tag:blogger.com,1999:blog-81006165542409823582024-03-12T16:32:24.641-07:00Ragnar Is A Pirate"Losses? I think we lost our temper for a few minutes back there, but we're recovering."Unknownnoreply@blogger.comBlogger11125tag:blogger.com,1999:blog-8100616554240982358.post-64757266343970349622023-05-12T09:02:00.003-07:002023-05-12T09:02:31.156-07:00Interview of Trinity Place Holdings CEO Matt Messinger $TPHS<p>Trinity Place Holdings ($TPHS) is a storied company I originally <a href="https://seekingalpha.com/article/264704-syms-undervalued-real-estate-holdings-hide-huge-upside">wrote up in its prior iteration as Syms</a>. The basic story at the time was that the company's retail operations were struggling and MIGHT turn around, but mainly that the real estate was worth a lot. If the company went bankrupt, shareholders would do well, even if the company's turnaround didn't work out... The price just seemed too low. A few months later, Syms declared bankruptcy, and the stock made some good returns for its shareholders. My timing was much more luck than skill. </p><p>Fast forward a little more than 12 years, and I believe that the company has again been (wrongly) left for dead. I recently took a position in the company and yesterday, interviewed TPHS's CEO- Matt Messinger. That interview is at the bottom of this post- but here is a <a href="https://www.youtube.com/watch?v=bINEIaN_iy8&t=1369s">link directly to the YouTube video.</a> </p><p>At a glance, Trinity Place looks like it is in less than great shape- they even recently discussed in a <a href="https://finance.yahoo.com/news/trinity-place-holdings-inc-sets-204500302.html">press release</a> that they have a "going concern" paragraph in its risk factors. However, this risk factor is due to pending debt maturities- I believe these will be worked through in a rational way where the company and its lenders can win. </p><p>Additionally, TPHS is presently <a href="https://finance.yahoo.com/news/trinity-place-holdings-announces-review-124000960.html">exploring strategic alternatives</a> that could lead to a radical transformation of the company. If this happens, there could be potential monetization of its ~$500 million in federal and state net operating losses. There are lots of different forms a transaction could take. I will anxiously await to see what happens with regard to this. </p><p>For assets, the company's current real estate holdings consist of:</p><p>237 11th St, Brooklyn, New York</p><p><iframe allowfullscreen="" height="450" loading="lazy" referrerpolicy="no-referrer-when-downgrade" src="https://www.google.com/maps/embed?pb=!1m18!1m12!1m3!1d3024.0327788863137!2d-73.9528117!3d40.71729489999999!2m3!1f0!2f0!3f0!3m2!1i1024!2i768!4f13.1!3m3!1m2!1s0x89c2595bede966ab%3A0xe9fb15d010765946!2sWilliamsburg%2C%20Brooklyn%2C%20NY%2011211!5e0!3m2!1sen!2sus!4v1683838762121!5m2!1sen!2sus" style="border: 0;" width="600"></iframe> </p><p> 330 Rte 17N, Paramus New Jersey</p><p><iframe allowfullscreen="" height="450" loading="lazy" referrerpolicy="no-referrer-when-downgrade" src="https://www.google.com/maps/embed?pb=!1m18!1m12!1m3!1d3013.7446294951624!2d-74.07030979999999!3d40.943263699999996!2m3!1f0!2f0!3f0!3m2!1i1024!2i768!4f13.1!3m3!1m2!1s0x89c2fae733c7193f%3A0x9fb67d04955fa2bd!2s330%20NJ-17%2C%20Paramus%2C%20NJ%2007652!5e0!3m2!1sen!2sus!4v1683838708031!5m2!1sen!2sus" style="border: 0;" width="600"></iframe></p><p>77 Greenwich St, Lower Manhattan, New York City</p><p><iframe allowfullscreen="" height="450" loading="lazy" referrerpolicy="no-referrer-when-downgrade" src="https://www.google.com/maps/embed?pb=!1m18!1m12!1m3!1d3024.481415929925!2d-74.0135328!3d40.7074175!2m3!1f0!2f0!3f0!3m2!1i1024!2i768!4f13.1!3m3!1m2!1s0x89c25a11212156b9%3A0xebf3fe7d56632423!2s77%20Greenwich%20St%2C%20New%20York%2C%20NY%2010006!5e0!3m2!1sen!2sus!4v1683838835486!5m2!1sen!2sus" style="border: 0;" width="600"></iframe> </p><p>The Greenwich location is a new build tower close to Wall St, the World Trade Center, and Battery Park. It has a lot of large luxury condos for sale- more about them can be found <a href="https://jolieongreenwich.com">here</a>. It seems that the residential real estate market in New York City is holding up well, and that the problems are largely in the commercial area.</p><p>Additionally, the company has high inside ownership and other significant shareholders, such as the Michael Price estate. The company seems to be very well connected to get positive outcomes. This is pointed out by <a href="https://twitter.com/ExpectedValues/status/1640746923417108480?s=20">@expectedvalues on Twitter</a>. The CEO also owns a nice amount of stock and has also over time made open market purchases. I believe that he is incentivized to do well for the company and its shareholders because of this.</p><p>Assets worth considering:</p><p>*Desirable commercial space in New Jersey</p><p>*A condo tower in New York that has very nice units for sale</p><p>*105 units in Brooklyn that were recently re-zoned to have substantially more air rights valuable to other developers or potential future owners of this building. <a href="https://twitter.com/retails_edge/status/1653470439660765192?s=20">@retails_edge wrote on twitter that the building alone may be worth $67m</a>. I think that the cap rate he used was a bit low, and that the value of the building is probably more than this. </p><p>*A multi-million dollar lawsuit against the GC and seller of the Brooklyn apartments for defects in the workmanship of the newly build building.</p><p>*Around $500m of federal and state Net Operating Loss carryforwards (some of the state losses are in Florida)</p><p>*NYSE listing</p><p>* A well-connected shareholder base and a CEO who is Chairman of the Board of the <a href="https://cmom.org/about/">Children's Museum of Manhattan</a>. </p><p><br /></p><p>Risks:</p><p>*Rapid and dramatic deterioration of the residential and multifamily real estate market in New York City</p><p>*Lenders not being willing to work with the company</p><p><br /></p><p>I think that $TPHS stock, which currently has a share price of $0.48 and a market capitalization of ~$17.85 million is undervalued and has been left for dead. Because there are a very wide array of outcomes I could see happening, pinning down a target price on this stock is difficult. This said, I think that $TPHS is a very interesting and compelling bet. </p><p>Below is my interview with Matt Messinger- I hope that you enjoy it. :D</p><p><iframe allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" allowfullscreen="" frameborder="0" height="315" src="https://www.youtube.com/embed/bINEIaN_iy8" title="YouTube video player" width="560"></iframe> </p><p><br /></p><p> Disclosure: I own shares of TPHS</p><p><br /></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8100616554240982358.post-18089752835706629812022-11-27T16:43:00.006-08:002022-11-29T16:12:17.717-08:00Altisource Asset Management ($AAMC) Update: New Business Up & Running, Share Repurchases, and Summary Judgement Arguments<p>In my last <a href="http://ragnarisapirate.blogspot.com/2022/06/altisource-aamc.html">writeup, I discussed how Altisource Asset Management</a><a href="http://ragnarisapirate.blogspot.com/2022/06/altisource-aamc.html"> ($AAMC)</a> seemed like an attractive investment because of its discount to an adjusted book value of ~$25/share compared to the then price of ~$10.50/share. I thought that it was probable that the company would settle a preferred stock lawsuit that would be a catalyst, but didn't give much mind to the lending business that the company was getting up and running. Since the stock is now trading at ~$20/share and it has been about 5 months since that writeup, that begs the question: "what has happened in the way of developments at the company?!"</p><p>Well, quite a lot! </p><p>First, it has oral arguments for summary judgment against Luxor this coming Thursday, December 1st at 11AM...</p><p>Other than that, it is VERY impressive what the company has achieved in just the last 5 months since <a href="https://seekingalpha.com/pr/18857443-altisource-asset-management-corporation-announces-appointment-of-ceo">appointing Jason Kopack as CEO</a>. Jason is THE guy in the alternative lending space and <a href="https://www.linkedin.com/in/jason-kopcak-6144686">has an excellent resume</a>. I cannot think of anyone better than he to lead Altisource. Because of Kopack coming on-board, I am very excited about the company's future.</p><p>Here is a summary of points that I will then break down into greater detail later in this writeup:</p><p>1) Established its <a href="https://altlendinggroup.com">lending business</a> that has generated over $120 million of loans (and already received payoffs!)</p><p>2) Established a <a href="https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwizhuudt8_7AhWLFTQIHXmhDDkQFnoECA8QAQ&url=https%3A%2F%2Fseekingalpha.com%2Fnews%2F3867262-altisource-asset-management-launches-50m-in-line-of-credit&usg=AOvVaw1ksFQPvHU1g5OUJ62UBh9Q">$50 million warehouse line with Flagstar Bank</a> to assist the growth of its origination platform</p><p>3) Progressed in its <a href="https://www.globenewswire.com/news-release/2022/10/31/2545017/24694/en/AAMC-Files-Lawsuit-Against-Former-Board-Member-Nathaniel-Redleaf-for-Improperly-Disclosing-Confidential-Information-for-Financial-Gain.html">litigation against Luxor and former Luxor appointee to AAMC’s board</a>, Nathaniel Redleaf, with summary judgment arguments happening this Thursday, December 1st at 11AM. 2022. If you want to watch the oral arguments, DM me on Twitter, and I will forward you the Microsoft Teams link to watch. <a href="https://twitter.com/ragnarisapirate">Here</a> is the link to my Twitter.</p><p>4) <a href="https://seekingalpha.com/news/3859628-altisource-asset-management-repurchases-2868k-shares">Repurchased ~14% of shares outstanding</a> and eliminated a most favored nations agreement overhang</p><p>5) Worked with the NYSE to <a href="https://www.globenewswire.com/en/news-release/2022/08/15/2498225/24694/en/Altisource-Asset-Management-Corporation-Announces-NYSE-Acceptance-of-Remediation-Plan-to-Address-Deficiency-Letter-Notice.html">get in compliance</a> with the exchange's listing standards</p><p>6) Launched a new website reflecting all of these changes: <a href="https://www.altisourceamc.com/">https://www.altisourceamc.com/</a></p><p>7) Valuation: Probably VERY undervalued, with catalysts, and the company can reasonably earn $10/share (on a ~$20 current stock price)</p><p>If you want to get some of this info directly from the horse's mouth, I strongly suggest you check out <a href="https://ir.altisourceamc.com/static-files/2a59e761-7014-43f0-922a-6175383171b7">this presentation</a> paired with this <a href="https://event.webcasts.com/starthere.jsp?ei=1580139&tp_key=704665e60f">recent company conference call</a>. It is worth a listen while you are driving or exercising. If reading a transcript is more your speed, <a href="https://seekingalpha.com/article/4553459-altisource-asset-management-corporation-aamc-q3-2022-earnings-call-transcript">it is from Seeking Alpha</a>. </p><p>______</p><p><b><u>Lending Business Is Drinking From A Firehose:</u></b> Altisource has come a long way to establishing its mortgage origination platform. It originates loans on single and multifamily housing for developers and then sells those loans to institutional investors. There are a few public lenders in this space- <a href="https://manhattanbridgecapital.com/index.php">Manhattan Bridge Capital</a> ($LOAN), <a href="https://broadmark.com/">Broadmark</a> ($BRMK), and <a href="https://www.sachemcapitalcorp.com/">Sachem Capital</a> ($SACH). Previously, I have <a href="https://seekingalpha.com/article/4337187-sachem-capital-93_5-percent-upside-and-sachem-baby-bonds-18_5-percent-ytm">written up and owned the stock and bonds</a> of Sachem.</p><p>Note that Altisource has a DIFFERENT process from many other lenders in this space such as Manhattan Bridge Capital (check out <a href="https://manhattanbridgecapital.com/pdf/mbc-presentation.pdf">this presentation</a>) and Sachem Capital (see <a href="https://d1io3yog0oux5.cloudfront.net/_6ce6bfab5e32d1ef99f30efc7f08a95e/sachemcapitalinc/db/229/432/pdf/SACH+Investor+Presentation+August+2022+Draft+6.pdf">their presentation</a>). Whereas these companies originate and keep the loans on their books, Altisource originates the loans and then sells them, collecting income from the sale and interest rate share. Currently, AAMC is establishing forward sales contracts to produce consistent and, more importantly, predictable cash flows. These forward sales contracts will also allow the company to anticipate the volume of loans that they need to originate. The end buyers for these originated assets are varied- credit funds, banks, REITs, and insurance companies are some examples of institutions in the market for these high-yielding instruments. </p><p>Per <a href="https://ir.altisourceamc.com/static-files/e391a3ee-6ccb-485d-9825-229a7844a4eb">this presentation</a>, these take the form of Correspondent, Wholesale, and Direct to Borrower originations. The company typically does Debt Service Coverage Ratio (DSCR) or Bridge Loans. DSCR loans are more or less a form of permanent financing for rental properties. In contrast, bridge loans allow investors to quickly purchase, renovate, and stabilize an investment property before they sell the property or establish permanent financing. Bridge loans carry a higher interest rate than DSCR because they typically carry more risk than a stabilized rental home with tenants living in it. Below is a tweet where some investors talk about how they have successfully used DSCR loans to build a portfolio. Additionally, <a href="https://coronadotimes.com/news/2022/11/23/dscr-investment-property-loan/">here is an article on DSCR loans</a>.</p><blockquote class="twitter-tweet"><p dir="ltr" lang="en">DSCR Loans are an awesome option for new investors or people without strong financials<br /><br />As long as you have a decent credit score and a good deal you should be able to get financed<br /><br />This is how I got my first long term debt</p>— Nate 🏠 (@N8RealEstate) <a href="https://twitter.com/N8RealEstate/status/1579443130398449664?ref_src=twsrc%5Etfw">October 10, 2022</a></blockquote><p><script async="" charset="utf-8" src="https://platform.twitter.com/widgets.js"></script></p><div><p></p></div><p></p><div>Bridge loans are attractive because they allow investors to close on a property quickly when it needs work and likely has tenant and maintenance issues. </div><div><br /></div><div>Here is a link to a Twitter thread from a hard money lender <a href="https://twitter.com/flynn_bob?s=21&t=F_Jum57oGvQ_qm9kh5JCvQ">named Bob Flynn</a> that explains how bridge loans (also called hard money loans) work.</div><div><blockquote class="twitter-tweet"><p dir="ltr" lang="en">HARD MONEY MONDAY<br /> <br />Want to understand how Hard Money Loans are made?<br /><br />Hard Money Lenders make high-interest-rate (8-12%) loans secured by real estate<br /><br />I publish a weekly thread called <a href="https://twitter.com/hashtag/hardmoneymonday?src=hash&ref_src=twsrc%5Etfw">#hardmoneymonday</a><br /><br />In 2021 I walked through a loan from prospecting to closing 👇👇<br /><br />1/11</p>— Bob Flynn (@flynn_bob) <a href="https://twitter.com/flynn_bob/status/1478170390954487808?ref_src=twsrc%5Etfw">January 4, 2022</a></blockquote> <script async="" charset="utf-8" src="https://platform.twitter.com/widgets.js"></script>
</div><div>Regarding research and scuttlebutt on the company's products- I have used the company’s loan products for 2 rental properties I own. One is a DSCR loan- it’s a loan that was done at 70% LTV on a 30-year fixed note at ~8.75% interest. That is more than I would have paid in interest at a bank (then 6.5%, now 7.25%)- but I wanted to test the product. Plus, banks in my market will not originate 30-year fixed mortgages for investors. Something to consider is that if you amortize a loan over 30 years rather than 20, (which is pretty standard for banks here in Central KY), the difference in payment is roughly equivalent to 1.5% in additional interest- so the difference in monthly payment is basically non-existent- though, total payments over the life of the loan are significantly more. Something that does offset that is that The extra interest expense gives you better tax treatment relative to your cash flow, which keeps more money in your pocket in the early years of the loan.</div><p>Because of this, it can be pretty rational for an investor to pay a higher rate for AAMC’s product. Just knowing that your payment will never change can be very nice. As an example- earlier in the year, I got some 30 year fixed loans at 6.5%- while that was a high rate at the time- it comparably looks pretty good now!</p><p>If you want to see some specifics of the house I received a loan on so that you can see the collateral that AAMC has- check out the series of tweets below- it even has some Matterports $MTTR of the house- so you can virtually walk through it!</p><blockquote class="twitter-tweet"><p dir="ltr" lang="en">Just closed a DSCR loan with <a href="https://twitter.com/search?q=%24AAMC&src=ctag&ref_src=twsrc%5Etfw">$AAMC</a> on an opportunity zone rent house. <br /><br />For all you updating your dcf models- they have another ~$130k loan on their books. <br /><br />Terms: 70% loan to value, with interest rate just over 8.5%. 30 year amortization on a house generating $1,275/no in rent.</p>— Jeff Moore (@ragnarisapirate) <a href="https://twitter.com/ragnarisapirate/status/1592640190538928128?ref_src=twsrc%5Etfw">November 15, 2022</a></blockquote><blockquote class="twitter-tweet"><p dir="ltr" lang="en">Ever wonder what one of our houses start out looking like? Well, here one is, AFTER it was cleaned out. <br /><br />There was a hoarder here, and we removed about 2 dumpster loads of stuff.<a href="https://t.co/ZWvPPINCVM">https://t.co/ZWvPPINCVM</a></p>— Jeff Moore (@ragnarisapirate) <a href="https://twitter.com/ragnarisapirate/status/1574808780763791360?ref_src=twsrc%5Etfw">September 27, 2022</a></blockquote><p></p><p>I also have a bridge loan scheduled to close this Tuesday (11/30/22) on a 4 plex that I paid ~$65K for, and I plan to invest ~$300K in the renovation of. Once stabilized, the building should rent for in excess of $3,600/mo. For this, Altisource is financing 70% of the purchase price and will reimburse a majority of the construction funds I pay out once they are verified via inspection. The setup is very similar to a standard construction loan that a bank does. Once the property is stabilized and rented, I can refinance the property through Altisource or another lender- I could also sell the property to another investor. I think that the building will be worth a little more than $400K when completed, and at the end, Altisource will have a mortgage on the property with a balance of less than $300K. This strikes me as a safe loan for them. </p><p><script async="" charset="utf-8" src="https://platform.twitter.com/widgets.js"></script><script async="" charset="utf-8" src="https://platform.twitter.com/widgets.js"></script></p><p>The process for applying for both of these loans was pretty straightforward. You can see the start of the origination process at https://altlendinggroup.com. From there, I dealt with a contact at the company for coordinating closing, title work, appraisal, and the like. The company does a significant amount of verification regarding a borrower, and is mainly concerned with credit score, number of successful exits in real estate deals, as well as lease status and Loan To Value of the subject property. And of course- if the rent will cover the debt payments on the property.</p><p>The timing of the company rolling out this product is pretty much perfect given the current conditions of the real estate market. Below is a tweet from <a href=" https://twitter.com/JeffFeldman_?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor">Jeff Feldman</a> who is a real estate financier, referencing the strong demand in the industry for the products similar to the ones that Altisource offers- there are over 200 of them!</p><blockquote class="twitter-tweet"><p dir="ltr" lang="en">Spoke to a lender who is being pummeled with deals right now. <br /><br />Type of lender they are?<br /><br />Higher yielding bridge, balance sheet, quick close lender.<br /><br />His problem.<br /><br />He wants/needs more capital.<br /><br />A lot of deals that need rescuing with buyers still wanting to close.</p>— Jeff Feldman (@JeffFeldman_) <a href="https://twitter.com/JeffFeldman_/status/1585258060079333378?ref_src=twsrc%5Etfw">October 26, 2022</a></blockquote><p>Perhaps the most exciting about the product that the company is rolling out is that it is a business that has already been folded into a public company several times over the last few years. <a href="https://www.redwoodtrust.com">Redwood Trust</a> $RWT has <a href="https://www.prnewswire.com/news-releases/corevest-announces-acquisition-by-redwood-trust-300939261.html">acquired</a> several <a href="https://www.businesswire.com/news/home/20220428005915/en/Redwood-Trust-Announces-Strategic-Acquisition-of-Riverbend-Lending">companies</a> in this <a href="https://www.prnewswire.com/news-releases/redwood-trust-closes-previously-announced-acquisition-of-5-arches-300807644.html">space</a>. Corevest alone <a href="https://www.mpamag.com/us/specialty/commercial/redwood-trust-snaps-up-corevest-for-490-million/180603">went for nearly half a BILLION dollars</a> compared to Altisource's current market cap of ~$35 million. Below is a link to a tweet where I discuss the specifics of these tuck-in acquisitions for Redwood. I will do my best to add to these threads in the future if there are any developments of mention. Note- the acquisitions were for companies doing originations in line with the volumes that $AAMC thinks it can do. The buyout prices were <u><i>many multiples</i></u> of Altisource's current market cap of $35 million. </p><blockquote class="twitter-tweet"><p dir="ltr" lang="en">Has anyone followed the acquisitions of mortgage originators that Redwood Trust <a href="https://twitter.com/search?q=%24RWT&src=ctag&ref_src=twsrc%5Etfw">$RWT</a> has done? Here is one that did about a billion in loan originations in a year, and was only 5 years old. <br /><br />Interesting as to how this pertains to the market <a href="https://twitter.com/search?q=%24AAMC&src=ctag&ref_src=twsrc%5Etfw">$AAMC</a> is in.<a href="https://t.co/ck8kHDBR78">https://t.co/ck8kHDBR78</a></p>— Jeff Moore (@ragnarisapirate) <a href="https://twitter.com/ragnarisapirate/status/1594535298503172098?ref_src=twsrc%5Etfw">November 21, 2022</a></blockquote> <script async="" charset="utf-8" src="https://platform.twitter.com/widgets.js"></script>
