Tuesday, July 17, 2012

Sometimes, It's Best To Take A Pass #5: Preferred Stock and Banyan Rail Services.

Banyan Rail Services is a really neat little company. They get paid by railways to take their old rail ties, then, sell them to power plants to burn for fuel or to other companies to chipped up for mulch. Anything where a company pays you to take something off of their hands and then another party pays you to take off of yours immediately strikes me as a very interesting and profitable business model. Really, Banyan strikes me as the middleman's shark of a middleman. Couple this with a constantly increasing tangible book value and they seem even more interesting... However, historically, this company has done nothing but lose money and dilute common stockholders.

When you dive into their annual report and see things like the following (not to mention some really hair risk factors such as large amounts of customer concentration):

As a result of the private placements including issuances of preferred stock in 2011, there are shares of outstanding preferred stock which can be converted into as many as 1,878,030 shares of our common stock for $1.10 to $2.50 per share.  In addition, as of December 31, 2011 we have issued options to purchase 175,000 shares to our directors as compensation for serving on the board at prices ranging from $2.00 to $3.50 a share. If the directors’ options are exercised or the shares of preferred stock are converted, your ownership of the Company will be diluted. In addition, the issuance of a significant number of shares upon conversion of shares of preferred stock or the exercise of options could depress the price of our stock if there isn’t enough demand for the shares in the market. Even if the shares of preferred stock are not converted, the large number of shares issuable upon conversion of the preferred stock could cause an overhang on the market.
Not only this, but, the dividends that have been paid to the holders of the stock (which, seem to be insiders of the company) have been making up a huge percent of the company's earnings losses...

Granted, preferred stock issuance can often times be a great thing, in recent memory, it has been used to keep individual companies a float. When Warren Buffett buys the stuff, it is a vote of confidence that due to Reflexivity, can actually save an economy and a stock market. While preferred stock at Banyan has certainly kept the company a float, it has done little more than stretched out the losses that have been racking up to the holders of the common stock.

Looking above, we see that while the company, on a market cap of ~$6 million is trading for something like 20x the previous years improvement in tangible book (a metric that I have developed a loose liking for) for a startup that has potential, it is interesting. However, the improvement has been solely caused by preferred stock issuance and is bogged down by the company's operations. Interestingly, there are just over 3 million shares outstanding and the preferreds are convertable into nearly 2 million common shares.

Then, check out the subsequent events of the most recent 10Q:
Note 13. Subsequent Events
In April 2012, the Company filed a certificate of designation with the Delaware Secretary of State designating an additional 10,000 shares of its preferred stock as Series C Preferred stock.

In April 2012, the Company issued 4,000 shares of its series C Preferred shares to Patriot Rail Services. The preferred shares were issued for $100 per share, or $400,000 in the aggregate at a conversion price between $2.50 and $2.40 per share of common stock. The proceeds of the money received were used to fund working capital requirements.

On May 11, 2012, the Company completed a refinancing of its existing debt into one $3.0 million term note that matures on June 1, 2017. The new term note has principle payments of $50,000 per month plus interest. The note shall bear interest at the prime rate plus 3% or Libor (2.0% floor) plus 4.5% (6.5% as of March 31, 2012). The note is secured by certain of the Company's assets.
On May 11, 2012, the Company was completed the financing of a new $1.0 million line of credit working capital and a $500,000 line of credit for capital expenditures. The working capital line will mature on June 1, 2017 and the capital expenditure line will mature on June 1, 2013 at which time the amounts outstanding will convert to a term loan maturing on June 1, 2017. Both loans shall bear interest at the prime rate plus 3% or Libor (2.0% floor) plus 4.5% (6.5% as of March 31, 2012), and are secured by certain of the Company’s assets.
Now, check out the related party transactions from the 10K:

"During 2011 the Company issued 4,000 shares of its Series B Preferred and 7,850 shares of its Series C Preferred Stock of Patriot Rail Services, Inc. (“PRS”). The preferred shares were issued for $100 a share, or $1,185,000 in the aggregate."

A few lines before that, there is this:

"Our Chairman and CEO, Gary O. Marino; President, Donald Redfearn; Director, Bennett Marks; are officers and significant stockholders of Patriot Rail."

Granted, as I previously stated, if a rail company has cash and can set something up where they can save and even make a company profitable through buying preferred stock, that is a good thing- even if the firm doing the saving is largely owned by insiders to the company in distress. The flip side, however, is that there is a potential for those very people or entity to further seize or gain control of a company by doing such transactions, without buying shares of the company in the open market, which would often bid the price of the shares up.

All thas said, if the company does manage become profitable, it is comforting to know that they have over $4 million in net operating losses that have a decent life on them (2011-2030: see note 14 of the most recent 10K). Heck, only $66K of them expire before 2018! Certainly, the preferred shares have kept the company a float, which, if there is much of a future for the company is a great thing. However, from where I sit, the common shares seem to be priced for an overly good scenario that I don't see playing out very well for present holders of the common stock.

I again find myself yet again, taking a pass...

Disclosure/Disclaimer: I have no position in regard for or against any of the entities mentioned. I reserve the right to change my positions at any time. This post is my opinion. Always do a ton of your own research before even contemplating anything that I say, do, write, or so much as think about.

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