," in which you settle a case and go to trial anyway.
A high-low settlement reduces the risk of a jury trial for both sides by establishing a floor and a ceiling on any award. If the jury returns a verdict within the high-low range, then the verdict stands. But a verdict above or below the range is replaced with the amounts agreed to in the settlement.
Here's how researchers who performed the first study of high-low agreements in civil litigation described high-low agreements:
"A high-low agreement is a private contract that, if signed by litigants before trial, constrains any plaintiff’s recovery to a specified range. In our theoretical model, trial is both costly and risky. When litigants have divergent subjective beliefs and are mutually optimistic about their trial prospects, cases may fail to settle. In these cases, high-low agreements can be in litigants’ mutual interest because they limit the risk of outlier awards while still allowing mutually beneficial speculation."
Last year, JDSupra referred to high-low agreements as a "familiar mediation technique." I think they are way more familiar in the context of an insured personal injury dispute. And yet, a high-low might make a lot of sense in our context, especially if "the defendant is simply not comfortable with the runaway downside risk...[and] the defendant needs to cap her liability to satisfy some of her stakeholders..."
They could be talking about us.
In our case, one could imagine that Elysium knows it is going to at least have to pay ChromaDex a few million dollars for the ingredients it never paid for. ChromaDex, in turn, knows that a really big judgment of $20M or $40M won't be collectible anyway.
So it would be entirely rational for the parties to agree that (I'm choosing numbers from thin air) Elysium must pay ChromaDex at least $4M, but that ChromaDex will under no circumstances attempt to recover more than $12M.
That deal would be particularly valuable to Elysium if it allowed Elysium to raise the funds necessary to both (1) pay their lawyers, and (2) cover the maximum judgment of up to $12M. It would be valuable to ChromaDex, too, because it would guaranty a minimum recovery, and also guaranty that funds were available to recover perhaps three times that, should the jury award more.
The high-low settlement would also allow Elysium to test its legal theory that ChromaDex wasn't harmed by any of Elysium's antics, while ALSO allowing ChromaDex to test its theory that what Elysium did was legally wrong -- but all within prescribed limits that both parties could live with.
For a high-low settlement to make sense, of course, it would have to resolve ALL the litigation, and it would have to also set the terms on which the two companies could co-exist in the future.
For example, maybe Elysium agrees to buy NR from ChromaDex and pay in advance. Or maybe Elysium agrees to switch to a different NAD precursor. Or maybe Elysium agrees to take over the pharmaceutical NR business (the '807 patent that it is currently trying to destroy before the CAFC), and leave ChromaDex the supplement NR business.
To be absolutely clear, I am only speculating. I have not been tipped by any anonymous source, and I have ZERO direct evidence to support my speculation -- other than what everyone can see in plain sight, which is that both parties are suddenly flourishing as if the litigation had been settled, even though the litigation appears headed to trial in a few months.
But although I have no direct evidence for the existence of a high-low settlement, the circumstantial evidence seems strong. It WOULD in fact be in both parties' interests to so proceed, and no sane investor is going to drop $40M on Elysium unless their liability were capped.
So that's my theory.
What's yours?