<p></p><p>In terms of yearly origination volumes, Jason Kopcak, AAMC's CEO, has stated that the company will be able to do more than<a href="https://ir.altisourceamc.com/static-files/f83cb4d5-2eae-4515-8027-e8d8ae14e5b7"> $600 million</a> in loan originations. How realistic is that? In the market the company is in, I believe that it is <u><i>very</i></u> achievable. Mr Kopcak said on the company's <a href="https://event.webcasts.com/viewer/event.jsp?ei=1580139&tp_key=704665e60f">most recent conference call</a> that the market for DSCR loans is likely in the trillions of dollars and that the market for bridge financing being in the hundreds of billions of dollars. For a sanity check, Corevest, on <a href="https://www.corevestfinance.com">its homepage</a>, claims to have originated over $20 BILLION in loans... This is for a <a href="https://councils.forbes.com/profile/Beth-O%27Brien-Founder/d3ac1dbb-c515-4071-bff4-71ad0e0748e4">company established in 2014</a>. $20 billion in 8 years... </p><p>For even more of a sanity check, see the tweet below, where Kiavi has averaged doing well more than a billion dollars of lending per year. Kind of interesting that Kiavi had done an average of more than a billion a year in lending. <a href="https://twitter.com/search?q=%24AAMC&src=ctag&ref_src=twsrc%5Etfw">$AAMC</a> has the goal of just doing $600 million... 🤔</p><blockquote class="twitter-tweet"><p dir="ltr" lang="en"><br />Kiavi Surpasses Funding $10 Billion in Loans to Real Estate Investors <a href="https://t.co/ZlsrAeBJ4d">https://t.co/ZlsrAeBJ4d</a></p>— Jeff Moore (@ragnarisapirate) <a href="https://twitter.com/ragnarisapirate/status/1593798761809002505?ref_src=twsrc%5Etfw">November 19, 2022</a></blockquote> <script async="" charset="utf-8" src="https://platform.twitter.com/widgets.js"></script>
<p>Also, below is a Twitter thread where I discussed several items on the previously referenced conference call. </p><blockquote class="twitter-tweet"><p dir="ltr" lang="en"><a href="https://twitter.com/search?q=%24AAMC&src=ctag&ref_src=twsrc%5Etfw">$AAMC</a> investor call was 🔥🔥🔥<br /><br />There lending platform seems like it's getting ready to 🚀🚀🚀<br /><br />Trading for a lot less than book AND it should have lots of earnings power<br /><br />Even had a B Riley analyst on the call. 🤔🤔🤔 <a href="https://twitter.com/search?q=%24RILY&src=ctag&ref_src=twsrc%5Etfw">$RILY</a><br /><br />AAMC Investor Call - 1580139 <a href="https://t.co/erRLfCuWb8">https://t.co/erRLfCuWb8</a></p>— Jeff Moore (@ragnarisapirate) <a href="https://twitter.com/ragnarisapirate/status/1587879234743197697?ref_src=twsrc%5Etfw">November 2, 2022</a></blockquote> <script async="" charset="utf-8" src="https://platform.twitter.com/widgets.js"></script>
<p></p><p>The bottom line is that it seems very plausible that Altisource can achieve $600 million in originations in short order. This is especially true as they produced more than $123 million in loan commitments as of <a href="https://ir.altisourceamc.com/static-files/2a59e761-7014-43f0-922a-6175383171b7">September 30th</a>... As of <a href="https://ir.altisourceamc.com/static-files/b9ad548b-456f-47dc-a522-679192c571da">June 30th, they had $31 million</a>... so the math certainly checks out.</p><p><b><u>New Warehouse Line Of Credit:</u></b> To aid the growth of the origination business, the company opened a $50 million warehouse line with <a href="https://www.flagstar.com">Flagstar Bank</a> ($FBC) (the bank recently granted the amount going up to $52.5 million). A warehouse line is a loan secured by mortgages that the company originates. In its most recent conference call, the company also said that it is looking to establish a more extensive borrowing base to grow its alternative lending business. A valid concern is that some companies can get in trouble with these lines of credit and insufficient collateral if underwriting is sloppy and they are caught in a down market. I don't think that is too much of a worry with Altisource for several reasons. First, the company has a LOT of collateral- at the <a href="https://ir.altisourceamc.com/static-files/7fcbf338-6c13-411e-9b9b-4deb3f0b2de0">end of Q3</a>, total loans outstanding were nearly $100 million. So, the company could see the value of their loans being SIGNIFICANTLY impaired and still be okay. I don't think there is any worry about a capital call, here.</p><p>Per the company's most recent conference call, AAMC is also looking at other funding options. The type of equity the company has should provide a nice buffer for this additional leverage, especially considering that they have become more conservative in their underwriting in terms of Loan To Value ratios. Consider that the collateral for the $52.5 million warehouse facility is $62 million in loans. This means that the company could easily use its reserves of ~$38 million in loans to fund more borrowing. While I doubt the company would do this as much as possible at the moment, hypothetically, this could support another $150 million in warehouse lines under the same terms as Flagstar's current debt facility. Even more once AAMC has a few profitable quarters under its belt. </p><p>Given this, it would take a VERY significant housing correction for the company to default on its debt covenants. Currently, the warehouse line has $52.5 million drawn against it and $62 million of collateral. Now keep in mind- the collateral are loans that are at 70% or so LTV, so the appraised value of the real estate that AAMC has a mortgage against is likely around $90 million... Even in the extremes of the Great Recession- real estate prices nationally didn't decline by nearly the 40% that would need to happen for the company to come up with more collateral for its warehouse line. In fact, national real estate prices went <a href="https://www.washingtonpost.com/news/business/wp/2018/10/04/feature/10-years-later-how-the-housing-market-has-changed-since-the-crash/">down by 33%</a> during a time when people were literally questioning if it was the end of the financial world. So, in terms of stress testing the loans and the debt facility that AAMC currently has- I am not too worried. </p><p>An interesting side point is that a housing correction could be a boon for AAMC. As a hypothetical: in our collective lifetimes, when would the BEST time to have started a bank have been? Without a doubt, it would have been in 2008/2009 when every other bank was imploding. When you could start with a fresh loan book that would be full of loans at LTVs that were not only lower than had previously been offered but were also based on values that had been adjusted down because of falling real estate prices and your conservative underwriting. Beal Bank used this exact <a href="https://www.forbes.com/2009/04/03/banking-andy-beal-business-wall-street-beal.html?sh=b5bbc7c1a4d5">sort of </a>playbook in the 2000s. </p><p>Take a look at what is <a href="https://www.businesswire.com/news/home/20221107005879/en/Broadmark-Realty-Capital-Announces-Third-Quarter-2022-Results">going on at Broadmark</a>... They seem to be getting more conservative and preserving capital. Given the recent share price declines that reflect that the company has <a href="https://s201.q4cdn.com/304055452/files/doc_financials/2022/q3/Broadmark-Earnings-Deck-3Q22.pdf">nearly $300 million of loans in some sort of default</a>, there could be a situation where Broadmark would start selling loans. Now, combine that with the AAMC underwriting team's history, where they underwrote BILLIONS of dollars worth of real estate deals for Front Yard Residential before it <a href="https://www.multihousingnews.com/pretium-ares-close-2-5b-acquisition-of-front-yard-residential/">got bought out</a>. Specifically, the team led the acquisition of <a href="https://ir.altisourceamc.com/static-files/0a7f9071-41c7-4ff0-946a-b2f2923febcc">over 14,000 single-family residences and over 4.1 BILLION in non-preforming mortgages and REOs</a>. That is pretty darn impressive for a company with a current market cap of ~$35 million!</p><p>Is it possible that AAMC could purchase underwater loans from forced sellers (maybe Broadmark or similar operators?), work with borrowers to stabilize and modify the loans, then sell them back to the market? I think that there is a non-zero chance of that happening- but more importantly, this illustrates the type of things a clean company can do when entering a troubled market with <a href="https://www.axios.com/2022/09/21/mortgage-industry-layoffs-interest-rates">lots of participants closing their doors</a>. </p><p><u><b>Progress In Preferred Stock Litigation:</b></u> As part of the ongoing preferred stock lawsuit with Luxor, motions for summary judgment were filed in the New York Supreme Court on July 19th.</p><p>In those motions, there were pieces of discovery included as exhibits that included some pretty damning items against Luxor. These took the form of emails where Luxor Executives in not so many words implied that they could not redeem PART of their preferred shares- which is what the whole case is about. There were also emails that came out where a Luxor appointee to AAMC's board of directors was sharing material non-public info.</p><p>Oral arguments for summary judgment are scheduled for December 1st, 2022. If you want to watch the oral arguments, DM me on Twitter, and I will forward you the Microsoft Teams link to watch. See below for the link.</p><blockquote class="twitter-tweet"><p dir="ltr" lang="en">I just got off the phone with the Commercial Division of the NY State Supreme Court. They sent me the Microsoft Teams info to watch the Luxor v <a href="https://twitter.com/search?q=%24AAMC&src=ctag&ref_src=twsrc%5Etfw">$AAMC</a> case that is happening Thursday, December 1st at 11AM. <br /><br />DM me with your email address if you want the info. 🙂</p>— Jeff Moore (@ragnarisapirate) <a href="https://twitter.com/ragnarisapirate/status/1595475635799048239?ref_src=twsrc%5Etfw">November 23, 2022</a></blockquote> <script async="" charset="utf-8" src="https://platform.twitter.com/widgets.js"></script><p>In my last write-up, I thought there was a strong possibility of there being a settlement before the trial- that appears to have not played out. However, the legal arithmetic has changed. We now have more clarity on the emails that came out in discovery from the former AAMC director (and Luxor appointee) to his colleagues. </p>Here is a link to a thread on Twitter where I look at some of the items that came out in the Luxor v AAMC suit.<blockquote class="twitter-tweet"><p dir="ltr" lang="en">It's <a href="https://twitter.com/search?q=%24AAMC&src=ctag&ref_src=twsrc%5Etfw">$AAMC</a> summary judgement filing day! <br /><br />Seems like there is something that Luxor doesn't want to come out... Gee- I wonder what that could be? 🤔<a href="https://t.co/XmKKZi9AhV">https://t.co/XmKKZi9AhV</a> <a href="https://t.co/rzQN8RPC6m">pic.twitter.com/rzQN8RPC6m</a></p>— Jeff Moore (@ragnarisapirate) <a href="https://twitter.com/ragnarisapirate/status/1549585606120017925?ref_src=twsrc%5Etfw">July 20, 2022</a></blockquote> <script async="" charset="utf-8" src="https://platform.twitter.com/widgets.js"></script>
<blockquote class="twitter-tweet"><p dir="ltr" lang="en">Looks like the <a href="https://twitter.com/search?q=%24AAMC&src=ctag&ref_src=twsrc%5Etfw">$AAMC</a> case against its former director is officially live in the USVI. Now, to just see the documents... 🤔<a href="https://t.co/z5MVqQGBbR">https://t.co/z5MVqQGBbR</a> <a href="https://t.co/GYkkRyfRnU">pic.twitter.com/GYkkRyfRnU</a></p>— Jeff Moore (@ragnarisapirate) <a href="https://twitter.com/ragnarisapirate/status/1588641629254320128?ref_src=twsrc%5Etfw">November 4, 2022</a></blockquote> <script async="" charset="utf-8" src="https://platform.twitter.com/widgets.js"></script>These are severe charges, and there are <u><i>literally</i></u> emails that were discovered where the former director was giving away tons of material non-public info and then typed, "If anyone wants some of the non-public info that makes me not concerned about this, just let me know." There were multiple instances of this, and one would think Luxor wouldn't want these emails in the public domain for many reasons... <div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2dFe6CQmNuPmwDhR0KqNJnJ4RScGE0O_DChf3s8e_gU3q7fJ89IYzOMN_UY_o3pK8X3XyEOuRkbC_ir2F-kXe4g_IFZIVaXJJYqgRt3D-fh3WdD4r7KZhxxRQNYkH_-20uQM4DO22OXiJx4NfCyV26gedEmj_QsX6GcBd7c37vmzjVqMJTbcF455R/s1088/BF7CBA36-8D23-4FB8-9DE9-6C4E53EFD0F5.jpeg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="815" data-original-width="1088" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2dFe6CQmNuPmwDhR0KqNJnJ4RScGE0O_DChf3s8e_gU3q7fJ89IYzOMN_UY_o3pK8X3XyEOuRkbC_ir2F-kXe4g_IFZIVaXJJYqgRt3D-fh3WdD4r7KZhxxRQNYkH_-20uQM4DO22OXiJx4NfCyV26gedEmj_QsX6GcBd7c37vmzjVqMJTbcF455R/w640-h480/BF7CBA36-8D23-4FB8-9DE9-6C4E53EFD0F5.jpeg" width="640" /></a></div><br /><div><br /></div><div><br /></div><div>Going forward, I think that it is reasonably likely that there will be some sort of settlement. One point is that these preferred shares are in a <a href="https://www.reuters.com/article/us-hedgefunds-luxor-exclusive/exclusive-hedge-fund-luxor-capital-alters-terms-of-withdrawal-plan-idUSKCN0WU1SH">special purpose investment vehicle</a> that is in wind-down mode. As a plus for AAMC, a bonus from the Putnam repurchase, there is no longer a "most favored nations clause," meaning that AAMC could settle with Luxor for more than they did with other claimants, and Altisource wouldn't have to pay any of the additional settlement to Putnam. Though, I think it is fairly likely that the company could settle for less than previous amounts because the net present value of the preferred stock is worth less today than it was a year ago. Given that the discount rate for instruments like this has gone up with interest rates- a preferred stock yielding 0% until 2044 could potentially be worth as little as 5 or 6 cents on the dollar, whereas previously, it was worth 11-12 cents on the dollar in the near zero interest rate environment that we were in when AAMC was negotiating with Putnam.<div><br /></div><div>Pulling this back into the operations of Altisource, I believe that Flagstar would have looked at the merits of Luxor's preferred stock case and decided that it wasn't enough of an issue to keep them from lending AAMC money. </div><div><div><p><u><b><i>SIGNIFICANT</i> Share Repurchases:</b></u> Another essential item is that the company <a href="https://www.yahoo.com/now/altisource-asset-management-corporation-announces-124300291.html">repurchased 286,783 shares of common stock</a> from Putnam (a considerable shareholder previously that sued and SETTLED with the company over the same preferred stock that Luxor is in litigation with AAMC over). This repurchase represents just under 14% of $AAMC's outstanding shares. Not only did they repurchase a HUGE amount of stock, but they also were able to eliminate the "most favored nations" clause in their <a href="https://www.streetinsider.com/Corporate+News/Altisource+Asset+Management+%28AAMC%29+Announces+Settlement+of+Litigation+with+Putnam+Investments%2C+LLC/17995165.html">settlement agreement with Putnam from 2021</a>. This significantly reduces the risk for $AAMC with a potential Luxor settlement. The company now has the freedom to settle for more than 11.5 cents on the dollar without paying previous preferred shareholders extra money. </p></div><div><p>Given this repurchase, if the company settles with Luxor on the same terms that it did Putnam, my estimate of adjusted book value is ~$24/share compared to the current share price of ~$20/share. If the settlement price goes down to 6 cents, then the book value would be roughly $28/share.</p></div><div><br /></div><div><u><b>New Website Demonstrating The Future For the Business:</b></u> Given all of these developments and updates, it is amazing what has been accomplished in such a short period of time! The company's <a href="https://www.altisourceamc.com">new website</a> makes clear to me that the future of the company is in its alternative lending business and not in the $2 million that it has set aside to fulfill an OPTION to roll out <a href="https://forumpay.com/atm">Forum Pay Crypto ATMs</a>. These ATMs, despite the routing of crypto prices, seem to still have GREAT economics. Again, this option currently represents virtually none of the company’s assets, and IF the program gets up and running, the total allocation will be under 2% of the company’s assets. Keep in mind- if this materializes, AAMC company will NOT be taking crypto onto their balance sheet and taking a risk with the value of digital currencies. With a redesigned website that focuses on the alternative lending platform, I don’t think that much focus should be put on the crypto items for the company. </div><p><b><u>Risks:</u></b></p><p>*Not selling loans- One of the most important items for the company is to execute on forward sales contracts with REITs, insurance companies, banks, and the like. I have full confidence in the company doing this over time, as the CEO, Jason Kopcak, is very well connected in this space. I think that the higher-yielding loans that the company is originating should sell themselves, and as such, I don't view this as a huge risk. Especially when the company is a minnow in the ocean of these loans. It should be easy for the company to take market share. </p><p>If the company can not sign sales agreements, then the company will likely keep up its efforts to do so. I have no reason to think they won't succeed in this. Should that be the case, then the company will have high-yielding debt instruments on its books, much like Sachem Capital, Manhattan Bridge Capital, and the like carry on theirs. Hardly a bad scenario. </p><p>*Impairment of loans on the books: with interest rates going up, the company did take a temporary write-down of $1.56 million on their loan book of more than $100 million. This was due to interest rates rising, and the present value of the loan being reduced. This was NOT because of an impairment of the actual loan in terms of it being in foreclosure. However, there is a risk that foreclosures could happen, which could impair the company's collateral. Though, I think that this is mitigated by their underwriting.</p><p>*A recession that sees real estate prices fall by more than in 2008. As noted above, a severe recession could impair some of the loans that AAMC has on its books, but, I think that risk is mitigated by the company originating loans that have lower LTVs and that they are also ramping up as housing is going down. This could be a great way for them to have a more stable book of business than others. </p><p>*Fraud- If the company commits fraud, then the buyers of their loans would have a case against them. However, having personally gone through the underwriting process, I believe that the company is operating in an ethical manner, that is very thorough. So, again, I think that the risk is mitigated. </p><p>*NYSE De-listing- the company had been suspended from trading for a few months because they didn't have an operating business. Though that has been fixed, and the NYSE has given AAMC until <a href="https://www.globenewswire.com/en/news-release/2022/08/15/2498225/24694/en/Altisource-Asset-Management-Corporation-Announces-NYSE-Acceptance-of-Remediation-Plan-to-Address-Deficiency-Letter-Notice.html">November of 2023</a> to get in compliance. Given the progress that has been made at the company, I am not concerned about this. It seems like the shareholders that minded a de-listing sold in the spring of 2022 when the share price was beaten down to ~$10/share. It also seems that a lot of those shares were sold to new <a href="https://www.sec.gov/Archives/edgar/data/1555074/000119312522222344/d370570dsc13ga.htm">13G filer Theodore King</a>, who does not seem to have a problem investing in companies that could trade Over The Counter. King owns more than 10% of the company. </p><p>*Litigation- the company could get a negative judgment in the preferred stock suit with Luxor. Though, given the company's history of prevailing in litigation, and settling the majority of the preferred stock claims, I am not worried about the case that is having oral arguments this Thursday, December 1st. Key to note is that Luxor is not even arguing that the preferred stock conversion should be able to bankrupt AAMC. Luxors arguments seem to be that AAMC should have redeemed SOME of the preferred stock back to Luxor, even though the documents clearly say "all but not less than all". Additionally, Luxor doesn't prescribe any sort of amount that the company should redeem. The arguments seem disingenuous, and, frankly, seem to be biding for time. </p><p><b><u>Valuation:</u></b> The bottom line is that a company with executives that are this shrewd with capital allocation and business formation deserves MORE than a valuation equal to book value. It seems perfectly reasonable for them to grow into a multiple of a company that bears their name: "asset management." </p><p>To this end, A REAL business is emerging. As of the end of Q3 company put together a portfolio of ~$100 million in loans. I believe that this amount has continued to grow since that time. The company noted that it has even received payoffs on some of its loans to the tune of more than $13 million. </p><p>On the revenue side, the company should be able to originate and sell <a href="https://ir.altisourceamc.com/static-files/f83cb4d5-2eae-4515-8027-e8d8ae14e5b7">$600 million in loans per year</a>, with an average <a href="https://ir.altisourceamc.com/static-files/e391a3ee-6ccb-485d-9825-229a7844a4eb">spread of 350 bps</a>- which comes to $21 million in origination-related revenues. Add in interest from the loans they carry on their books until the sale of about $10 million a year- this assumes ~$100 million lent out at an average rate of 10%. So, total revenue of $31 million.</p><p>On the expense front, I think that a year from now, legal expenses will be pretty de minimus since the Luxor litigation is probably coming to an end, and the company is also towards the end of its legal spat with its ex-CEO (where the company is in GREAT shape and should get some money). I also think that professional fees and acquisition charges will come down a lot as well, as I am under the impression that these were due to acquiring some of the loans on their books now and are not part of the fees that will be ongoing with the origination platform. So, call corporate overhead and all that $6.5 million a year. The company will pay interest on its warehouse line- let us assume that is about $2.75 million a year (5.5% on $50 million). Total expenses will be ~$9.25 million.</p><p>Pretax earnings should be $21.75 million,based on these numbers. Given the complexities of tax structures and such in the US Virgin Islands, where $AAMC is based, I will let you figure out the tax rate that the company pays. However, if we use some generalities here and assume that the company is paying out 17.5% in taxes, we get to $17.94 million in earnings OR with just under 1.78 million shares outstanding, <u><i>just north of $10/share in earnings</i></u>...</p><p>_______</p><p>What does this estimate NOT include? A few things- because I am trying to keep things simple. I think my estimate is a pretty “average scenario” where if you would, say, adjust SG&A costs up, you could reasonably take loan originations/sales as well as interest income up to more than offset the cost increases.</p><p>*Loan charge-offs. First, the loan BUYER will assume the risk unless AAMC does something fraudulent. Having worked on 2 loans with them- I don’t see that happening, given how they verify all the different aspects of the borrowers and collateral. There were items that they asked for that I have never provided to a bank in the nearly 20 years that I have been doing residential real estate. Also, given the lowered LTVs that the company is underwriting, I don’t think there will be many issues here- not to say they won’t be there- I just am not using them for my back-of-the-envelope math. Also, note that Manhattan Bridge Capital ($LOAN) <a href="https://manhattanbridgecapital.com/pdf/mbc-presentation.pdf">has never had a single loan go into foreclosure</a>, so this is not unheard of in the space. </p><p>*New lines of business. The company could well earn more money by servicing loans or, as mentioned on their website, <a href="https://www.altisourceamc.com/our-businesses/">asset management</a>. </p><p>*Origination volume that becomes more than a few hundred basis points of the total market. If the company could get just 2% of the originations for the market they are in, this would be the story of a lifetime. Remember that $600 million a year in originations is a drop in the bucket when Corevest is doing <i><u>single</u></i> securitization deals <a href="https://www.businesswire.com/news/home/20220629005947/en/CoreVest-Completes-313-Million-Single-Family-Rental-Securitization">over $300 million</a>!</p><p>*Significant growth of overhead. The company has indicated that it will NOT be significantly increasing overhead. Previously, it had kept its loan originators in India employed so that the company would be ready to roll when operations were up and moving, as a result, a lot of those costs are baked in. While AAMC is increasing its headcount in India, keep in mind that these low-cost workers underwrote billions of dollars in real estate transactions for Front Yard Residential. They are efficient and provide the company with a lower cost profile than many others in the space here in the States. As a result, AAMC should be able to generate wider margins than its competitors. </p><p>*Shifting of product mix. Currently, it is anticipated that the company will be <a href="https://ir.altisourceamc.com/static-files/e391a3ee-6ccb-485d-9825-229a7844a4eb">averaging 350 basis points</a> on its originations- what happens if DSCR loans that generally give the company a more extensive spread take up a larger piece of the pie than, say, Correspondent loans that don’t provide as much spread?</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtZiODjdjNSzGesxa6QF4xy8ZsuiK091fwFvI-k-Dnjj5OgbDuYpn9BSe2lmH5XfUYNY18V-n_aino9RQi06spg8nsJQ9qGqEvskD73u0ebtGJhH7-pXZo1fHCZ3z-YvZFxLmVWxe3Nm9cEjwGrWlu-GiqgqbDAJelHIF87toKRtU9UTU4V79exmaC/s1672/Screen%20Shot%202022-11-27%20at%207.15.50%20PM.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="323" data-original-width="1672" height="124" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtZiODjdjNSzGesxa6QF4xy8ZsuiK091fwFvI-k-Dnjj5OgbDuYpn9BSe2lmH5XfUYNY18V-n_aino9RQi06spg8nsJQ9qGqEvskD73u0ebtGJhH7-pXZo1fHCZ3z-YvZFxLmVWxe3Nm9cEjwGrWlu-GiqgqbDAJelHIF87toKRtU9UTU4V79exmaC/w640-h124/Screen%20Shot%202022-11-27%20at%207.15.50%20PM.png" width="640" /></a></div><br /><p>*Declining interest rates. If inflation continues to fall, <a href="https://fortune.com/2022/11/24/when-will-fed-pivot-interest-rate-hikes-soon-federal-reserve-jerome-powell/">then ideally, interest rates will also fall</a>. If that happens, then the loans on the company's books will be worth more in principal because they were originated at higher rates. It greatly helps that company seems to have adjusted its lending to the higher interest rate environment that we are in.</p><p>*New financing lines or methods for the company to grow with. In the <a href="https://seekingalpha.com/article/4553459-altisource-asset-management-corporation-aamc-q3-2022-earnings-call-transcript">company's most recent investor call</a>, Jason Kopach indicated that Altisource was looking at a new warehouse line to increase borrowing capacity. This would increase the number of loans that could bear interest or, more specifically, be sold in accordance with the sales model that the company has outlined. I have also suggested that the company utilize the same sort of baby bonds that <a href="https://seekingalpha.com/article/4535084-sachem-capital-buy-the-7-percent-yielding-baby-bonds">Sachem Capital has issued several series of</a>. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHBfezPt0BJvuNt-kRggn9-UV6cxny0r8QB4IfUExnuV1tMg_v9jhq47LtFYrPD_SmoRgYSM2VKgeStmbBaDy-PMB9WUzLZCplFToTDb-5pKEheJhLC9cK4QTbrztgJafSWjR3dQSp9kM5dlqtQtQfhSgYjgRWzTf182K73IWoaV3tRMNRBTaMjmzt/s683/Screen%20Shot%202022-11-27%20at%207.23.07%20PM.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="683" data-original-width="633" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHBfezPt0BJvuNt-kRggn9-UV6cxny0r8QB4IfUExnuV1tMg_v9jhq47LtFYrPD_SmoRgYSM2VKgeStmbBaDy-PMB9WUzLZCplFToTDb-5pKEheJhLC9cK4QTbrztgJafSWjR3dQSp9kM5dlqtQtQfhSgYjgRWzTf182K73IWoaV3tRMNRBTaMjmzt/w594-h640/Screen%20Shot%202022-11-27%20at%207.23.07%20PM.png" width="594" /></a></div><br /><p><br /></p><p>*Tax rate analysis. Keep in mind- I assumed a 17.5% tax rate for the company, which is probably high given it is a company based in US Virgin Islands (with a small NOL). Because of this structure, the company can take advantage of better capital allocation options for shareholder capital return than its competitors. Where a REIT such as Manhattan Bridge Capital or Sachem has to distribute out 90% of its income, AAMC is not under that obligation and can be more nimble with returns of capital via spin-offs, dividends, or share repurchases (that is, has a <a href="https://www.globenewswire.com/en/news-release/2022/07/22/2484444/24694/en/Altisource-Asset-Management-Corporation-Announces-Repurchase-of-Common-Stock.html">recent history of doing!</a>).</p><p>*Accretive capital allocation. As mentioned several times, the company has repurchased its shares. I think that this shows the company gets capital allocation. I will also note that the company has a significant number of these shares held in treasury, which to me is very exciting. If the stock gets to an attractive price where issuing the shares would be accretive, then the company has that optionality. RCI Entertainment ($RICK- check out the capital allocation slide on page 14 of <a href="http://www.rcihospitality.com/investor/documents/quarterlyreports/2022q3a.pdf">this presentation for reference</a>) is a company that has done buybacks and issuance <a href="http://www.rcihospitality.com/761/pressrelease.aspx">very successfully as of late</a>, in addition to all the names that everyone already knows such as Auto Zone ($AZO), Teledyne, and the like. </p><p>Keep in mind that the Putnam shares that were <a href="https://altisourceamc.gcs-web.com/news-releases/news-release-details/altisource-asset-management-corporation-announces-repurchase">recently repurchased for $10/share</a> had been issued a little more than a year earlier for a price in the <a href="https://www.globenewswire.com/en/news-release/2021/02/18/2178002/24694/en/Altisource-Asset-Management-Corporation-Announces-Settlement-of-Litigation-with-Putnam-Investments-LLC.html">$20/share range</a>. This, in effect, had an impact of LOWERING the settlement cost with Putnam. It's one thing when a company <u><i>talks</i></u> about capital allocation and share repurchases- it is another when they <u><i>actively deliver</i></u>. </p><p>All this, together, basically means that I know I will be precisely wrong on some or perhaps even all of the points in my valuation. However, I believe I will be roughly and directionally correct when looking at the valuation in aggregate.</p><p>_______</p><p>In conclusion, I am coming to ~$10/share in recurring earnings on a company that has repurchased many shares, has insider ownership, is an exciting business, and is currently trading for ~$20 a share. What's that worth? I am not sure, but probably a lot more than the shares are selling for right now.</p><p>If you want to get some of this info directly from the horse's mouth, I strongly suggest you check out <a href="https://ir.altisourceamc.com/static-files/2a59e761-7014-43f0-922a-6175383171b7">this presentation</a> paired with this <a href="https://event.webcasts.com/starthere.jsp?ei=1580139&tp_key=704665e60f">recent conference call</a>. It is worth a listen while you are driving or exercising. If reading a transcript is more your speed, <a href="https://seekingalpha.com/article/4553459-altisource-asset-management-corporation-aamc-q3-2022-earnings-call-transcript">try this link from Seeking Alpha</a>. </p><p><b><u>Disclosure:</u></b> I am long shares of $AAMC. This is not investment advice. Do your own research. I have used the company's loan products to test them out as part of my "<a href="http://www.scuttlebuttinvestor.com/blog/2018/11/19/the-scuttlebutt-method">scuttlebutt</a>" on the company. I have not and will not receive compensation of any kind for this writing.</p> <script async="" charset="utf-8" src="https://platform.twitter.com/widgets.js"></script></div></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8100616554240982358.post-69771836363844444822022-06-20T19:55:00.006-07:002022-06-20T20:02:49.110-07:00Altisource (AAMC)<p><span style="background-color: black;">Altisource is a storied company that was part of the Bill Erbey complex (see this <a href="https://www.forbes.com/sites/liyanchen/2013/11/27/the-new-subprime-bet-how-bill-erbey-built-a-2-8-billion-fortune-by-getting-inside-homeowners-heads/?sh=feaf877794be">Forbes write-up</a>) arising from the Great Financial Crisis. Right now, it is more or less a play on a set of 2 lawsuits- the most important of which is <a href="https://iapps.courts.state.ny.us/webcivil/FCASCaseInfo?parm=CaseInfo&index=%2FVK4kHgLJmcLs6vSUjg4JA%3D%3D&county=5Pd744EBoNw4ppVhvUDYuQ%3D%3D&motion=M&docs=&adate=05/05/2022&civilCaseId=Y0r3t6L9_PLUS_JSW9kkpfJ8CIg%3D%3D">active in the New York Supreme Court</a>. Last fall, Thomas Braziel and I <a href="https://seekingalpha.com/article/4454653-altisource-could-go-from-deep-value-to-speculative-crypto-play">discussed $AAMC with Andrew Walker at Yet Another Value Blog</a>.</span></p><p></p><div class="separator" style="clear: both; text-align: center;"><span style="background-color: black;"><iframe allowfullscreen="" class="BLOG_video_class" height="381" src="https://www.youtube.com/embed/0JojC9Cd13c" width="575" youtube-src-id="0JojC9Cd13c"></iframe></span></div><span style="background-color: black;"><br /></span><p></p><p><span style="background-color: black;">More or less, the story at the time was that <a href="https://www.streetinsider.com/Corporate+News/Altisource+Asset+Management+%28AAMC%29+Announces+Settlement+of+Litigation+with+Putnam+Investments%2C+LLC/17995165.html">lawsuits concerning the company's preferred stock were getting settled</a>, and the remaining suit should as well. What would remain is a cash box with acquisitions coming in the alternative lending or crypto space. To this end, sound executives were coming on board and even MOVING to the US Virgin Islands. People generally don't pick up and move for something going bankrupt because of lawsuits. The basic math at the time was that the shares were trading in the mid to high 20s with a book value of a similar amount. A settlement could happen with the lawsuit, or there could be a business acquisition, and the stock could rip because it has a less than large float.</span></p><p><span style="background-color: black;">_____</span></p><p><span style="background-color: black;">>>>>Fast forward to today>>>></span></p><p><span style="background-color: black;">_____</span></p><p><u><i style="background-color: black;">In my mind- the workout value of the company is ~$25/share vs. a current share price of $10.50- this gives no value to the business the company is developing in the lending space.</i></u></p><p><span style="background-color: black;">There have been a few developments, and generally, I think that the catalysts are getting closer. </span></p><p><span style="background-color: black;">While the price of AAMC's stock has come down by more than 1/2, the story has not substantially changed. In my mind, that makes it a better deal with more of a margin of safety. As recently as last week and in the prior months, I have been adding to my position.</span></p><p><span style="background-color: black;">Here are the highlights.</span></p><p><span style="background-color: black;"><b><u>*New Leadership at the company</u></b> has me optimistic for its future. Jason Kopack<a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/1555074/000155507422000013/aamc-20220316.htm"> began with the company in mid-May 2022</a> and has a storied past in the mortgage business. With former CEO Thomas McCarthy <a href="https://www.sec.gov/Archives/edgar/data/0001555074/000155507422000034/ex991aamctkmdeparture51920.htm">leaving the company</a> (he had been interim CEO, so no surprise there), the company's strategic direction seems clear. <u><i>This is nearly a pure-play alternative lending business</i></u> that may also pursue a limited opportunity in Crypto ATMs with <a href="https://forumpay.com">Forum Pay</a>. In their investor presentation, the company expects ROEs on the crypto ATMs of 40%- if they can, then more power to them! Right now, this is a small aspect of the potential business and only has a commitment of $2 million dollars. For my valuation, I don't ascribe value to the crypto play other than getting it as a free call option.</span></p><p><span style="background-color: black;"><b><u>*NYSE trading suspension</u></b>- the NYSE suspended the company's trading on November 30, 2021. However, the issues with not having an operating business were fixed, and <a href="https://finance.yahoo.com/news/altisource-asset-management-corporation-announces-193400213.html">the company's stock resumed trading</a> in March of 2022. More on this later in this write-up.</span></p><p><span style="background-color: black;"><u><b>*More settlements</b></u> with preferred stockholders have culminated- while not massive amounts, in January of 2022, <a href="https://ir.altisourceamc.com/news-releases/news-release-details/altisource-asset-management-corporation-announces-settlement-0">some more minor preferred stockholders</a> settled. </span></p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p style="text-align: left;"><i><span style="background-color: black; font-family: inherit;"><org idsrc="xmltag.org" style="box-sizing: border-box; caret-color: rgb(34, 34, 34); color: #222222;" value="AAMC">"Altisource Asset Management Corporation</org><span style="caret-color: rgb(34, 34, 34); color: #222222;"> (“AAMC” or the “Company”) (NYSE American: AAMC) today announced that it had entered into a settlement agreement (the “Settlement Agreement”) with two institutional investors related to the Company’s Series A Convertible Preferred Stock (the “Series A Shares”). Under the Settlement Agreement, the Company has agreed to pay the institutional investors approximately </span><money style="box-sizing: border-box; caret-color: rgb(34, 34, 34); color: #222222;">$665 thousand</money><span style="caret-color: rgb(34, 34, 34); color: #222222;"> in cash in exchange for </span><money style="box-sizing: border-box; caret-color: rgb(34, 34, 34); color: #222222;">$5.79 million</money><span style="caret-color: rgb(34, 34, 34); color: #222222;"> of liquidation preference of the Company’s Series A Shares (</span><money style="box-sizing: border-box; caret-color: rgb(34, 34, 34); color: #222222;"><u>11.5 cents</u></money><span style="caret-color: rgb(34, 34, 34); color: #222222;"><u> per dollar liquidation amount of the Series A Shares</u>). As a result of this settlement, the Company estimates that it will recognize a gain of approximately </span><money style="box-sizing: border-box; caret-color: rgb(34, 34, 34); color: #222222;">$5.1 million</money><span style="caret-color: rgb(34, 34, 34); color: #222222;"> to additional paid in capital in the first quarter of 2022. The resulting outstanding remaining liquidation preference of Series A Shares will be approximately </span><money style="box-sizing: border-box; caret-color: rgb(34, 34, 34); color: #222222;">$144.2 million</money><span style="caret-color: rgb(34, 34, 34); color: #222222;">, which represents the entire Luxor Funds position."</span></span></i></p></blockquote><p><span style="background-color: black;">The terms are relatively similar to the <a href="https://ir.altisourceamc.com/news-releases/news-release-details/altisource-asset-management-corporation-announces-settlement">settlement with Putnam in February of 2021</a>. </span></p><p><span style="background-color: black;"><u><b>*Potential de-listing from the NYSE.</b></u> On June 3rd, 2022, Altisource disclosed that the company <a href="https://ir.altisourceamc.com/news-releases/news-release-details/altisource-asset-management-corporation-announces-receipt">received a deficiency letter</a> from the NYSE. However, the company will submit a plan to eventually comply with the listing standards by June 30th. This may give them until November 30, 2023, to come into full compliance. Even if the NYSE doesn't accept the plan or the company fails to complete it, the shares will trade OTC- hardly the world's end. </span></p><p><span style="background-color: black;"><a href="https://www.nyse.com/publicdocs/nyse/markets/nyse-american/MKT_Continued_Listing_Standards.pdf">Here is a PDF</a> where the NYSE talks about its listing standards. </span></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpPJXZP0OU9i8gBVdkrJR0_hZ2E-QNAZQpiyQ5bgHGMSWiZjbsRIjk5VJPkdLVawPwfGY6k3bCA6X6ri9bHD-8tswRBuN7ng26oAEt1lUmEhU9fu1qJ1-h1FO4l5u-LMUZ22lc2lJF8vu68Jg-AnWgkoWt87yLdJ6arAbhjLJNOopq9Nl7ciblOCYT/s1260/Screen%20Shot%202022-06-19%20at%207.20.18%20PM.png" style="background-color: black; margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="946" data-original-width="1260" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpPJXZP0OU9i8gBVdkrJR0_hZ2E-QNAZQpiyQ5bgHGMSWiZjbsRIjk5VJPkdLVawPwfGY6k3bCA6X6ri9bHD-8tswRBuN7ng26oAEt1lUmEhU9fu1qJ1-h1FO4l5u-LMUZ22lc2lJF8vu68Jg-AnWgkoWt87yLdJ6arAbhjLJNOopq9Nl7ciblOCYT/w640-h480/Screen%20Shot%202022-06-19%20at%207.20.18%20PM.png" width="640" /></a></div><div><span style="background-color: black;"><br /></span></div><span style="background-color: black;">I generally believe that the de-listing has to do with Item(s) I-IV of the financial criteria section. The company needs to have $2 million - $6 million in stockholders equity if reported losses from continuing operations and/or net losses in the last 2 - 5 fiscal years. I personally think that the plans the company has in regards to its lending business will solve these loss problems. I also think the company will be able to develop a plan to solve the stockholder's equity issues. As an example, see this <a href="https://ir.altisourceamc.com/news-releases/news-release-details/altisource-asset-management-corporation-reports-fourth-quarter-8">press release from March of 2022</a>; the company noted that the gain on settlement of its preferred stock was recorded directly to equity. If there is a settlement with Luxor, it's reasonable to assume the same accounting treatment would occur, and the shareholder equity requirements of the NYSE would be met.</span><div><span style="background-color: black;"><br /></span></div><div><span style="background-color: black;">While the NYSE may see things differently than my logic, it is important to note that a de-listing where AAMC would trade over the counter is not the end of the world. While the company has a relatively small float, I have a hard time believing that many (if any) of the remaining shareholders have any restrictions or reservations about owning a company that trades OTC. </span><p><span style="background-color: black;"><u><b>*Insider purchases of stock</b></u> to the tune of just under 10,000 shares. While not a tremendous amount (roughly $100K dollars), it is interesting to see the timing of the investments. These purchases happened on April 25th, 2022 (see pic), and were disclosed in this press release on April 27th, 2022.</span></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrOFk0OFlmjtJTmOcvHb7V2LVM3vw1N7J62H5BS16I1zz0Xa9M1kcEL_8xSWTJb8nFvgLffquBYONxZ9PWNLZIHZYG8FZJuMHUpugieFydjpDU8rNF0CGpoGfUkJCUCc03KMpswHYWyFg6R6fuCnZdcKTQeaqAEcPl8i-N89fnPKprOQX687HbVXIj/s1215/Screen%20Shot%202022-06-19%20at%206.52.17%20PM.png" style="background-color: black; margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="263" data-original-width="1215" height="138" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrOFk0OFlmjtJTmOcvHb7V2LVM3vw1N7J62H5BS16I1zz0Xa9M1kcEL_8xSWTJb8nFvgLffquBYONxZ9PWNLZIHZYG8FZJuMHUpugieFydjpDU8rNF0CGpoGfUkJCUCc03KMpswHYWyFg6R6fuCnZdcKTQeaqAEcPl8i-N89fnPKprOQX687HbVXIj/w640-h138/Screen%20Shot%202022-06-19%20at%206.52.17%20PM.png" width="640" /></a></div><span style="background-color: black;"><br /></span><p><span style="background-color: black;">Before these purchases, on April 22nd, the company <a href="https://ir.altisourceamc.com/news-releases/news-release-details/altisource-asset-management-corporation-reports-first-quarter-9">released financial results</a> and disclosed the following without much detail being given (underline mine):</span></p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p style="text-align: left;"><span style="font-family: inherit;"><i style="background-color: black;"><span style="caret-color: rgb(34, 34, 34); color: #222222;">The Company intends to <u>bring a lawsuit against our former director, </u></span><u><person style="box-sizing: border-box; caret-color: rgb(34, 34, 34); color: #222222;">Nathaniel Redleaf</person><span style="caret-color: rgb(34, 34, 34); color: #222222;">, and </span><org style="box-sizing: border-box; caret-color: rgb(34, 34, 34); color: #222222;">Luxor Capital Group, LP</org></u><span style="caret-color: rgb(34, 34, 34); color: #222222;"><u> and certain of its funds and managed accounts</u> (collectively, “Luxor”), for among other things, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and breach of contract</span><span style="border: 0px; box-sizing: border-box; caret-color: rgb(34, 34, 34); color: #222222; margin: 0px; padding: 0px; vertical-align: baseline;">.</span><span style="caret-color: rgb(34, 34, 34); color: #222222;"> The Company has taken steps to facilitate the filing of this lawsuit.</span></i></span></p></blockquote><p><span style="background-color: black;">On April 29th, the company issued <a href="https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=DpGTWFpLlJY8ICZ/DALWOQ==&system=prod">this bomb of a letter</a> to the Judge in the New York Supreme Court case. In the letter, they wrote (underline Judge:</span></p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><div class="page" title="Page 1"><div class="layoutArea"><div class="column"><p style="text-align: left;"><span style="font-family: inherit;"><i style="background-color: black;">AAMC learned through discovery in this case that <u>Mr. Redleaf repeatedly disclosed AAMC’s confidential information to his colleagues</u> at Luxor who were managing a position in AAMC’s common stock of more than $200 million. <u>The documents listed in Attachment A establish this conduct and show that Plaintiffs were trading in AAMC’s common stock while in possession of this information.</u> AAMC intends to pursue claims arising out of Mr. Redleaf’s breach of his fiduciary duties. In addition, two of the documents on Attachment A relate to Luxor’s bad faith conduct that potentially gives rise to a contract claim. Moreover, these documents may be relevant to respond to any equitable arguments that Plaintiffs may raise in this case.</i></span></p></div></div></div></blockquote><p><span style="background-color: black;">One of my favorite <a href="https://twitter.com/NonGaap?s=20&t=3EELB3K7CkHxl-CT4nJeng">Twitter accounts is @NonGaap</a>. While he has not been super active as of late, he regularly discusses incentives and how often disclosures are done so that members of the board or management can benefit. From my peJudgetive, this <u><i>could have happened</i></u> given the timing of the disclosures and purchases. See below for a highlight of the dates.</span></p><p><span style="background-color: black;">Friday, April 22, the company discloses they are bringing suit against a former director, Nathaniel Redleaf, for breach of fiduciary duty.</span></p><p><span style="background-color: black;">On Monday, April 25th, insiders purchase just under 10,000 shares of $AAMC stock for around $100K. </span></p><p><span style="background-color: black;">Friday, April 29th, the company issued a letter to the Judge in the Luxor trial that seems to imply that the former director gave inside information to the Luxor. Not only that but Luxor, who is in a legal dispute, traded while in possession of that information...</span></p><p><span style="background-color: black;">While the judge <a href="https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=WN631Cq87DXzLxiIobpTag==&system=prod">would not let the company disclose the documents immediately</a>, my reading is that the company can use them as part of its Summary Judgment Arguments. Those arguments <a href="https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=w6oQdPoZ4vepl0KDHlE3hA==&system=prod">will be submitted on or before July 19th, 2022</a>.</span></p><p><span style="background-color: black;"><u><b>*<a href="https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=DpGTWFpLlJY8ICZ/DALWOQ==&system=prod&TSPD_101_R0=08533cd43fab200099e076c3fc8bf07d125af412ec0f2928dbea1f5f2289a9c08d67fbc129e6c8bb08e838b7cb1430001e133ae1816c2730429d9fa2fa793958a08b5b0a33503877963c04006a5df6e3de179ba5e58e2693654683b9c7b2c5a3">Allegations of insider trading</a> and breach of fiduciary duty</b></u> seem to provide Luxor with a solid incentive to settle the legal dispute with Altisource. See below for the letter concerning the emails that AAMC dug up in discovery.</span></p><p><span style="background-color: black;"><iframe allow="autoplay" height="480" src="https://drive.google.com/file/d/13nQcMRTb-xEGPV8knmUARpDoHVP9fnyr/preview" width="640"></iframe></span></p><p><span style="background-color: black;">_____</span></p><p><b><i><u style="background-color: black;">Why does this opportunity exist?</u></i></b></p><p><span style="background-color: black;">In my mind, the considerable selloff in shares of AAMC was due to <u><i>investor exhaustion</i></u> from the <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/0001555074/000155507421000095/aamc-20211130.htm">trading suspension that began on November 30th, 2022</a>. The issues with not having an operating business were resolved with this <a href="https://finance.yahoo.com/news/altisource-asset-management-corporation-announces-193400213.html">press release</a> on March 18, 2022. Because the company took action to form an alternative lending group, trading of Altisource's stock resumed on March 21, 2022. Imagine a shareholder base that couldn't buy or sell its stock for nearly 4 months... On the face of things, you would be pretty perturbed. I know that I wasn't exactly thrilled. <a href="https://www.bloomberg.com/profile/person/15030090">Joshua Horowitz</a>, a company shareholder who owns ~2% of shares outstanding, even <a href="https://www.sec.gov/Archives/edgar/data/0001555074/000110465922006722/tm224185-1_dfan14a.htm">filed a proxy expressing his frustration</a>!</span></p><p><span style="background-color: black;">Something to keep in mind- it was evident that the company didn't have an operating business. It was apparent that they didn't have one for an extended period. The NYSE <a href="https://www.nyse.com/publicdocs/nyse/markets/nyse-american/MKT_Continued_Listing_Standards.pdf">makes its listing requirements public</a>- so should this suspension have been a shock? Probably not- however, I will admit, I was taken a little bit off guard. </span></p><p><span style="background-color: black;">Regardless, the company worked to solve the problem. They even <a href="https://www.sec.gov/Archives/edgar/data/0001555074/000155507422000010/ex991aamcshareholderltrres.htm">responded to the proxy from Mr. Horowitz</a> rather than using the defense of an ostrich sticking its head in the sand, as many smaller companies tend to do. To me- the company's response and efforts to (successfully) fix these issues are about all that can be asked for. They now have an operating business- and it is one that I like! It seems to be relatively similar to Sachem Capital ($SACH), a lender where <a href="http://ragnarisapirate.blogspot.com/2020/04/sachem-capital-935-upside-and-sachem.html">I owned both the equity and the baby bonds in 2020</a>. </span></p><p><b style="background-color: black;">In my mind, the other (and primary) reason for the lagging share price is the <i><u>lack of a settlement with Luxor concerning the redemptions of the company's preferred stock</u></i>- as such, let's look at the Luxor suit.</b></p><p><span style="background-color: black;"><u>In March 2014, several parties gave AAMC $250 million in cash for $250 thousand preferred shares that come due in 2044 and yield 0% interest.</u> As you can imagine, the present value of something due nearly 2 decades from today yielding nothing (literally, NOTHING) is not worth a lot. An income security becomes worth less in a rising rate environment when the discount rate increases. Additionally, rising rates typically mean good outcomes for alternative lenders. </span></p><p><span style="background-color: black;">In March 2020, several preferred holders wanted to redeem their preferred stock. Luxor delivered a redemption notice to AAMC in late January 2020, saying so much.</span></p><p><span style="background-color: black;">The only problem was that Altisource didn’t have the legally available funds. There were ~$144 million in preferred redemptions to Luxor alone. This was when the company had ~$16.7 million in cash and only $49 million in assets as per its <a href="https://www.sec.gov/Archives/edgar/data/0001555074/000155507420000023/aamc10q3312020.htm">10Q for the period ending on March 31st, 2020</a>. The preferred share agreement clearly states that the preferreds only need to be redeemed in FULL. They refused to pay any preferred holders because AAMC was losing money and only had a fraction of the legally available funds. For quick reference- here is the definition of "legally available funds" from <a href="https://www.lawinsider.com/dictionary/legally-available-funds">Law Insider</a>:</span></p></div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><div><p style="text-align: left;"><span style="background-color: black;"><dfn style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; font-weight: 700; text-align: justify;">Legally Available Funds</dfn><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> </span><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;">means, as of any </span><a href="https://www.lawinsider.com/clause/determination-date" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">determination date</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;">, an amount </span><a href="https://www.lawinsider.com/clause/equal-to" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">equal to</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> the </span><a href="https://www.lawinsider.com/clause/aggregate" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">aggregate</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> gross asset </span><a href="https://www.lawinsider.com/clause/value-of-the-fund" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">value of the Fund</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> as of such date, </span><a href="https://www.lawinsider.com/clause/minus" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">minus</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> the </span><a href="https://www.lawinsider.com/clause/sum" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">sum</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> as of such </span><a href="https://www.lawinsider.com/clause/date-of" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">date of</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> (i) the </span><a href="https://www.lawinsider.com/clause/liabilities-of-the-fund" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">liabilities of the Fund</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;">, and (ii) the amount that would be </span><a href="https://www.lawinsider.com/dictionary/needed" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">needed</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;">, </span><a href="https://www.lawinsider.com/dictionary/if-the-fund" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">if the Fund</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;">were to be </span><a href="https://www.lawinsider.com/dictionary/dissolved" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">dissolved</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> at the time of </span><a href="https://www.lawinsider.com/clause/the-payment" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">the Payment</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;">, to </span><a href="https://www.lawinsider.com/dictionary/satisfy" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">satisfy</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> the preferential rights upon </span><a href="https://www.lawinsider.com/dictionary/dissolution-of" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">dissolution of</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> </span><a href="https://www.lawinsider.com/clause/shareholders" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">shareholders</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> whose preferential rights are </span><a href="https://www.lawinsider.com/clause/superior" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">superior</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> to those </span><a href="https://www.lawinsider.com/clause/receiving" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">receiving</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> such Payment; </span><a href="https://www.lawinsider.com/clause/provided-that" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">provided that</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> </span><a href="https://www.lawinsider.com/clause/no-payment" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">no Payment</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> shall be </span><a href="https://www.lawinsider.com/dictionary/deemed" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">deemed</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> to be made from “Legally Available Funds” if, </span><a href="https://www.lawinsider.com/clause/after-giving" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">after giving</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> </span><a href="https://www.lawinsider.com/clause/effect" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">effect</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> to such Payment, the Fund would be </span><a href="https://www.lawinsider.com/dictionary/unable-to-pay" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">unable to pay</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> its </span><a href="https://www.lawinsider.com/clause/existing" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">existing</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> and </span><a href="https://www.lawinsider.com/clause/reasonably-foreseeable" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">reasonably foreseeable</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> </span><a href="https://www.lawinsider.com/clause/debts" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">debts</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;">, </span><a href="https://www.lawinsider.com/clause/liabilities-and-obligations" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">liabilities and obligations</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;">, whether or not </span><a href="https://www.lawinsider.com/clause/liquidated" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">liquidated</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;">, matured, </span><a href="https://www.lawinsider.com/dictionary/asserted" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">asserted</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;"> or </span><a href="https://www.lawinsider.com/clause/contingent" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">contingent</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;">, as they become due in the </span><a href="https://www.lawinsider.com/dictionary/usual-course-of-business" rel="noopener noreferrer" style="box-sizing: border-box; caret-color: rgb(51, 51, 51); color: #333333; font-family: system-ui; font-size: 15px; text-align: justify; text-decoration: none;" target="_blank">usual course of business</a><span face="system-ui" style="caret-color: rgb(51, 51, 51); color: #333333; font-size: 15px; text-align: justify;">.</span> </span></p></div></blockquote><div><p><span style="background-color: black;">See below for the original complaint from Luxor. You can also access the file <a href="https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=556nyuUifULfv4mfPRyXyg==&system=prod">on the New York Supreme Court site</a>. </span></p><p><span style="background-color: black;"><iframe allow="autoplay" height="480" src="https://drive.google.com/file/d/1ZBi-GwkAKYpX2Td4RRNQHILX7A1im994/preview" width="640"></iframe></span></p><p><span style="background-color: black;"><br /></span></p><p><span style="background-color: black;">Luxor’s boiled-down argument seems that the company should have redeemed PART of the preferred shares.</span></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8LMEGZRoTXh0Ko0vNQlALb5cTilnoJIXKJgzx8uWsQkyeyUNd77CA6CZHqYCut2FAVuzOZeW0YfKgS-TpenNiiJo90VxGt-0pUiNCvsbGj1-3zQJWzdT0pL8JGqK5e3ZHFbzRQ2s20BRw7IrS_QEt8beH1O-myYMft5RJvvFbyYf5SPQs7vm7cC4i/s1008/Screen%20Shot%202022-06-20%20at%209.37.42%20PM.png" style="background-color: black; margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="340" data-original-width="1008" height="216" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8LMEGZRoTXh0Ko0vNQlALb5cTilnoJIXKJgzx8uWsQkyeyUNd77CA6CZHqYCut2FAVuzOZeW0YfKgS-TpenNiiJo90VxGt-0pUiNCvsbGj1-3zQJWzdT0pL8JGqK5e3ZHFbzRQ2s20BRw7IrS_QEt8beH1O-myYMft5RJvvFbyYf5SPQs7vm7cC4i/w640-h216/Screen%20Shot%202022-06-20%20at%209.37.42%20PM.png" width="640" /></a></div><p><span style="background-color: black;">To me, Luxor's argument seems to go directly against the language in the preferred documents. Ironically, the law firm representing Luxor (<a href="https://www.akingump.com/en/">Akin Gump</a>) also drafted the preferred share purchase agreement. I have spoken with several attorneys, who indicated that the document was sloppy, at best.</span></p><p><span style="background-color: black;">Here is the language in the <a href="https://www.sec.gov/Archives/edgar/data/1555074/000155507414000008/ex31seriesapreferred.htm">preferred document</a> from the <a href="https://www.sec.gov/Archives/edgar/data/0001555074/000155507414000008/0001555074-14-000008-index.htm">8K regarding the issuance</a>:</span></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyfqz8ZjPTJ5hOogjNFvYhzFCQeZSRO7VMcZGTwV41OO5Y5tz9c2Q_fAgVAOSvX6TQHbz9xtcjfptcEFuZ7159sf7r_MsfhnWhues3de7a9CAM1Zf6aNZG6cqo6vSO7KSadeFdcdqF7V1VrJmaeAtsEegflmVbQbp4LjjAPrrUc-m5TniOmsJqsyEJ/s1249/Screen%20Shot%202022-06-20%20at%209.44.04%20PM.png" style="background-color: black; margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="113" data-original-width="1249" height="58" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyfqz8ZjPTJ5hOogjNFvYhzFCQeZSRO7VMcZGTwV41OO5Y5tz9c2Q_fAgVAOSvX6TQHbz9xtcjfptcEFuZ7159sf7r_MsfhnWhues3de7a9CAM1Zf6aNZG6cqo6vSO7KSadeFdcdqF7V1VrJmaeAtsEegflmVbQbp4LjjAPrrUc-m5TniOmsJqsyEJ/w640-h58/Screen%20Shot%202022-06-20%20at%209.44.04%20PM.png" width="640" /></a></div><p><span style="background-color: black;">Per the company's 10Q- AAMC is required to pay back the preferred stock holders out of funds legally available and is required to do so in the redemption of all, but not less than all of the issuance (see highlights).</span></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgflRmN1pGdLPU9NqnkODJZFQDcLundS5AXIyUdz3doWulX7QERDlvDZ0l_L4bd_3uPiSacN2NzyaRwZvMi3hPpvvyxIaSUuaxMNHP1QyaS91XHVB7y0hvF04HTMezPIxUuM6Jq-S3FpVg8M1KdIlkTBC9kTFSAl2c0CVfuTH_wQXtxoNvNbukgRI5d/s893/Screen%20Shot%202022-06-20%20at%208.46.26%20PM.png" style="background-color: black; margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="322" data-original-width="893" height="230" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgflRmN1pGdLPU9NqnkODJZFQDcLundS5AXIyUdz3doWulX7QERDlvDZ0l_L4bd_3uPiSacN2NzyaRwZvMi3hPpvvyxIaSUuaxMNHP1QyaS91XHVB7y0hvF04HTMezPIxUuM6Jq-S3FpVg8M1KdIlkTBC9kTFSAl2c0CVfuTH_wQXtxoNvNbukgRI5d/w640-h230/Screen%20Shot%202022-06-20%20at%208.46.26%20PM.png" width="640" /></a></div><p><span style="background-color: black;">As we move on in the trial, it seems that Luxor has stalled and held things up but a recently agreed to <a href="https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=iomswOj1TKx42LRyt2cd3Q==&system=prod">Joint Stipulation And Order</a> that seems to have a Summary Judgement date more "set in stone" as all discovery is not finished. Check out the docket for yourself: As of now, it appears that summary judgment motions will be submitted <a href="https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=w6oQdPoZ4vepl0KDHlE3hA==&system=prod&TSPD_101_R0=08533cd43fab20006eb4be10655f4c0511768e9adaea19a00ee96ec1ee61aed054cfd30c69a61a86084c599952143000beead692c98a269a7aca19f9d8479dff609becf48f92fd9157136ce556cf4324b96676c55740d61be30e3b0b7ea6776a">on or before July 29th</a>, 2022.</span></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjryQUs96ZlzUHhDNeLnfCa-VtJJWyCBkw3BWGGq78wiZL6ROvDGGM1hL4j51_r-1QWFCXbdJoqtkco1T7vAuREE1JwbuWEc0owWX-9rRjA8V84H3lK4W-PUPZJ72oZs32sYMPmylVDg9zg6pNGRlZLsa0QqQA-tys7l2FH0UiFLcs0-L2Wx039CCyd/s1077/Screen%20Shot%202022-06-20%20at%207.31.27%20PM.png" style="background-color: black; margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="958" data-original-width="1077" height="570" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjryQUs96ZlzUHhDNeLnfCa-VtJJWyCBkw3BWGGq78wiZL6ROvDGGM1hL4j51_r-1QWFCXbdJoqtkco1T7vAuREE1JwbuWEc0owWX-9rRjA8V84H3lK4W-PUPZJ72oZs32sYMPmylVDg9zg6pNGRlZLsa0QqQA-tys7l2FH0UiFLcs0-L2Wx039CCyd/w640-h570/Screen%20Shot%202022-06-20%20at%207.31.27%20PM.png" width="640" /></a></div><p><span style="background-color: black;">It seems customary for legal spats such as the one that Luxor and AAMC are in to settle right before they go to trial. Though, the allegations of breach of fiduciary duty and potentially trading of securities involved trading while possessing what seems to be material non-public information... That revelation seems that it could change the arithmetic of the case and cause a settlement before summary judgment arguments are submitted. If I was Mr. Redleaf or Luxor, I would very much so want this to be out of the public eye. The incriminating evidence seems to originate from emails found in discovery and can be part of the summary judgment arguments by AAMC. A settlement in the next month would help keep Luxor from getting some serious egg on its face. But who really knows- it seems that Luxor's preferred shares of AAMC are being <a href="https://www.reuters.com/article/us-hedgefunds-luxor-exclusive/exclusive-hedge-fund-luxor-capital-alters-terms-of-withdrawal-plan-idUSKCN0WU1SH">held in a special purpose vehicle</a>... so we will see.</span></p><p><span style="background-color: black;">_______</span></p><p><b><u style="background-color: black;">Moving on to the business side of things.</u></b></p><p><span style="background-color: black;">This <a href="https://ir.altisourceamc.com/static-files/f83cb4d5-2eae-4515-8027-e8d8ae14e5b7">Investor Presentation</a> (see PDF below) was also beneficial for the company is laying out its vision for the future. </span></p></div><span style="background-color: black;"><iframe allow="autoplay" height="480" src="https://drive.google.com/file/d/1LfhKv-UgpwlqJtHazf94GpwD1NdGFeFQ/preview" width="640"></iframe></span><div><span style="background-color: black;"><br /></span></div><div><span style="background-color: black;"><br /></span></div><div><p><span style="background-color: black;">In terms of action Altisource has taken, we can see the following on the operations side: the mortgage lending business seems to be humming along- <a href="https://www.sec.gov/Archives/edgar/data/0001555074/000155507422000034/ex991aamctkmdeparture51920.htm">more commitments, more loans under evaluation, and the company also recently hired a new head of sales</a>. This should help them originate and sell high-yielding loans, which will generate more income for the company than just investing for yield with the loans that AAMC chooses to keep on their books. Another item that I found interesting is that the company can utilize its staff already employed in India for the mortgage business. While the new sales hires and such will affect margins, expenses for the new business won't seem as bad as they could have, given that the company was already employing some workforce. </span></p><p><span style="background-color: black;">Highlights that I found to be highlights of the presentation:</span></p></div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><div><p><span style="background-color: black;"><span style="font-family: "Montserrat,Bold";">-Secure </span><span style="font-family: Montserrat;">Lines of Credit to leverage the initial capital commitment of up to $40 million<u><i> to create origination/purchase capacity of $100+ million</i></u>.</span></span></p></div><div><p><span style="background-color: black; font-family: Montserrat;">-ROE for the Alternative Lending Origination Platform after 120 days: Target 30%+</span></p></div><div><p><span style="background-color: black; font-family: Montserrat;">-ROE for Assets held on balance sheet: Target 12-15%</span></p></div><div><p><span style="background-color: black; font-family: Montserrat;">-An origination team is expected to be in place within 60-90 days and shortly thereafter it is assumed that loan origination volume will exceed $50 million a month</span></p></div></blockquote><div><p><span style="background-color: black;">Please note that the company is trading substantially BELOW boot value (less than 50% in my estimate), so these returns will essentially be doubled concerning the company's current market cap.</span></p><p><b><u style="background-color: black;">Back of the envelope workout value, based on the numbers of their last 10Q:</u></b></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimy3Rao75OAhGti7Q9zGYJAduOabhNya8hwOWIhNZuTEBJbFF1kydsz5ogkNzL2SN_DdKs5_XGHGxFX0mLKso6Kp6qSQ9QyXztyI-ZTeY958zVOHSNatVRLM1vHGHKdKdg96YegWi9MS5boqrrwoy_KRVhl_7HbZLUes69o-2_p2o73ohJ6EB3fXeW/s1242/Screen%20Shot%202022-06-20%20at%207.55.07%20PM.png" style="background-color: black; margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="938" data-original-width="1242" height="483" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimy3Rao75OAhGti7Q9zGYJAduOabhNya8hwOWIhNZuTEBJbFF1kydsz5ogkNzL2SN_DdKs5_XGHGxFX0mLKso6Kp6qSQ9QyXztyI-ZTeY958zVOHSNatVRLM1vHGHKdKdg96YegWi9MS5boqrrwoy_KRVhl_7HbZLUes69o-2_p2o73ohJ6EB3fXeW/w664-h483/Screen%20Shot%202022-06-20%20at%207.55.07%20PM.png" width="664" /></a></div><p><span style="background-color: black;">YES... I know that I rounded; I know that there will be future litigation expenses; I know there will be SG&A; I know they could settle with Luxor for MORE than 11.5 cents on the dollar or not at all; I know that AAMC could even issue stock to Luxor as part of a settlement; I know they have acquired loans that are bearing interest... However, I will assume that the interim interest from the loans will make the company break even in the quarter and that going forward, the return metrics will start to look pretty decent. After all, with this "adjusted" book value of $25.53/share, with the share price currently at $10.50/share and a market cap of $21.64 million- <u><i>it doesn't take a whole lot of loan origination and sales to make this thing really hum when they think they can get loan originations to over $100 million.</i></u> </span></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCD8hc9d81qXTOuiLfJkROFKRxZceoqe5egx_jOJVYFkw7yiYMVGl7MqR4274Tr1qyz3wHsOiRoW3K9JoGrNGErjvnE-g5HD37qF11u59AAeMz7W6G0NZ6kARRpP54ajGGAb8pyH8atsaF3DF7fm98J4d9czY0qXhpT9iZ7AvLfEK4NeqrYK10OjDA/s697/Screen%20Shot%202022-06-20%20at%208.10.53%20PM.png" style="background-color: black; margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="552" data-original-width="697" height="506" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCD8hc9d81qXTOuiLfJkROFKRxZceoqe5egx_jOJVYFkw7yiYMVGl7MqR4274Tr1qyz3wHsOiRoW3K9JoGrNGErjvnE-g5HD37qF11u59AAeMz7W6G0NZ6kARRpP54ajGGAb8pyH8atsaF3DF7fm98J4d9czY0qXhpT9iZ7AvLfEK4NeqrYK10OjDA/w640-h506/Screen%20Shot%202022-06-20%20at%208.10.53%20PM.png" width="640" /></a></div><p><span style="background-color: black;">I think that the fundamental uniqueness of the alternative lending business will shine in the interest rate environment that the country seems to be entering. When numerous lending institutions make loans harder to get as they begin to fear a recession, lenders generally just deny loans rather than increase the loan's interest rate to reduce demand for their product (<a href="https://www.forbes.com/sites/sergeiklebnikov/2022/04/13/jpmorgan-boosts-credit-reserves-as-profits-tank-jamie-dimon-warns-about-significant-challenges-ahead/?sh=216def547f31">here</a>, <a href="https://www.usnews.com/news/business/articles/2022-04-14/big-bank-profits-decline-as-deal-making-mortgages-slow">here</a>, and <a href="https://www.americanbanker.com/news/refi-slowdown-means-no-more-lazy-mode-for-mortgage-lenders">here</a>). That is the situation in which a company like Altisource can come in and provide loans to real estate investors and the like at double-digit interest rates for a spectacular return. What will be really interesting is if the company can raise capital in a way similar to Manhattan Bridge Capital or Sachem Capital. My bet is that the answer will be "yes." AAMC already has a more impressive balance sheet than <a href="https://manhattanbridgecapital.com/press-article.php?press=279/manhattan-bridge-capital-inc-reports-first-quarter-2022-results">Manhattan Bridge Capital</a> ($LOAN), and Sachem Capital has grown its balance sheet with the issuance of more than a <a href="https://www.sachemcapitalcorp.com/news-media/press-releases/detail/101/sachem-capital-corp-announces-closing-of-public-offering">handful of "baby bond" offerings</a>. Sachem has even <a href="https://www.sachemcapitalcorp.com/news-media/press-releases/detail/103/sachem-capital-corp-announces-sale-of-an-additional-2-5">made issuances for OVER allotments</a>! I see no reason why $AAMC will be unable to do this. </span></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRI1e1LXOWvZPJMMBilzx10xvj2V49zlzrD_pmHLYwoJVYofMofVDdhus5QbPzDB68tKtVly4-OYQ2I6j9VklbcjiJdqDAqrM-ueLqCETFcPWV_nIpbthwTitEEOm8K4YqGpV4rkARyMQhC7kIEeVEmBp9FDzUgefiSHT8fV8rHKydAG6ZBEEUnuEy/s1240/Screen%20Shot%202022-06-20%20at%208.35.38%20PM.png" style="background-color: black; margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="612" data-original-width="1240" height="316" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRI1e1LXOWvZPJMMBilzx10xvj2V49zlzrD_pmHLYwoJVYofMofVDdhus5QbPzDB68tKtVly4-OYQ2I6j9VklbcjiJdqDAqrM-ueLqCETFcPWV_nIpbthwTitEEOm8K4YqGpV4rkARyMQhC7kIEeVEmBp9FDzUgefiSHT8fV8rHKydAG6ZBEEUnuEy/w640-h316/Screen%20Shot%202022-06-20%20at%208.35.38%20PM.png" width="640" /></a></div><p><b><u style="background-color: black;"><br /></u></b></p><p><span style="background-color: black;"><b><u>In the meantime... </u></b>We wait. I certainly like the dynamics of a cash box that is turning into a lending entity. This has exciting dynamics given the current rate environment and even has the potential to offer returns that are not correlated to the broader market. </span></p><p><span style="background-color: black;">Sure, there is the risk associated with the lawsuit- however, I do not see how this would take the company to zero given the wording of the documents- "legally available funds" is pretty straightforward, and I feel comfortable investing in this. I generally think that there will be a settlement with Luxor in the next month before Summary Judgement arguments are due or in the month before oral arguments are heard by a judge on December 1, 2022.</span></p><p><u style="background-color: black;">EVEN IF the Luxor lawsuit ends up not getting resolved, Altisource will be able to lend more funds out and continue <b>growing</b> the business while the <i><b>preferred stock receives a 0% yield until 2044.</b></i> Given that the market is absolutely <i>freaking</i> out about interest rates- I can think of many less bad things than having a <i>0% fixed loan for the next 2 decades..</i>.</u></p><p></p><p><span style="background-color: black;">Disclosure: I own shares of AAMC.</span></p></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8100616554240982358.post-60059950882986405262021-07-15T11:51:00.007-07:002021-07-15T13:27:31.956-07:00Currency Exchange International ($CXI/$CURN): Mis-Priced Covid Recovery Play<p><span style="font-size: 18px;">Every once and a while I like to put up guest posts on Ragnar (<a href="http://ragnarisapirate.blogspot.com/2021/01/pmd-psychemedics-corp-trucking-along.html">see this awesome one on $PMD</a>). As such, here is a post from one of my favorite people: <a href="https://twitter.com/chrisolin?s=21">Chris Olin</a>. He is one of the handful of people who helped keep me sane during COVID. </span><span style="font-size: 18px;">We are both long the stock, and think that it is a really good price, for the flows of cash that should be coming. :)</span></p><p><span style="font-family: "Times New Roman"; font-size: 12px;"><br /></span></p><p><span style="font-family: "Times New Roman"; font-size: 12px;">Ticker: OTC: CURN; TSX: CXI</span></p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Market cap: $65M<span style="font-family: Helvetica; font-size: 11px;"> [1]</span></p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Net Cash: $53M</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Enterprise Value: $12M</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Last Share Price: $10.20</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Currency Exchange International (“CXI”) is a fast-growing, unlevered reopening play whose main business was laid low by covid. After reducing its cost structure and taking share from competitors that have shut down operations, the company is poised to benefit from a recovery in international travel and a return to double-digit revenue growth. Valued at less than 9x FY2023 earnings, the stock has 130%-250% upside from here.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;"><span style="text-decoration: underline;">Business Overview</span></p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">CXI operates in the US and Canada and is organized into two segments: ~85% of revenues are derived from physical banknote exchange and the remainder are from facilitating international payments. Geographically, ~80% of revenues are from the US and ~20% are from Canada.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">The banknotes business physically exchanges foreign currencies for both retail clients (at high margins) and for wholesale bank/corporate clients (at low margins). This business was hit very hard by covid as it is heavily dependent on international travel. Covid-related revenue declines aside, this is a decent business with few competitors, from which CXI has been taking share for many years, growing revenues by ~10% per annum pre-covid<span style="font-family: Helvetica; font-size: 11px;"> [2]</span>.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">The company’s main competitors in the wholesale business are large banks which enjoy the majority of the industry’s market share. However, smaller banks often prefer working with CXI because they don’t always feel comfortable securing their foreign currency from a direct competitor and most also don’t want to rely on a single vendor. The wholesale industry also largely competes on service, rather than price. CXI has an advantage here with smaller customers who are often not worth the larger wholesalers’ time.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Over the last decade or so, several wholesale bank competitors (e.g., HSBC, Bank of Ireland) have left the industry, largely because the small size of the revenues compared to those of their core banking businesses doesn’t justify the regulatory headaches. CXI’s main non-bank competitor, Travelex, also completely exited the North American market last year, partly due to covid and partly due to financial problems that pre-date covid. Despite the loss of competitors and CXI’s market share growth, the company is still a distant #2 (in Canada) or #3 (in the US) and has a lot of room to grow once transaction volumes return.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;"> <span face="TimesNewRomanPS-BoldMT" style="font-weight: bold; text-decoration: underline;">Market Share Development</span></p>
<p style="font-family: Helvetica; font-size: 11px; font-stretch: normal; line-height: normal; margin: 0px;"><br /></p><p style="font-family: Helvetica; font-size: 11px; font-stretch: normal; line-height: normal; margin: 0px;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBnDaR2CYYkB-hdLxAVMx_QNPCvI8ePQHR-L1zkF6zEgvrVp75P_nRdNQgGHI34em0eg6wS65aPBFsBI9Gg0xiUrWYkBgBxXg_1LqKSFrsbm1tKguh2KefA7m_r29YT5HKayN-l_rUAeE/s986/1F527B0C-0FBF-4740-AE6D-435385CA8150.jpeg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="470" data-original-width="986" height="306" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBnDaR2CYYkB-hdLxAVMx_QNPCvI8ePQHR-L1zkF6zEgvrVp75P_nRdNQgGHI34em0eg6wS65aPBFsBI9Gg0xiUrWYkBgBxXg_1LqKSFrsbm1tKguh2KefA7m_r29YT5HKayN-l_rUAeE/w640-h306/1F527B0C-0FBF-4740-AE6D-435385CA8150.jpeg" width="640" /></a></div><br /><span style="font-family: "Times New Roman"; font-size: 12px;"><br /></span><p></p><p style="font-family: Helvetica; font-size: 11px; font-stretch: normal; line-height: normal; margin: 0px;"><span style="font-family: "Times New Roman"; font-size: 12px;"><br /></span></p><p style="font-family: Helvetica; font-size: 11px; font-stretch: normal; line-height: normal; margin: 0px;"><span style="font-family: "Times New Roman"; font-size: 12px;">Source: Currency Exchange International.</span></p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Fortunately, the other business segment, international payments, has been unaffected by covid and continued its very rapid growth trajectory with revenues increasing by 29% in 2020 and 97% YoY in H1 2021. This segment was started from zero a few years ago and has quickly grown to become ~15% of the company’s revenues. Not all of this growth has been organic, as the company acquired a small Canadian payments business at the end of fiscal Q3 2020, but historical organic growth rates have been in excess of 25% and it is likely that this segment can continue to grow at ~20% per year for at least the next couples of years.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">In the US, payments clients are primarily mid- and small-sized banks that don’t process enough international transactions to justify the costs of an in-house solution. The company also processes transactions for small non-bank clients in Canada that want a high-touch experience and don’t transact large enough volumes for the big banks to provide the desired service levels.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Compared to other non-bank fintech solutions, CXI is also a more attractive option for banks especially since the company is a regulated financial institution itself<span style="font-family: Helvetica; font-size: 11px;"> [3]</span> and management has a long track record in the industry. CXI therefore offers its clients’ compliance departments peace of mind as well as cost savings. As in banknotes, a similar dynamic is at play in this segment as banks often prefer to work with CXI instead of outsourcing their payments business to a large commercial bank competitor. There is a lot of room for expansion in this segment and double-digit growth should be possible for quite some time.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;"><span style="text-decoration: underline;">Response to the Pandemic</span></p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">As the banknote business sharply declined last spring, Management reacted quickly to cut costs by closing marginal retail stores, renegotiating rents, automating tasks (e.g., installing money-counting machines), combining overlapping roles, cutting salaries, etc., ultimately reducing operating expenses by about $2.5M per quarter as of the first half of FY2021.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">A chunk of this reduction was due to variable costs and others that will increase again as the company gets back to historical revenue levels. However, it is likely that a return to FY2019’s $42M revenue level would be accompanied by at least a $1.75M-$2M permanent annual reduction in costs. That is quite significant given that the company only earned $3M in FY2019.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">CXI has not only been playing defense, however. Since the pandemic began, the company has been aggressively signing new wholesale banknote clients onto their platform. Most of these were formerly Travelex customers and some were even referred to CXI by recent Travelex employees.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">On the retail side, the company has expanded into locations that Travelex vacated using its agent model, where third-party retailers (e.g., Duty Free Shops) take banknotes for sale on consignment and share the economics with CXI. This has allowed the company to pick up some premier, high-volume airport locations that will likely be among the first to return to pre-covid volumes.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Management has also been winning new banknote business from foreign banks that need to source US dollars. This is a somewhat nascent business for the company, but it has the potential to become very big over time, potentially bigger than the legacy banknote segment.</p>
<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">While volumes from all these new clients and locations are currently small, the upside is that the base banknote business will be at least 15-20% larger than it was pre-pandemic once industry transaction volumes normalize. Furthermore, the company has also managed to raise prices on banknote transactions due to the reduction in competition.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">As previously discussed, the payments business was unaffected by covid and grew 74% from the first quarter of FY2020 through H1 FY2021. Despite the difficulties in the larger banknote business, management continued to take steps to maintain the payment segment’s rapid growth, investing in additional salespeople and integrating the company’s offerings into additional banking software platforms (e.g., Jack Henry, Finestra, and Fiserv) that provide easy access to more potential clients.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;"><span style="text-decoration: underline;">Future Financials</span></p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">CXI has very little debt and a sizeable net cash position of over $50M. Yes, some of this is inventory, but ~$25M is operating cash. The minimal debt that the company has is comprised of a couple revolvers that are used for working capital. Management has reduced the cash burn to $1-$2M per quarter, so the company can withstand a protracted period of reduced banknote transaction volumes if necessary.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">However, the ongoing covid vaccine deployment, especially in North America and Europe, makes it likely we won’t have to wait too long for the company to return to profitability. 2022 will likely be close to a normal year and we are likely to see a full recovery in revenues by 2023.</p>
<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Given the changes in the business in the last year or so, what might the company’s financials look like once industry banknote transaction volumes have returned to pre-covid levels? Perhaps the simplest method is to start with FY2019’s results as a baseline and add in cost savings and incremental growth from there.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">In FY2019, the company enjoyed peak revenue of about $42M and $6.2M of EBITDA. The permanent covid cost reductions translate into $1.3-$1.5M of additional after-tax earnings<span style="font-family: Helvetica; font-size: 11px;"> [4]</span>, such that pro-forma “recovered” earnings start at $4.5M-$4.7M, all other things being equal. Yet we know that wholesale clients on the platform are up 15-20% over the last year and CXI is well positioned to capture much of the retail share formerly held by Travelex.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">If transaction volumes are also up 15-20% over FY2019’s peak numbers in a normalized environment, then CXI should conservatively increase earnings on that additional volume by 15-20%. Banknote revenue was $39.1M in FY2019, so revenue from this segment might be $45M-$47M if the industry were fully recovered today. Add in a little more growth since the business will likely not be fully recovered for another year or so and we are likely looking at $53M-$56M of banknotes revenue in FY2023. Using the 11-11.5% profit margin implied by the new cost structure, the company is likely to earn an additional $1.5M-$2M in after-tax earnings from this growth. This assumes no operating leverage, but of course there will likely be some. <span style="font-family: Helvetica; font-size: 11px;">[5]</span></p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">That’s also just on the banknotes side. The payments business could easily be bringing an additional ~$7M of revenue over FY2019’s levels by FY2023. Several payments salespeople and support staff have been hired so far this year, so some, but not all, of the additional SG&A required to support this growth is already baked into our pro-forma baseline “recovered earnings<span style="font-family: Helvetica; font-size: 11px;"> [6]</span>” number. Taking this nuance into account, a conservative analysis might indicate that this growth would add ~$2.5M in after-tax income over the next 2.5 years.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Adding it all up, the company is likely to earn $8.5M-$9M in FY2023, which compares very favorably to a ~$73M fully diluted market cap, especially for a company with a strong balance sheet that is experiencing double digit top-line growth.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;"><span face="TimesNewRomanPS-BoldMT" style="font-weight: bold;"> </span><span face="TimesNewRomanPS-BoldMT" style="font-weight: bold; text-decoration: underline;">FY 2023 Earnings Waterfall</span></p>
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<p style="font-family: Helvetica; font-size: 11px; font-stretch: normal; line-height: normal; margin: 0px;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3bOJUbU6oLkGFJJdXcWU6CaU_AoEU6cbCuje6R8fLYTtqq3ReelfZOglEhuGJje9n_k21d-7HHspFukMzODqbl_XaFwumtXu37CrbP5e_hCa0k9sY4Wt9Hfz6vYIP76FE0BKlNcEZgYs/s689/D32DD7D9-DC1E-4B84-90BC-EEB154C625AC.jpeg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="395" data-original-width="689" height="366" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3bOJUbU6oLkGFJJdXcWU6CaU_AoEU6cbCuje6R8fLYTtqq3ReelfZOglEhuGJje9n_k21d-7HHspFukMzODqbl_XaFwumtXu37CrbP5e_hCa0k9sY4Wt9Hfz6vYIP76FE0BKlNcEZgYs/w640-h366/D32DD7D9-DC1E-4B84-90BC-EEB154C625AC.jpeg" width="640" /></a></div><br /><span style="font-family: "Times New Roman"; font-size: 12px;"><br /></span><p></p><p style="font-family: Helvetica; font-size: 11px; font-stretch: normal; line-height: normal; margin: 0px;"><span style="font-family: "Times New Roman"; font-size: 12px;"><br /></span></p><p style="font-family: Helvetica; font-size: 11px; font-stretch: normal; line-height: normal; margin: 0px;"><span style="font-family: "Times New Roman"; font-size: 12px;">Source: Author; Currency Exchange International</span></p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Prior to covid, the company frequently sported an earnings multiple of over 30x. Given the company’s relatively small market share in each of its segments, its attractive historical growth rates, and lack of net debt, a return to that valuation level doesn’t seem unreasonable. On my estimate of FY2023 earnings, a 30x multiple implies a market cap of at least $255M or ~$35 per share, nearly a ~250% return from here. A more conservative 20x multiple still values the company at ~$24 per share, providing a ~130% return.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;"><span style="text-decoration: underline;">Risks</span></p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">In the short-term the obvious main risk is around international travel in North America. If such travel comes back very slowly, that would definitely be a negative for CXI. However, with the vast majority of Canadians and Americans vaccinated, I think it will be a hard sell to continue to place restrictions on travel.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">There is also a risk that regulatory costs continue to be a drag on the payments business. Management was surprised a couple years ago when Canadian regulators kept asking for additional processes that required expensive employees to be hired. This “start-up” phase of the payments business went on far too long and there was clearly a learning curve for the company that needed to be overcome. You can look back and see how investors were also surprised and punished the stock. While revenues continued to grow quickly during this period, earnings stagnated due to the fixed costs required by the new payments segment.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">That being said, the company is quite confident now that they have the right systems, processes, and personnel in place to satisfy regulatory requirements and that there will not be large future increases in expenses in the payments business, or at least not any that are not tied to increasing revenue. Management has been wrong on this before, but we did not see any big increases in FY2020 or so far in FY2021, so I think the team probably has it right this time.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Looking out over a longer horizon, cash is losing market share in developed countries. The previous trend was steady and slow, but covid has accelerated it. Whether covid-related reductions in use of cash persist is an open question. That CXI has already started to see recoveries in volume with the limited international travel occurring is a good sign. The company has also been so effective at gaining banknotes market share that, while a reduction in the overall pie wouldn’t be ideal, it might not be so bad for CXI. This is probably the most significant risk to the thesis, however.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Central banks are also talking about and, in some cases, experimenting with digital bearer cash that is transferred via blockchain technology. This is a near-existential risk for the banknotes business, but Western central bank efforts are in still in the nascent exploration phase and it will take many years for any digital cash system to be implemented. There are many regulatory and privacy hurdles to overcome for digital cash to be successful and there is a good argument that any such system will be unworkable, at least in the US.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;"><span style="text-decoration: underline;">Conclusion</span></p>
<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">When the banknotes business recovers, the company will look quite attractive: double-digit pre-pandemic growth rates, a streamlined cost structure, minimal required capital expenditures, and reduced competition, all for less than 9x FY2023 earnings.</p>
<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;">Regardless of when international tourists start coming back in significant numbers to North America (or more importantly, when the market starts pricing their return in), CXI will be poised to benefit with its larger client base. The company has plenty of liquidity, no net debt, and will have no problems waiting.</p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px;"><span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0);">___________________________</span></p>
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<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px 0px 5px;"><span style="font-family: Helvetica; font-size: 10px;"> [1]</span> All figures herein are in USD.</p>
<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px 0px 5px;"><span style="font-family: Helvetica; font-size: 10px;"> [2]</span> Note that banknotes revenue growth can be volatile, depending on whether any high margin “exotic” currencies are popular in a given year. This was the case in FY2018 when Iraq dinars and Vietnamese dong suddenly came into vogue, adding $1.65M in revenue that was not repeated in FY2019. Top-line growth in FY2019 therefore appears anemic if you don’t make any adjustments.</p>
<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px 0px 5px;"><span style="font-family: Helvetica; font-size: 10px;"> [3]</span> In Canada, the company runs its business through a regulated bank. While the US subsidiary is not a bank, the company and its management have decades of experience complying with AML and other relevant regulations, something that start-up fintech companies cannot claim.</p>
<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px 0px 5px;"><span style="font-family: Helvetica; font-size: 10px;"> [4]</span> 26.5% tax rate.</p>
<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px 0px 5px;"><span style="font-family: Helvetica; font-size: 10px;"> [5]</span> I’ve also glossed over the fact that banknotes revenue and payments revenue likely have different contribution margins, but payments was small enough in 2019 that I think this math still gets us conservatively in the right direction.</p>
<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px 0px 5px;"><span style="font-family: Helvetica; font-size: 10px;"> [6]</span> This additional payments SG&A is included in H1 FY2021’s results, which is our comparator for determining how much cost was taking out of the business vs. FY2019.</p>
<p style="font-family: "Times New Roman"; font-size: 12px; font-stretch: normal; line-height: normal; margin: 0px; min-height: 13.8px;"><br /></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8100616554240982358.post-72374818079342846082021-02-24T16:48:00.001-08:002021-02-24T16:48:25.512-08:00Thryv Warrants and Thryv Stock- A Value Creating Positive Feedback Loop<p>Please reference the Thryv post<a href="https://ragnarisapirate.blogspot.com/2021/01/thryv-thry.html"> on RagnarIsAPirate</a>, which can somewhat catch you up on the situation at my favorite company. Also, a notable update is the <a href="https://www.globenewswire.com/news-release/2021/01/06/2154110/0/en/Thryv-Inc-to-expand-international-footprint-with-intent-to-acquire-Australia-s-Sensis-Holdings.html">Sensis acquisition</a>, and <a href="https://twitter.com/ragnarisapirate/status/1356256296522174469?s=20">debt refinance</a>... Thryv has been busy!</p><p>Sure, THRY has had a slight lag in growth, but that is reaccelerating, and the company is projecting that it will have over 200,000 subscribers to its SaaS business in the medium term (<a href="https://s25.q4cdn.com/929024644/files/doc_downloads/2020/09/Thryv-Investor-Day-2020-Full-Transcript.pdf">from here</a>). That represents a more than 400% growth in SaaS subscribers in the coming years!</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEig_aqxMnLHf32lCaAlk2hCXXhKmoyAE0Pw5DIjpxY7dVlIWWagas53FiZP-9LxA6iKGZts2w0zXEcxxXOojTP7u6kcfNE0dcP74Tzwy4eIU5qjx2jlegTM0ZCA9QY58glW6Dnt4cV0Hco/s3462/Screen+Shot+2021-02-15+at+8.26.29+PM.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="642" data-original-width="3462" height="118" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEig_aqxMnLHf32lCaAlk2hCXXhKmoyAE0Pw5DIjpxY7dVlIWWagas53FiZP-9LxA6iKGZts2w0zXEcxxXOojTP7u6kcfNE0dcP74Tzwy4eIU5qjx2jlegTM0ZCA9QY58glW6Dnt4cV0Hco/w640-h118/Screen+Shot+2021-02-15+at+8.26.29+PM.png" width="640" /></a></div><p><u><i>And while that is a HUGE deal...</i></u> I want to talk about something else- Thryv Warrants and what they mean for the common stock. Because these warrants exist, I believe the company will be able to pay off its debt much sooner than is presently appreciated by the market. While there is not a ready market for the warrants, I have been actively buying them in private transactions. Yes, this post is technically about the warrants, but try not to focus on them as the overarching theme of this post. I am long shares of THRY, and think that these warrants <u><i>give <b>the stock</b> some compelling upside AND downside protection.</i></u> In fact, I think that the presence of the warrants give the stock some “icing on the cake” so to speak. 🎂🍰🧁</p><p>________</p><p>As you can see below in the company's <a href="https://www.sec.gov/Archives/edgar/data/1556739/000114036120019569/nt10007762x12_s1.htm">S1 filing</a>, Thryv has roughly 10.6 million warrants outstanding, which will convert to ~5.8 million shares of common stock. Currently, there are a hair more than 31 million shares outstanding, per the company's <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/1556739/000162828020016327/dxm-20200930.htm">most recent 10Q</a>. Normally, seeing that a company is facing dilution of ~18% from warrants is reason for pause. Let me explain why it is not.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgr9uMdm_1SZa03Plv_82wWEEB5coDeTLGdxqZ5hIh_15c3xVg-o6g2xmGlET5DZfEvvLoYLrwfA5vnsbJ23_XRQ_iTDAVd7bTtACRWyZy4vo8958RdWyzFgm83PHFSf0aHVRMeP7x9BuA/s945/Screen+Shot+2021-02-11+at+6.20.12+PM.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="265" data-original-width="945" height="180" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgr9uMdm_1SZa03Plv_82wWEEB5coDeTLGdxqZ5hIh_15c3xVg-o6g2xmGlET5DZfEvvLoYLrwfA5vnsbJ23_XRQ_iTDAVd7bTtACRWyZy4vo8958RdWyzFgm83PHFSf0aHVRMeP7x9BuA/w640-h180/Screen+Shot+2021-02-11+at+6.20.12+PM.png" width="640" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8WGDPYyjTCn2rc6EV22hD0VorTOXx89YoTXnWczbLg5qPew3EmSKq_L46u9Vl0Tocf0n4D6ApFZQFKdJ7CZLu3ueU9SbDS4yQ8LJ8wQnFikmxzhtaX0t3zwjYkdMBYd319Dc3aEEJ0zc/s969/Screen+Shot+2021-02-11+at+6.22.00+PM.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="448" data-original-width="969" height="296" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8WGDPYyjTCn2rc6EV22hD0VorTOXx89YoTXnWczbLg5qPew3EmSKq_L46u9Vl0Tocf0n4D6ApFZQFKdJ7CZLu3ueU9SbDS4yQ8LJ8wQnFikmxzhtaX0t3zwjYkdMBYd319Dc3aEEJ0zc/w640-h296/Screen+Shot+2021-02-11+at+6.22.00+PM.png" width="640" /></a></div><div><br /></div>Thryv’s legacy business (the Yellow Pages) is a melting iceberg, and is loaded up with debt. It seems that people who are not comfortable with the company's financials always gravitate to the debt load. The risk of the company not being conservative enough in correctly projecting the revenue decline of the Yellow Pages business is simply too much for them. As this relates to the warrants, I think that the dilution and concurrent cash infusion into the company effectively eliminates the risk of the debt blowing up the company, and will actually help the company make more acquisitions, as well as fund growth. Here is why.<div><br /></div><div><u><i><b>The warrants, if exercised, will bring in A LOT of money into the coffers of the company. The math here is simple... If the stock trades for more than $24.39 between now, and August 15th, 2023 (2.5 years out!) and all of the 5.8 million warrants get exercised, that will bring in, in excess of $141 million dollars to the company coffers. Put another way, that is ~1/5 of the total debt that the company currently has. </b></i></u></div><div><br /></div><div><br /></div><div>Per a recent <a href="https://twitter.com/ragnarisapirate/status/1356256296522174469?s=20">Bloomberg release</a>, related to THRY’s debt offering, the company is in the process of raising $700 million in debt. The goal is to refinance their current debt and to fund the acquisition of <a href="https://www.globenewswire.com/news-release/2021/01/06/2154110/0/en/Thryv-Inc-to-expand-international-footprint-with-intent-to-acquire-Australia-s-Sensis-Holdings.html">Sensis</a>. It seems that the deal has been priced (again, per a Bloomberg news story), and is ready to go... Sure, the interest rate for the debt is high, but the company is cash flowing more than enough to cover the debt and principle payments. Additionally, this lets the company get a REALLY compelling deal done, as I will highlight below. Just think what the company could do, if these warrants exercise, and they use the cash to pay off debt! $100 million in cash would save the company $8.5mm a year in interest- and the next year, $9.22mm- and the next year, another $10mm... that’s pretty compelling, on top of paying down principle!</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitzChaIbY4YUFTZFhBlYDST6hfrGtC9ipNAfH_HmDSJKul7KZBgQCsVjuw4CaTyh9eu06K-e-6XYLbGANuZmp7imt9gBkDZP1heOpAk3vx9rt-R8OqSm1F0cLvy6goHIGUI6nR4VT7Wtc/s2006/5769FD1C-0E16-41AF-B596-78F69A1FDDF8.jpeg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="2006" data-original-width="1284" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitzChaIbY4YUFTZFhBlYDST6hfrGtC9ipNAfH_HmDSJKul7KZBgQCsVjuw4CaTyh9eu06K-e-6XYLbGANuZmp7imt9gBkDZP1heOpAk3vx9rt-R8OqSm1F0cLvy6goHIGUI6nR4VT7Wtc/w410-h640/5769FD1C-0E16-41AF-B596-78F69A1FDDF8.jpeg" width="410" /></a></div><br /><div><br /></div><div><br /></div><div>Aside from the savings on their debt- the BIG idea here, is that Sensis is a business that will help Thryv recruit paying customers to its SaaS business. The company has stated that when they began rolling out Thryv software to its Yellow Page customers, they had roughly 10% of them sign up for the SaaS offering. Sensis has about 130K customers, so, that would indicate roughly 13,000 new SaaS customers. Frankly, I would be all about them doing the acquisition JUST for the customers.</div><div><br /></div><div>It’s a bold statement to make, but I do so, because this is a very interesting customer acquisition strategy- not only do they have experience doing this sort of customer conversion, but, they can bring value to a Yellow Pages style business that almost no one else can because of the Saas business they offer. Hypothetically, lets say that you assign no value to the cash flows of Sensis (hint- there will be cash flows), and allocate 100% of the $195mm purchase price to the 13,000 Thryv SaaS customers that the company hopes to gain. That’s ~$15,000 per user. The average Thryv user spends about $293/month or $3,500 annually- meaning that the acquisition cost per customer under some pretty conservative assumptions (ie they don’t grow their ARPU via ThryvPay or other offerings) is ~4.2x revenue. Thryv seems to be (per its presentations) at the critical mass where incremental increases in revenue have a huge impact to earnings and cash flow- so this acquisition has the potential to really bulk up the company. After all- another 13,000 customers would grow the current customer count by nearly 30%!</div><div><br /></div><div>Keep in mind, this is happening in an environment when SaaS businesses trade for double digit multiples of revenue... And, I will admit that Sensis probably has fewer customers now, than it did last year from the melting iceberg effect- but the math still roughly works for whatever level of conversion and customers you want to assign. </div><div><br /></div><div>Because of the company being able to do deals like this, and provide value in ways that others cannot- I believe that Thryv will at some point make a play for other Yellow Pages companies. Specifically, I think that they will make a play for Yellow Pages Canada once Y.TO <a href="https://finance.yahoo.com/news/public-notice-removal-moveable-dam-180000697.html">pays off the remainder of their debt in the coming months</a>. Yellow Pages Canada has already begun declaring dividends- which seems to be a way of prepping the company for a sale this coming summer or fall. </div><div><br /></div><div>One last thing: let's take a minute to look at the incentives of the company, via a screen shot below of the recently repriced executive stock options. I have talked about the repricing of the executive stock options before, so, I will not get into the logic of the reprice in this write up.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgr_cTcQFXxkyXDHx8w03L0oBJMyXDlEDxq8y9W_iqGGNqbAuW3xZGgDVgxvj_k1sa95Ns9SjUCogb7cl7jD6DXkRYm08usFCERnja_xbR-jjPGnCx1hFYHv8HCxLIP9LF86yllTeLkQTU/s1056/Screen+Shot+2021-02-11+at+6.36.12+PM.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="100" data-original-width="1056" height="60" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgr_cTcQFXxkyXDHx8w03L0oBJMyXDlEDxq8y9W_iqGGNqbAuW3xZGgDVgxvj_k1sa95Ns9SjUCogb7cl7jD6DXkRYm08usFCERnja_xbR-jjPGnCx1hFYHv8HCxLIP9LF86yllTeLkQTU/w640-h60/Screen+Shot+2021-02-11+at+6.36.12+PM.png" width="640" /></a></div><div><br /></div>You will note, that the warrants conveniently expire 6 months after the first set of executive stock options expire, and 6 months before the next set, for the <a href="https://www.sec.gov/Archives/edgar/data/1556739/000114036120029954/xslF345X03/form4.xml">company's CFO</a>. the net value of the stock options, at the exercise price of the warrants, is $10.57/share, and when you multiply that by the ~37,000 shares he is entitled to buy in that first swing, that's a total of $391K... And the more the stock goes up in that time, the better the warrants will do, and the better the stock options will do. <div><br /></div><div><br /></div><div>Furthermore, if you look at the options that are expiring in the year surrounding the warrant expiration, the amount of exposure for the executives DOUBLES... For the CFO, that means that there is over $782K on the line...</div><div><br /></div><div><br /></div><div>It gets even more interesting for the company's <a href="https://www.sec.gov/Archives/edgar/data/1556739/000114036120029952/xslF345X03/form4.xml">CEO, Joe Walsh</a>:</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7vEdHgcEszRRRGVm-YyuORaSE_fr0TF1ltbnthiC94Z8JnmSktw1q_u917wq1B1wToB-Pyly2DdciERQ70OTESdSNhB8z9Ss_r_siLC66ktHRrAY5wan-NS6UT44TAXYECA_KsuyNpg4/s1354/Screen+Shot+2021-02-11+at+6.46.55+PM.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="100" data-original-width="1354" height="48" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7vEdHgcEszRRRGVm-YyuORaSE_fr0TF1ltbnthiC94Z8JnmSktw1q_u917wq1B1wToB-Pyly2DdciERQ70OTESdSNhB8z9Ss_r_siLC66ktHRrAY5wan-NS6UT44TAXYECA_KsuyNpg4/w640-h48/Screen+Shot+2021-02-11+at+6.46.55+PM.png" width="640" /></a></div><div><br /></div>His more than 1.1 million stock options start to expire in monthly installments, as of January 1, 2021... Meaning that for ~87.5% of his options, they all expire BEFORE the end of the warrant exercise date. <div><br /></div><div><a href="https://docs.google.com/spreadsheets/d/1w-46iz-ainqbCqg4m1P_D5zoeSn8bG9wiU8_ZFG8b4E/edit?usp=sharing">Here is a link to a spreadsheet</a> highlighting the option setup for the executive team, as well as a screen shot.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZqOQbEcJn_Pgp6hlYehgBr0R4rLUSffko7_y_2JPgkoRn1pB0VJmCz_waUrcygBnS9q3Nj9by0em8Ma8KgvlHna_dakKC-LEBX2AGlvow3LkovOrG8SNyuyrzErWNnE2deWvGnsLNON8/s777/Screen+Shot+2021-02-11+at+7.04.07+PM.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="230" data-original-width="777" height="190" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZqOQbEcJn_Pgp6hlYehgBr0R4rLUSffko7_y_2JPgkoRn1pB0VJmCz_waUrcygBnS9q3Nj9by0em8Ma8KgvlHna_dakKC-LEBX2AGlvow3LkovOrG8SNyuyrzErWNnE2deWvGnsLNON8/w640-h190/Screen+Shot+2021-02-11+at+7.04.07+PM.png" width="640" /></a></div><br /><div><br /></div><div>If exercised at the price of warrant exercise, the total value for all executive stock options is ~$17 million dollars, and the value of the options expiring just in the year of warrant expiration is $5.67 million... If the price of the stock goes up to $30 (just $7 more than the current price) this would ensure that the warrants get exercised, the company gets infused $141 million to play with (pay down high interest debt), and the executives would make over $26 million dollars. </div><div><br /></div><div>So as to say... the incentives seem VERY interesting here, and in my mind, kind of acts to weight the scales to more money to be coming into the company because of the various incentives surrounding the warrants. This should significantly mitigate any risks that the company has with declining revenues and debt, which eliminates risk. It will also give the company some firepower to potentially acquire the Yellow Pages in Canada (Y.TO) to further get customers and grow the SaaS business. Furthermore, the company seems to have a decent shot of getting included in the Russell Indexes at some point as <a href="https://www.benzinga.com/news/13/06/3703210/dex-media-set-to-join-russell-3000-index">Dex Media had been in the past</a>. This would create demand for the stock that would also help the price rise due to what is in essence, forced buying. This is awesome as it relates to the exercise of the warrants, and thus the overall strategy of the company to grow and deleverage.</div><div><br /></div><div>Oh... and one last thing that just came out in the most recent earnings guidance from the company. They have released a <a href="https://twitter.com/ragnarisapirate/status/1364029371414171648">large amount of the valuation allowance for the company's tax asset</a>. Generally, a company cannot do this without some really compelling reasoning. In fact, there are a lot of scenarios where they wouldn't WANT to do this. Can you imagine the auditors' scrutiny that this would have had to go through? The company was at one point bankrupt in the past 5 or so years, has a side of the business with declining revenue, and a credit rating that gives them junk bond status.... Yet, the company’s auditor is comfortable enough to let them release over $100mm in tax valuation allowances. If this doesn’t scream “Thryv is earning money and that shouldn’t stop anytime soon” I don’t know what does.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjm6ERryAqP9JzC7jg4n-_xYgEvq7oGXeULFnTmvLj37tLQ_-R8OtLIbbck-0gwMvUJl6D03kDdXcMulrtv3EL4gSlgmUZD64UKfp3sP175YVXhhIqHp9-y3QuGjWWtmRs_NM9usFuy1qg/s2048/Eu4Be9WXMAAtuwv.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="2048" data-original-width="947" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjm6ERryAqP9JzC7jg4n-_xYgEvq7oGXeULFnTmvLj37tLQ_-R8OtLIbbck-0gwMvUJl6D03kDdXcMulrtv3EL4gSlgmUZD64UKfp3sP175YVXhhIqHp9-y3QuGjWWtmRs_NM9usFuy1qg/w296-h640/Eu4Be9WXMAAtuwv.jpg" width="296" /></a></div><br /><div><br /></div><div><br /></div><div>I believe that individually, some of the items I bring up may not mean much... BUT, when combined, and looked at in their totality, these points should act to propel the stock price significantly higher. Because of this, it is my belief that these cumulative factors have created the setup of a reflexive virtuous cycle that will richly reward the executives, shareholders, and customers of the company.</div><div><br /></div><div>Now, if the company can just get these warrants to trade- that would be amazing... This way, arbitrage funds can come in, buy the warrants at a slight discount, and exercise them. This would bring money into the company sooner, rather than later...</div><div><br /></div><div>Disclosure: Long THRY and THRY Warrants.</div><div><div><br /></div><div><div><br /></div></div></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8100616554240982358.post-58144960133536014482021-01-27T17:58:00.003-08:002021-01-27T17:58:59.835-08:00$PMD Psychemedics Corp: Trucking Along Into A Potential Big Catalyst ($21 PT)<p><span style="-webkit-text-size-adjust: auto; font-family: inherit; font-size: 18px; font-style: inherit;">Every once and a while I like to put up guest posts on Ragnar. As such, here is one from once of my favorite people on Twitter: <a href="https://twitter.com/vanckzhu?s=21">@vanckzhu</a> We are both long the stock, and think that it is a really good price, for the flows of cash that should be coming. :)</span></p><p><span style="-webkit-text-size-adjust: auto; font-family: inherit; font-size: 18px; font-style: inherit;"><br /></span></p><p><span style="-webkit-text-size-adjust: auto; font-family: inherit; font-size: 18px; font-style: inherit;">Here is his original post: </span><a href="https://lightbluevalue.wordpress.com/2021/01/27/pmd-trucking-along-into-a-potential-big-catalyst-21-pt/">https://lightbluevalue.wordpress.com/2021/01/27/pmd-trucking-along-into-a-potential-big-catalyst-21-pt/</a></p><p><span style="-webkit-text-size-adjust: auto; font-family: inherit; font-size: 18px; font-style: inherit;"><br /></span></p><p><span style="-webkit-text-size-adjust: auto; font-family: inherit; font-size: 18px; font-style: inherit;">$PMD is a $39M market cap (similar for EV assuming PPP loan is forgiven) hair follicle testing company. It pioneered the first commercially-available drug test for hair in 1986, and states that they have the best hair follicle test on the market currently, 2-3x better than any other hair test. $38M in revenues in 2019, $25M on TTM basis ($5M in MRQ), historically operating margins range from 5% to 25%, although generally it hovers around ~20%. At peak Brazil was about 30% of revenues and was part of an expansion initiative, but Brazil sucked even in 2019 (revenues down nearly 30% y/y) and has since dropped basically to zero revenues. If we run-rate 3Q revenues to $20M, I think they can achieve 15-20% operating margins, or $3-$4M in operating income. So pretty cheap as is.</span></p><p data-adtags-visited="true" style="-webkit-text-size-adjust: auto; border: 0px; box-sizing: border-box; font-family: inherit; font-size: 18px; font-style: inherit; margin: 0px 0px 1.7em; outline: 0px; padding: 0px; vertical-align: baseline;"><br style="box-sizing: border-box;" />There’s four reasons for excitement today:<br style="box-sizing: border-box;" />1. The federal government is in the process of requiring hair testing for the transportation department. If you read the public docs (link below), it appears that there’ll be ~3M hair tests once this fully ramps and hair tests appear to cost about $40 (maybe $20 goes to $PMD? just guessing…). Maybe $PMD takes 1/3 of market share, or 1M tests (although I think there’ll be some cannibalization as some trucking companies already require hair tests). $20/test…is $20M, which is quite material vs ~$30M in U.S. revenues in 2019. If incremental operating margins are 25-30%…that’s $5M+ in operating income and you can see how this gets pretty exciting pretty quick. <a href="https://www.federalregister.gov/documents/2020/09/10/2020-16432/mandatory-guidelines-for-federal-workplace-drug-testing-programs" rel="noreferrer noopener" style="border: 0px; box-sizing: border-box; color: #1abc9c; font-family: inherit; font-style: inherit; margin: 0px; outline: 0px; padding: 0px; text-decoration: none; transition: all 0.2s ease-in-out; vertical-align: baseline;" target="_blank">https://www.federalregister.gov/documents/2020/09/10/2020-16432/mandatory-guidelines-for-federal-workplace-drug-testing-programs</a><br style="box-sizing: border-box;" />2. Peter Kamin took a 5.9% stake in December. His historical investments have generally been excellent (loved what he did with $CLWY), and his MO is to buy legacy cash flowing businesses and really turbo-charge the earnings.<br style="box-sizing: border-box;" />3. The 2Q:20 10-Q disclosed that they were approached by third parties and hence are undergoing a strategic review. That language dropped off in 3Q:20 strangely…but it seems that there does exist takeover interest. Quest Diagnositics would be a natural buyer IMO, since Quest also operates in Brazil in addition to the U.S. I think this actually is off the table now with Kamin invested.<br style="box-sizing: border-box;" />4. Management was awarded 35K in options ($4.07 strike price) and 150K in RSUs on 11/11/20.</p><p data-adtags-visited="true" style="-webkit-text-size-adjust: auto; border: 0px; box-sizing: border-box; font-family: inherit; font-size: 18px; font-style: inherit; margin: 0px 0px 1.7em; outline: 0px; padding: 0px; vertical-align: baseline;"><br style="box-sizing: border-box;" />So I think in a “normal” world they return to $30M in revenues at ~20% operating margins (~$6M operating income), and we’ll likely see another $5M with the passage of the law. $11M in operating income, $41M current EV. I think fair value could push this to $120M EV or even higher, so this could be a triple to ~$21 even with the recent runup. Not to mention, Brazil could be worth something still, and Kamin could work some magic on the expenses side. We probably find downside support around where Kamin bought his shares, which ranged from $3.74 to $4.68.<br style="box-sizing: border-box;" /><br style="box-sizing: border-box;" />I think this is a pretty good business assuming a “normal” environment. While they do have 9 patents, I don’t think the technology is the key competitive advantage (pops who is a chemist says the rough science is pretty straightforward). I think it’s really the process, reputation, and relationships in a regulated industry that’s built up over the decades. Historical returns on equity/capital/etc. are all pretty strong.<br style="box-sizing: border-box;" /><br style="box-sizing: border-box;" />This business is economically sensitive and basically is levered to hiring levels of blue collar workers (those who operate heavy machinery such as truck drivers, oil and gas workers, construction workers, etc., where the legal liability for accidents is high). In 2009, revenues fell by 28% and operating income by 45% but the company remained profitable. COVID has been worse, and they’ve lost money in 2Q and 3Q. However, I think we should be somewhere around breakeven in 1Q:21, with trucking tonnage indexes inflecting back positive y/y (<a href="https://www.bulktransporter.com/fleet-management/article/21153185/atas-truck-tonnage-index-jumps-74-in-december" rel="noreferrer noopener" style="border: 0px; box-sizing: border-box; color: #1abc9c; font-family: inherit; font-style: inherit; margin: 0px; outline: 0px; padding: 0px; text-decoration: none; transition: all 0.2s ease-in-out; vertical-align: baseline;" target="_blank">https://www.bulktransporter.com/fleet-management/article/21153185/atas-truck-tonnage-index-jumps-74-in-december</a>).<br style="box-sizing: border-box;" /><br style="box-sizing: border-box;" />While they’ve been losing money this year, there’s no credit risk here IMO. They were slightly net cash as of 9/30/20. There’s about $1.4M in income tax receivable credits coming in 4Q:20 and 1Q:21, and potentially a bit more PPP loans as well. Their 3Q 10-Q stated that they expect to have sufficient liquidity for the next 12 months, and that was filed on 11/10/20 which basically coincided with the vaccine announcements so their projections are likely conservative.<br style="box-sizing: border-box;" /><br style="box-sizing: border-box;" />Risks<br style="box-sizing: border-box;" />1. There’s some lawsuits about hair tests not being sufficient to disqualify job applicants, but the solution seems to be implementing an additional test (urine) when someone tests positive: <a href="http://masscases.com/cases/app/90/90massappct462.html" rel="noreferrer noopener" style="border: 0px; box-sizing: border-box; color: #1abc9c; font-family: inherit; font-style: inherit; margin: 0px; outline: 0px; padding: 0px; text-decoration: none; transition: all 0.2s ease-in-out; vertical-align: baseline;" target="_blank">http://masscases.com/cases/app/90/90massappct462.html</a><br style="box-sizing: border-box;" />2. Competition. LabCorp and Quest are large. However I think $PMD’s ability to stay in business since 1986 (and is used as a lab by federal gov’t) demonstrates sufficient staying power.<br style="box-sizing: border-box;" />3. Trucking hair test regulations scrapped. I view this as unlikely as this regulation has already entered public comment phase and some of the largest for-hire public trucking companies (Knight, Schneider, JB Hunt) are all pushing to require hair tests. The FAST act of 2015 mandates the development of hair testing as an alternative testing method. I do expect that implementation of the regulation will be delayed. As an anecdote, the timeline for the last major piece of trucking legislation on electronic logging devices suggests it could be another 5 years before actual enforcement:</p><p style="-webkit-text-size-adjust: auto;"></p><p data-adtags-visited="true" style="-webkit-text-size-adjust: auto; border: 0px; box-sizing: border-box; font-family: inherit; font-size: 18px; font-style: inherit; margin: 0px 0px 1.7em; outline: 0px; padding: 0px; vertical-align: baseline;">1) June 2012: MAP 21 act passed</p><p data-adtags-visited="true" style="-webkit-text-size-adjust: auto; border: 0px; box-sizing: border-box; font-family: inherit; font-size: 18px; font-style: inherit; margin: 0px 0px 1.7em; outline: 0px; padding: 0px; vertical-align: baseline;">2) April 2014: Public comment period opened (we’re roughly 4 months after public comment period opened for hair tests)</p><p data-adtags-visited="true" style="-webkit-text-size-adjust: auto; border: 0px; box-sizing: border-box; font-family: inherit; font-size: 18px; font-style: inherit; margin: 0px 0px 1.7em; outline: 0px; padding: 0px; vertical-align: baseline;">3) February 2016: becomes law</p><p data-adtags-visited="true" style="-webkit-text-size-adjust: auto; border: 0px; box-sizing: border-box; font-family: inherit; font-size: 18px; font-style: inherit; margin: 0px 0px 1.7em; outline: 0px; padding: 0px; vertical-align: baseline;">4) December 2017: early adoption allowed, beginning of 2-yr trial period</p><p data-adtags-visited="true" style="-webkit-text-size-adjust: auto; border: 0px; box-sizing: border-box; font-family: inherit; font-size: 18px; font-style: inherit; margin: 0px 0px 1.7em; outline: 0px; padding: 0px; vertical-align: baseline;">5) December 2019: electronic logging becomes mandatory</p><p data-adtags-visited="true" style="-webkit-text-size-adjust: auto; border: 0px; box-sizing: border-box; font-family: inherit; font-size: 18px; font-style: inherit; margin: 0px 0px 1.7em; outline: 0px; padding: 0px; vertical-align: baseline;"><span style="border: 0px; box-sizing: border-box; font-family: inherit; font-style: italic; margin: 0px; outline: 0px; padding: 0px; vertical-align: baseline;">Disclosure: Long</span></p><p data-adtags-visited="true" style="-webkit-text-size-adjust: auto; border: 0px; box-sizing: border-box; font-family: inherit; font-size: 18px; font-style: inherit; margin: 0px 0px 1.7em; outline: 0px; padding: 0px; vertical-align: baseline;"></p><div id="atatags-370373-601218fcdae67" style="-webkit-text-size-adjust: auto; border: 0px; box-sizing: border-box; font-family: inherit; font-size: 18px; font-style: inherit; margin: 0px; outline: 0px; padding: 0px; vertical-align: baseline;"></div><div data-adtags-width="676" id="atatags-26942-601218fcdaeab" style="-webkit-text-size-adjust: auto; border: 0px; box-sizing: border-box; font-family: inherit; font-size: 18px; font-style: inherit; height: 272px; margin: 0px auto; outline: 0px; overflow: hidden; padding: 0px; vertical-align: baseline; width: 300px;"></div><br class="Apple-interchange-newline" style="-webkit-text-size-adjust: auto;" />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8100616554240982358.post-51652528054749068352021-01-03T19:25:00.002-08:002021-01-03T20:52:22.025-08:00Thryv (THRY): Buy A Melting Iceberg; Get A SaaS Business For Free<p>Thryv is a bit of an oddball... first, it’s a melting iceberg of a business- The Yellow Pages. There is also a SaaS business that no one seems to have discovered. I know, I know... <a href="https://seekingalpha.com/article/2926566-dex-media-is-a-fascinating-value-play">Dex Media was a value play</a> that ended up <a href="https://www.usatoday.com/story/money/2016/05/17/marketer-dex-media-files-bankruptcy/84480424/">going bankrupt</a> back in the day, so <strike>hear me out</strike> <a href="https://investor.thryv.com/events-and-presentations/default.aspx">hear the company out</a> in their various presentations. They do a really good job of laying out the case for the company, both good and bad. I think that the 2 most interesting presentations, are the most recent- the <a href="https://event.webcasts.com/starthere.jsp?ei=1403021&tp_key=cc6b2604d0">Global TMT Virtual Conference</a> and the <a href="https://event.on24.com/eventRegistration/eventRegistrationServlet?referrer=https%3A%2F%2Finvestor.thryv.com&eventid=2775460&sessionid=1&key=4A3312FBE02A1FDCFBF0488A1BEA5931&regTag=">conference call </a>for the last 10Q (<a href="https://s25.q4cdn.com/929024644/files/doc_financials/2020/q3/Thryv-Q3-2020-Earnings-Call-Transcript.pdf">transcript</a>). Their <a href="https://s25.q4cdn.com/929024644/files/doc_presentations/Thryv_InvestorDay-Final.pdf">Investor Day Presentation</a> is also a good source.</p><p>For the "TL;DR" crowd, this company is actually 2 companies- 1 that is declining, the other is potentially worth multiples of the present valuation. There are several catalysts at hand, and the incentives all seem to line up. Plus, this is run and controlled by very sharp, very rich, and very well incentivized people. The current price is $13.50 and the market cap is $420mm. I think that it could be worth multiples of that. The catalyst that is in the nearish future is the spinning off the SaaS business. Management has said will occur, and that John Paulson is pushing for it to happen in the next year.</p><p><b><u>Two Businesses For The Price Of One</u></b></p><p>Thryv is 2 separately run businesses- the first, being the “shrinking iceberg” that is the <a href="https://www.yellowpages.com">Yellow Pages</a> (doing over a billion with a “B” in revenue ~$1.1bb in the trailing 12 months) and the second is the SaaS business- <a href="https://www.thryv.com">Thryv</a> (more on this, later, after talking about YP and management). The YP business should see revenue declines in the low 20%’s. This lines up with revenue declines for dial up ISP customers and such- which while certainly NOT the same, the scenarios do rhyme, as it is reasonable to think that the same people using dial up, use the Yellow Pages. A geographic search of Google Trends seems to validate that, when <a href="https://www.statista.com/statistics/185532/us-household-dial-up-internet-connection-usage-by-state-2009/">comparing to dial up usage</a>. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjeROKiLSe7HGL4-3fIHPBhQlTcTZbSugr-YCy6v9K5FqdZmE-JmGe5Hp0BM2fnAv6O8bfI8VtK0uRWiWL6KubychQMHwjdEobXzMKg44wdPZiCINrXkVzFZjlu0u1NPWJ8X-xiBBwoA1w/s1356/221947C5-2E8D-47A3-91B5-DF118352C2ED.jpeg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1036" data-original-width="1356" height="488" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjeROKiLSe7HGL4-3fIHPBhQlTcTZbSugr-YCy6v9K5FqdZmE-JmGe5Hp0BM2fnAv6O8bfI8VtK0uRWiWL6KubychQMHwjdEobXzMKg44wdPZiCINrXkVzFZjlu0u1NPWJ8X-xiBBwoA1w/w640-h488/221947C5-2E8D-47A3-91B5-DF118352C2ED.jpeg" width="640" /></a></div><div class="separator" style="clear: both; text-align: center;"><br /></div><p>Also, looking at the declining popularity of the Yellow Pages in Google searches over the previous 5 years... it seems like revenue declines in the low 20%s is actually a decent guess- historically, that seems to be about the decay rate, in terms of google searches- so, maybe that guess is even cautious? Who knows. But, it is representing a HUGE amount of revenue, and is on a variable cost structure. So, that is GOOD for a melting <strike>ice cube.</strike> Rather, iceberg.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLP4LDiYP2sWr0kVY6Ar4yPW2Ctqjys4U1_uDNosWLwRPbHZIqwbx6WdrNUYzgB18qIWcAsyebwCNi6tdayPkS5JP7M6Iu-p-ETtBGabY24vqR8MpWRRDuU75MjSyOCl5JkL3sxNN6Tmo/s1340/5E7B0A3E-03D5-4931-B9F1-190B85B622EE.jpeg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1262" data-original-width="1340" height="602" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLP4LDiYP2sWr0kVY6Ar4yPW2Ctqjys4U1_uDNosWLwRPbHZIqwbx6WdrNUYzgB18qIWcAsyebwCNi6tdayPkS5JP7M6Iu-p-ETtBGabY24vqR8MpWRRDuU75MjSyOCl5JkL3sxNN6Tmo/w640-h602/5E7B0A3E-03D5-4931-B9F1-190B85B622EE.jpeg" width="640" /></a></div><br /><p><br /></p><p>Given that the company has a decent debt load, it takes the large amount of cash flow generated from the Yellow Pages business, and generally uses it to pay off debt- not only that, but, they are REQUIRED to put 100% of excess cash towards debt repayments, per their credit agreements (<a href="https://www.sec.gov/Archives/edgar/data/1556739/000114036120019569/nt10007762x12_s1.htm">this is in their S1, page 138</a>). Keep in mind, the majority of debt holders, also own the vast majority of the equity. So as to say, it seems that even though there are 4 billionaires controlling about 91% of the stock (and a lot of the debt) there isn’t much of a way for management to blow the money on something stupid and potentially company wrecking. I DON’T think this would happen, because of the credentials of management, but that backstop is kind of nice, just to make things a bit more predictable. Check out the wording of the pre-payments.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYKgGfLf0A0YpFkxDZRgHlEWtiMF8VVmC7TifSacmkn4J7cnoNV5BQEZbF_fu2pEqP5f3FFHPGjRb7Qc6dLQ_ZX4fBtJ9ekjXXiYBlMcP3g6ZCpRF4g4ErM41FLOf63iVaQAlbAwZSYZ0/s1312/Screen+Shot+2021-01-03+at+6.28.11+PM.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1044" data-original-width="1312" height="510" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYKgGfLf0A0YpFkxDZRgHlEWtiMF8VVmC7TifSacmkn4J7cnoNV5BQEZbF_fu2pEqP5f3FFHPGjRb7Qc6dLQ_ZX4fBtJ9ekjXXiYBlMcP3g6ZCpRF4g4ErM41FLOf63iVaQAlbAwZSYZ0/w640-h510/Screen+Shot+2021-01-03+at+6.28.11+PM.png" width="640" /></a></div>The company still has 3 years until the maturity of their debt, of which, the vast majority should be paid off by that time. I think it is a safe bet to assume that they will be looking to reduce the interest rate in the future, either through refinances, or, other creative measure- such as a bond offering. The cash flow from last year alone was enough to pay off ~2/5 their long term debt obligations (as of 6/30/2020).<br /><p>And, this company actually makes money (they lost money in Q3, due to a pension contribution- more on that later)... check out their Income Statement and Cash Flow:</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhU4Gd89itKF1mgcYppMkYdrZAj6zQ1vXtswUdraevve-FSXdLjtQqdrqbyOfWSC_elp3rHEqwQzNGScP6pmXXJc1OtBNQfhm6yteeXte87VEXUdj5xU9ahqSqt6R0Wwfw6AdqNbbOEoiU/" style="margin-left: 1em; margin-right: 1em;"><img data-original-height="2048" data-original-width="1175" height="929" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhU4Gd89itKF1mgcYppMkYdrZAj6zQ1vXtswUdraevve-FSXdLjtQqdrqbyOfWSC_elp3rHEqwQzNGScP6pmXXJc1OtBNQfhm6yteeXte87VEXUdj5xU9ahqSqt6R0Wwfw6AdqNbbOEoiU/w534-h929/Screen+Shot+2021-01-03+at+6.24.36+PM.png" width="534" /></a></div>Massive amounts of depreciation. SG&A going down as the revenues from the YP decline, and cash flow that is about 1/2 the market cap of the company.... Seems like a compelling play, just based on that. So, the bottom line, is that all this operational cash flow will be going to pay off debt in an expeditious manner. As this happens, the interest they pay, will go down too! <div><br /></div><div>Presently, the debt is generally yielding LIBOR +9%. But, with some debt pay down, why not be able to refinance at a lower rate, and use the cost savings to pay down <u><i>even more</i></u> of the debt? Additionally, depending on the the method for the monetization of the SaaS business, all the debt could be paid off, and the remaining common stock could in all likelihood, trade kind of like a bond. </div><div><p></p><p><b><u>Management</u></b></p><p>The company is run by Joe Walsh. He owns over 6% of the company via call options. So, it's fair to say that he wants to see the stock do well. Previously, he built a competitor to the Yellow Pages, sold it to a larger company, then grew it more, then sold that to a public company. Then he joined a company called Yellow Book and grew that to be a $2bb company via acquisitions- they combined that with the Yellow Pages in the UK and went public. Then started a board advisory firm. after that, he was involved with a public company called <a href="https://en.wikipedia.org/wiki/Cambium_Learning_Group">Cambium</a>, that was <a href="https://www.businesswire.com/news/home/20181218005160/en/Veritas-Capital-Completes-Acquisition-of-Cambium-Learning-Group">taken out by a private equity firm</a>... so, he seems to really know his stuff. When the Yellow Pages was in bankruptcy, via DexMedia, he was brought in by the debt holders, to make something work. Since then, he has guided Thryv to where it is today.</p><p>Check out the <a href="https://www.wsj.com/articles/veritas-capital-to-buy-cambium-learning-for-14-50-a-share-1539622533">Cambium Learning chart, just before the buyout</a> for 14.50 a share... </p><p>More on Joe Walsh, <a href="https://www.marketscreener.com/business-leaders/Joseph-Walsh-065GWT-E/biography/">here</a> and <a href="https://corporate.thryv.com/about/corporate/joe-walsh/">here</a>.</p><p><b><u>SAAS!!!</u></b></p><p>HERE IS THE KICKER... Thryv also has a Saas business, called “<a href="https://www.thryv.com/">Thryv</a>.” Interestingly, they used their dying platform from the Yellow Pages, to get users on the white label SaaS business. To me, THAT is really interesting and shows a VERY creative way to use and monetize assets of an old business, and keeping development costs down. In the instance of other companies, such as Sears or virtually every local newspaper out there, there was never enough execution. But Thryv has a legit customer base of approximately 45,000 users, who are paying well over $200/month for services. Per management, this business is already profitable. Through diligent selling of their workforce, the company literally got 10% of the Yellow Page customers (and are still trying to get more, look on <a href="https://www.yellowpages.com/">their webpage</a>), on to the Thryv platform. Walsh refers to this strategy of “hunting in the zoo” for customers. If you have yet to check out the software- it is absolutely fantastic. Actually, it is PERFECT for the home services sector. The program is SUPER simple, and quite effective. It won’t scare anyone away with too many options, settings, or frills that no one needs, or wants- which is key. SaaS platforms such as Service Titan and CoConstruct (which I use, and love) are both great, but for a lot of smaller shops, they are just waaaaayyyy to complicated for what they need. And that is how you get past a lot of resistance for small businesses that don't have the time to learn a complicated system. Simple is the key, and Thryv is simple.</p><p>Something else that I find neat thing about Thryv, is that a hair stylist, plumber, veterinarian, or even a school tutor could use it. It is a very versatile software! As an antidote to this, I am buying 5 townhouses off of an investor I know, and his son owns a franchised floor epoxy coating business. So, I reached out to the son, to see if he uses any sort of CRM. Turns out, and I swear that I am not making this up... He uses Thryv! Also, he LOVES it- only issue was a QuickBooks compatibility issue a few months ago (which, is pretty par for the course with anything QuickBooks related, in my experience). The issue got resolved in a few days. Other than that, he loves it. So, that was a cool data point of sorts, for me. </p><p>Also, on recent calls, the Thryv execs talk about the great economics of dealing with franchises. Which if you think about it, is a beautiful model. Not only are you not having to sell the software to new businesses, you have a totally separate company that is out trying to grow their business, and in turn, is helping Thryv grow theirs! That is a unique type of operating leverage that I don't think many people, or businesses think about. </p><p>So, given that I like Thryv, and so do 45,000+ other people, what does Thryv do? </p><p>*SEO optimization, and makes sure that a company’s hours and other details, are consistent throughout the internet to around 60 different sites... Small things like this, make a HUGE difference for businesses.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivE88DUIHg1B-uXjjlmtidVh_hs2zfQVUUXHzqS_Cduc8EUmzRTHTKKTIYWCZqofHYgiGguLCFL3_hRUPZt2AVHiQageF20sYtKza3kKM2tbNHsu1ffqsnPPm7-BkFG-XewmQm0m_dQwE/s960/1552559745_thryv+dashboard.png" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="667" data-original-width="960" height="445" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivE88DUIHg1B-uXjjlmtidVh_hs2zfQVUUXHzqS_Cduc8EUmzRTHTKKTIYWCZqofHYgiGguLCFL3_hRUPZt2AVHiQageF20sYtKza3kKM2tbNHsu1ffqsnPPm7-BkFG-XewmQm0m_dQwE/w519-h445/1552559745_thryv+dashboard.png" width="519" /></a></div><p></p><p>*Billing</p><p>*Contracts</p><p>*Conversation Tracking</p><p>*Scheduling</p><p>*Website Support</p><p>*CRM database</p><p>*Estimates</p><p>*Payments</p><p>*Appointments</p><p>*Email</p><p>*Marketing Campaigns</p><p>*Follow ups for reviews for various sites, that go out for distribution</p><p>*Payments*- The company just introduced <a href="https://www.thryv.com/features/thryvpay/">Thryv Pay</a>. This is a great way for small businesses to take payment. Key is that it is built into their software- automatically connecting with, and reconciling to QuickBooks. It’s early on in the product's launch (coming online in the past few months) but the company is already reporting lots of transactions, has loads of signups, and- just look at the addressable market they have!</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivS0Pf2CNtRnXsx46mnAJOwPYfWUWOdgvvH4dxUlkfB-4BMhWDVPTXBwk8S6HqzFfPvStCWLK5cB9gUtEOihnxN1U0jBDP0r4zSD4jjRvtLr9zZscJnRa7ttKPMHVyRHIVM519cio31Cg/s1864/Screen+Shot+2021-01-03+at+7.33.54+PM.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="995" data-original-width="1864" height="342" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivS0Pf2CNtRnXsx46mnAJOwPYfWUWOdgvvH4dxUlkfB-4BMhWDVPTXBwk8S6HqzFfPvStCWLK5cB9gUtEOihnxN1U0jBDP0r4zSD4jjRvtLr9zZscJnRa7ttKPMHVyRHIVM519cio31Cg/w640-h342/Screen+Shot+2021-01-03+at+7.33.54+PM.png" width="640" /></a></div><br /><p>Fees are almost identical to companies such as Square, and if someone pays the vendor with a credit card, there is the option to add fees onto the transaction. Additionally, the money will be in the vendors bank account the next day. This is HUGE for many small businesses. </p><p>Thryv also has different verticals where they are going- such as legal, and the like. Really compelling stuff...</p><p>One last thing... Thryv's SaaS business is PROFITABLE. While not currently separated in SEC filings, I think that sort of reporting will be coming soon. Management has said on conference calls that the SaaS business is profitable- this is something that is not the case for many SaaS businesses that have sky high valuations. Also, the SaaS business and the legacy Yellow Pages business are run as totally separate entities, so, the segregation of their operating results will be easy to show, as the company looks to monetize Thryv in the coming quarters/years.</p><p>OH!? And guess what? Their churn rate? It’s about 2%. That’s pretty low on the face of things, but think of the stickiness of the customer base, especially when it is made up of the RIGHT customers. As mentioned earlier, I use CoConstruct for my business. A new, better, and cheaper software could come along, and there is no way that I would switch- it would be WAAAYYY too much of a pain, and would take forever, for not much better results. Retraining the people I work with would take forever, and be demoralizing. For my business, this would be about a hundred times more of a pain than switching from an iPhone/iPad/iMac/Apple Watch/Apple TV to an Android setup. By extension, we know what the market thinks about the stickiness of the ecosystems that AAPL and GOOG provide- and it makes sense, because there are <a href="https://www.lifehacker.com.au/2020/05/the-comprehensive-guide-to-quitting-google/">long articles</a> on HOW to do the switch- and thinking of that would probably give a person a hint of anxiety. Seems like a lot of work... There are even examples of <a href="https://twitter.com/ragnarisapirate/status/1341523040367206410?s=20">governments using inferior softwares for a very long time</a>, because switching is a pain. So, think of all these examples as a corollaries for small businesses and Thryv. So as to say... I doubt there will be people switching away from Thryv, once they get onboarded and use it for any length of time. </p><p>When looking at the growth rate for the Saas business, things are a bit deceiving at first. The company was originally selling to whoever would sign up. They admitted that didn't make for a good setup, because it made the churn so high. It also keeps referrals down, if people aren't happy with their software. It uses up valuable employee mind power, and time, too. So, they refocused on businesses that have multiple employees, and are in industries they feel are good to work with. The software simply is not that great for the type of business that is "a guy and a truck." It needs more working components than that to really provide value for a business. As such, they are really looking to set people up for success.</p><p>I recently did a product demonstration with one of the Thryv team members and this is exactly what the sales person asked me FIRST. They wanted to know my business setup, because <u><i>they wanted to make sure that they were a good fit for us</i></u>. While I already have software that I use, I work with contractors that will be purchasing the software soon- because they see the value in it, once it is shown to them. </p><p>Now that there has, in essence, been a "flushing of the system" where Thryv purposely lost and didn't sell to certain types of businesses, It seems apparent that the growth trajectory of Thryv will start again, making the situation even more compelling. The company can already see its EBITDA margins increasing. With COVID, software solutions are all the more important for small businesses, and small businesses are starting to really see that they NEED these solutions.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjdQ2UGIONMs4Cnc4qohKDipCrGgD_vtg_GlHXT4gZUSmH8ii_tHRJtyWaa1hdLatLUT_r2gBf64qM_lIrGk35rc2zI22F4LqxDb0FctUE5oGWhOmjk_SFbxTEnmxFQWGWmS0U5GohcnU/s1850/Screen+Shot+2021-01-03+at+7.32.58+PM.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="650" data-original-width="1850" height="224" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjdQ2UGIONMs4Cnc4qohKDipCrGgD_vtg_GlHXT4gZUSmH8ii_tHRJtyWaa1hdLatLUT_r2gBf64qM_lIrGk35rc2zI22F4LqxDb0FctUE5oGWhOmjk_SFbxTEnmxFQWGWmS0U5GohcnU/w640-h224/Screen+Shot+2021-01-03+at+7.32.58+PM.png" width="640" /></a></div><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvi7FtSnpalTouJKJVzmzxUaOeNkii8hjh_-a64RLp1lVTHnbu9Fwck4bLBEiu0CU8C4m3PUUKq5IeAldgqUB7ta0eg4zO_8LUpM4F1KCTp6-QQ33nIlw73P4tUpaO1F-EEPBwmPR4Suo/s1252/Screen+Shot+2021-01-03+at+7.38.02+PM.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="674" data-original-width="1252" height="344" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvi7FtSnpalTouJKJVzmzxUaOeNkii8hjh_-a64RLp1lVTHnbu9Fwck4bLBEiu0CU8C4m3PUUKq5IeAldgqUB7ta0eg4zO_8LUpM4F1KCTp6-QQ33nIlw73P4tUpaO1F-EEPBwmPR4Suo/w640-h344/Screen+Shot+2021-01-03+at+7.38.02+PM.png" width="640" /></a></div><p><b><u>Reducing Pension Liabilities</u></b></p><p>From the <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/1556739/000162828020016327/dxm-20200930.htm">most recent 10Q</a>, in the “subsequent events” section:</p><p>They are working to shed themselves of pension liabilities... while not huge in the grand scheme of the SaaS valuation, and me not wanting to focus on the pension, I do find this really interesting. Just that they are working to get rid of this is good, in the sense that they are paying attention to all aspects of the business, and actively shedding those liabilities. We should see in the next 10Q how much of the liability was shed. It <u><i>should be material though</i></u>, as they did disclose the matter in their subsequent events. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfvTlfSx53oZRqk-nQkGYHlwjYUVaP5-aWJhVqHGCponYd8NeD1xinCH9eF7goBpzrRj1Ib9USa7QiWg7CoUudl3Nsk1_OxtAlyIdIXrl3usb4VWiRKDYuRPCn3NXi9hnf6megnJ4fmsU/s1880/C3F042BF-FB7A-46AC-B680-1ED7E42E168C.jpeg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="469" data-original-width="1880" height="160" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfvTlfSx53oZRqk-nQkGYHlwjYUVaP5-aWJhVqHGCponYd8NeD1xinCH9eF7goBpzrRj1Ib9USa7QiWg7CoUudl3Nsk1_OxtAlyIdIXrl3usb4VWiRKDYuRPCn3NXi9hnf6megnJ4fmsU/w640-h160/C3F042BF-FB7A-46AC-B680-1ED7E42E168C.jpeg" width="640" /></a></div><p><br /></p><p><a href="https://twitter.com/ragnarisapirate/status/1344152828693147648?s=21"><b>Subleasing Office Space In Dallas Fort Worth</b></a></p><p>Due to COVID, the company went to a “remote first” setup. As such, they impaired their office's value...</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAAYcSK4RNZF3tWgaB-g7dCvWDgsWGY0Ri-UmDAeomBWKTtHzpRF2b_IM79ns4s6lWtJ1sGFYwF-OLBiI4dRgUlH_AkAFpFb-aff8skxW7Uv8LfMADQvQrWP49WxRbE7_S6ZJXODPxe70/s1830/65E4E54F-8DCF-4B0F-911E-05E6B73DD876.jpeg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="306" data-original-width="1830" height="108" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAAYcSK4RNZF3tWgaB-g7dCvWDgsWGY0Ri-UmDAeomBWKTtHzpRF2b_IM79ns4s6lWtJ1sGFYwF-OLBiI4dRgUlH_AkAFpFb-aff8skxW7Uv8LfMADQvQrWP49WxRbE7_S6ZJXODPxe70/w640-h108/65E4E54F-8DCF-4B0F-911E-05E6B73DD876.jpeg" width="640" /></a></div><p>BUT, they still have a lease in place. Keep in mind that they have been paying rent, and as they continue to pay it, their earnings and cash flow should be roughly the same as they had been historically... BUT. They could sub lease it - <a href="https://www.bizjournals.com/dallas/news/2020/11/05/thryv-headquarters-sublease.html">in fact- they are trying to</a>. Granted, office space is plentiful now- but with organizations like Oracle moving to Texas- this seems like to the THE PLACE you would want to be subleasing space, if you had to be in that spot. Being close to the airport in Dallas ain’t a bad spot, either...</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxXrjuwEy7l7TYbPFTi0MEC4HmIGUCcamJm8oVDJ3T9rrkR_YYFRC8W2zsjatwfZclhFI8uRu5WLnxcCp9bBLaVzRhZCVUTWcsGt5-AuJMBSPQQoBUQ3SA5gjiOhBwZ-TA69sQT3Ork94/s1284/FC0682C1-8474-4315-AA43-6158E35E5120.jpeg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="799" data-original-width="1284" height="398" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxXrjuwEy7l7TYbPFTi0MEC4HmIGUCcamJm8oVDJ3T9rrkR_YYFRC8W2zsjatwfZclhFI8uRu5WLnxcCp9bBLaVzRhZCVUTWcsGt5-AuJMBSPQQoBUQ3SA5gjiOhBwZ-TA69sQT3Ork94/w640-h398/FC0682C1-8474-4315-AA43-6158E35E5120.jpeg" width="640" /></a></div><p>So, while it may not be a catalyst- it could certainly shore up earnings- and more importantly, help get rid of more debt and interest payments. Formerly, the lease payments were a straight up drag on net income- they shouldn't be as much, net, in the future. Let’s say that they were paying $15/ft/year for the lease- that’s $5.1mm of a hit to the income statement. Let’s add in some for utilities, repairs, and things like that. Maybe they had security guards that they don’t need now, that they are work from home first. So, let’s round that $5.1mm up to an even $6mm. </p><p>Then, assume that even with the glut of office space, they can rent it out for half what they are paying, and eliminate the $.9mm of misc office expenses. That comes to $3.45mm in additional income that they didn’t have before. Sure, it’s not HUGE, but it’s something. Feel free to use whatever multiple you want, if you throw a 20x multiple on that (20x just as an example), then that represents a nearly $70mm uptick for the stock... that’s a hair more than 20% upside. Not bad!</p><p><u><b>Effects Of The Pandemic</b></u></p><p>In addition to working from home for a lot of the employees, the company also issued pandemic credits to help some of its customers. While they probably won’t be getting 100% of these revenues back, it will certainly buy them goodwill, and the additional revenues should go straight to the bottom line (and even better, to debt repayments). </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPH0Axd9t3f-0NXRoApXBuT0arac972nFjJMB8q-Jdey8THLaoXw5qPxHu6eQj5UTTIutR3Lcb-L2asFOPGtZs844ERcg4UoCbVDtAQxguKs-DgTseTjx17gdLnjrDSMyIjkf8neSW99c/s1886/D306D418-9C7D-4BD7-8DCE-AF0639DA7295.jpeg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="430" data-original-width="1886" height="146" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPH0Axd9t3f-0NXRoApXBuT0arac972nFjJMB8q-Jdey8THLaoXw5qPxHu6eQj5UTTIutR3Lcb-L2asFOPGtZs844ERcg4UoCbVDtAQxguKs-DgTseTjx17gdLnjrDSMyIjkf8neSW99c/w640-h146/D306D418-9C7D-4BD7-8DCE-AF0639DA7295.jpeg" width="640" /></a></div><div><br /></div><p><b><u>Valuation Ownership, And The Like</u></b></p><p>First- why is this cheap?</p><p>THRY just did a direct listing on the Nasdaq as they didn’t need to raise capital. Seriously- that's kind of the purpose of the direct listing that they did kind of counter intuitive for a Saas business, right? Aren't they always raising capital?! Anyway, they couldn’t talk about the company during this time- so there were no road shows or conferences like there are, now. COVID also put a damper on these shows. But with the company being more "free" to talk, they are, and the story is starting to get out. </p><p>In addition to people just not knowing about the story- as I mentioned early in this write up, the company's true worth is obfuscated by there being 2 companies in 1. John Paulson explains:</p><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="554" src="https://www.youtube.com/embed/EltyWTkpZI4" width="665" youtube-src-id="EltyWTkpZI4"></iframe></div><p>Speaking of John Paulson, lets examine the ownership of the company:</p><p>*Only about 9% of the stock is really out there, in “float.” So who are the holders? A bunch of billionaires. </p><p>~60% is owned by Affiliates of <a href="https://en.wikipedia.org/wiki/Jason_Mudrick">Jason Mudrick</a></p><p>~15.5% is owned by Affiliates of Goldenree- <a href="https://en.wikipedia.org/wiki/Steven_Tananbaum">Steven Tananbaum</a></p><p>~10.5% is owned by Affiliates of <a href="https://en.wikipedia.org/wiki/John_Paulson">John Paulson</a>.</p><p>~6% is owned by Yosemite Sellers Representatives- <a href="https://en.wikipedia.org/wiki/Steve_Feinberg">Stephen Feinberg</a></p><p>This brings the total ownership of billionaire hedge fund managers to in excess of 91% of outstanding shares... that not only makes for a pretty tight float- but also an ownership structure where the major owners are well connected, and wanting to see this do well. They have the control of the entity to make it happen.</p><p>On top of that, CEO <a href="https://corporate.thryv.com/about/corporate/joe-walsh/">Joe Walsh</a> owns 5.96% of the company via options... Sure, there are some warrants out there, but, that isn’t enough to really think about. So he would love to see the price shoot through the roof.</p><div class="separator" style="clear: both; text-align: center;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSV-PibnFQDjTMLoOvGn5c8KFi9xR8c5DgoHvCmGETu6T-4gq3HXrysypwitW_YhoWPh8XUgEZrpJB_5fdnzBUuo17cszhm1ZQOeI4chLXxyx_Od_FqLZkq1EIE5NrEk51XoWZaSgciko/s1079/24BD1BDD-7771-44C2-9EBD-3AAF273D56FA.jpeg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="440" data-original-width="1079" height="262" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSV-PibnFQDjTMLoOvGn5c8KFi9xR8c5DgoHvCmGETu6T-4gq3HXrysypwitW_YhoWPh8XUgEZrpJB_5fdnzBUuo17cszhm1ZQOeI4chLXxyx_Od_FqLZkq1EIE5NrEk51XoWZaSgciko/w640-h262/24BD1BDD-7771-44C2-9EBD-3AAF273D56FA.jpeg" width="640" /></a></div><p><i><b><u>CATALYST: SPLITTING THE COMPANY</u></b></i></p><p>First and foremost, CEO Joe Walsh, going back to his Cambium days, <a href="https://www.specialsituationinvestments.com/2018/10/cambium-learning-abcd-expected-sale-5-upside/">seems to know a thing or two about selling companies</a>... He has also stated that they are running the two businesses totally separate, and that they could split the company in two, tomorrow. Just in case you missed the John Paulson video earlier- did I mention that a 10% holder of the stock- billionaire John Paulson of subprime mortgage shorting fame, is calling for splitting the company in the next year?</p><p>To bolster this idea, there was recently a large re-pricing of stock options for the company’s executives. In my mind, this makes the monetization of the SaaS business at Thryv even more eminent. <a href="https://twitter.com/ragnarisapirate/status/1344478009537937410?s=21">Check out this tweet</a>, for reference, and explanation.</p><p>Given the situation, as it SEEMS to be unfolding, it is my hypothesis that the plan was to wait to monetize the SaaS business, and to grow it more for a few years. That being the case (management said said it was on the call) then there were a set of assumptions made between management, and the board. If the plan changes mid game, wouldn’t it make sense to make it so that the executives were incentivized to not only change the plan, but to reward them for changing the plan, mid game? Repricing the stock options certainly aligns with this scenario- as the additional money represented by the repricing is pretty significant- well in excess of $1.5mm dollars, but as a fraction of the stock option vesting price? it's nearly 1/6th... that ain't chump change. Additionally, <a href="https://nongaap.substack.com/p/gogo-strategic-alternatives">Mudrick was involved in a company called GoGo, and the same sort of option repricing happened RIGHT BEFORE the company announced that it was exploring strategic alternatives</a>... not exactly the same scenario, but, it certainly rhymes.</p><p>As John Paulson noted in the conference call (<a href="https://www.youtube.com/watch?v=EltyWTkpZI4&feature=youtu.be">here is a video of JUST the Paulson part of the call</a>): Hubspot (HUBS) gets a premium valuation to THRY. <a href="https://twitter.com/ragnarisapirate/status/1343726155023704065?s=21">Of note, HUBS only has about 2x the number of customers that Thryv does, but also gets about 50x the valuation</a>...</p><p><u><b>So What’s It Worth?</b></u></p><p>With about 31 million shares outstanding, the company is valued at $13.50/share, or, a market cap of ~$420 million. <a href="https://www.youtube.com/watch?v=EltyWTkpZI4&feature=youtu.be">John Paulson suggested in the last conference call</a>, that the declining business was worth about 2.5x EBITDA... which seems pretty standard for declining businesses like this. On the same conference call that this was mentioned in, the Joe Walsh even said that when they were valuing the YP business, that they used very conservative DCF numbers. Just look at the amount of cash flow this company produces!</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNkRU5e7OcJvmqNDkGRqIz5Np_qriXsGX2Lzd7cwXCMRgBZgEdGLxGW2ScbT3R_VBZqHrMyOyXXS7z-E_cYxS0M7EuKcbeHClMXwPY9ERX4wAZoTQxiD8YDuOHqOmzWp3IRcdfL4IR07k/s1295/9731D5E2-D533-49F7-B8F3-FA2A730EE219.jpeg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="879" data-original-width="1295" height="436" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNkRU5e7OcJvmqNDkGRqIz5Np_qriXsGX2Lzd7cwXCMRgBZgEdGLxGW2ScbT3R_VBZqHrMyOyXXS7z-E_cYxS0M7EuKcbeHClMXwPY9ERX4wAZoTQxiD8YDuOHqOmzWp3IRcdfL4IR07k/w640-h436/9731D5E2-D533-49F7-B8F3-FA2A730EE219.jpeg" width="640" /></a></div><br /><p><br /></p><p>So, when adding the long term debt back in to the equity (tho, not all the liabilities, because the pension should be going down due the subsequent event discussed earlier) this is about the current market cap of the whole company... So, call this a break even based on the Yellow Pages valuation- with the SaaS business thrown in for free.</p><p><b><u>Valuation Of The SaaS Business</u></b></p><p>*A recent <a href=" https://techcrunch.com/2018/11/15/airtable-maker-of-a-coding-platform-for-non-techies-raises-100m-at-a-1-1b-valuation/">valuation for Monday.com</a> (another software that I use, and love) who boasts around 100,000 users, <a href="https://www.bloomberg.com/news/articles/2020-05-22/valuation-of-israel-s-monday-com-jumps-42-to-2-7-billion">came in at a whopping $2.7bb</a>. A year before, <a href="https://techcrunch.com/2019/07/30/monday-com-raises-150m-more-now-at-1-9b-valuation-for-workplace-collaboration-tools/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAGnaru2E_ZjF-JzC6yCIQnLe8MyL5RpeDlKjdtod3TUt4WJT9jCroLWDSCzsMuHeYhEc9_HSp-c--JDD4B0oJROmTTCl0lhT2Kfj8Cij28Ed5UsgDd-J38682cgmi217wC8U8WpvaBiwM8TomZl71E-PHmSGlfqpomjE7SwC_xMb">their valuation was $1.9bb</a>, when they had 80K organizations, and about a year before, had 35K... Based on what I pay for Monday, and the setup it has, it is a kissing cousin to Thryv, in terms of revenue generation. I think that Thryv has a platform that can scale more than Monday, based on my experience with both softwares.</p><p>*Airtable, around 2 years ago with 85K customers, <a href="https://techcrunch.com/2018/11/15/airtable-maker-of-a-coding-platform-for-non-techies-raises-100m-at-a-1-1b-valuation/">was valued at $1.1bb</a>.</p><p>*Notion was recently valued at <a href="https://www.forbes.com/sites/davidjeans/2020/04/01/buzzy-work-app-notion-hits-2-billion-valuation/?sh=541d7b7078ec">$2bb with 4mm users</a>.</p><p>Based on this, and everything you already know about SaaS valuations- you can tell that the real kicker with Thryv is the SaaS business. If you put a 5x multiple on the revenue, that represents an additional $625mm of market cap. If you put a 10x multiple on revenue, which is where numerous companies like this seem to get valued at, that’s $1.25 bb in additional market cap. At 5x revenue, the share price would be ~$33.60/share, and at 10x, the share price would be about $53.80/share... compared to a current share price of $13.50. Even if valuations crater for SaaS businesses, I don’t think a double in the equity price is unreasonable- especially because Thryv, the software, actually makes money- unlike others that constantly need to raise capital to grow, such as Hubspot (HUBS). By the way, HUBS is presently valued at over 20x sales. Granted, there are differences in the companies... but, these various points do a pretty good job of showing what the worth of Thryv could be, going forward. </p><p>Add in the repricing of stock options, that I think were done to incentivize the executives at Thryv to monetize the SaaS business sooner, rather than later, and this the most compelling equity situation that I can think of. </p><p><br /></p><p>Disclosure: I am long THRY.</p></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8100616554240982358.post-78347631811987439632020-06-30T20:16:00.000-07:002020-06-30T20:16:51.550-07:00Spindletop Oil & Gas Co (SPND): Tons Of Cash, No Debt, and Optionality<div style="border: 0px; box-sizing: border-box; font-family: roboto, sans-serif; font-size: 13px; font-stretch: inherit; line-height: inherit; margin-bottom: 5px; padding: 0px; vertical-align: baseline;">
<span style="background-color: black;"><span style="color: white;">This one is short, sweet and to the point. If you are looking for a way to bet on the price of oil, own a cash box, or, have an inflation hedge, look no further than Spindletop Oil and Gas (SPND).</span></span></div>
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<span style="background-color: black;"><span style="color: white;">They have a load of assets, mainly consisting of cash, NO DEBT, and are trading for a significant discount to book value. They aren't loosing much money, either.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Current market cap is ~$12.5mm ($1.88/share)</span></span></div>
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<span style="background-color: black;"><span style="color: white;">As of the <a href="https://www.sec.gov/Archives/edgar/data/867038/000101738620000151/sog_2020mar31-10q.htm" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">most recent 10Q</a>:</span></span></div>
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<span style="background-color: black;"><span style="color: white;">CASH AND CDS OF $17,282,000 ($2.55/share) <u><i>and this is BEFORE a PPP Loan</i></u>.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Total assets of $23,519,000</span></span></div>
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<span style="background-color: black;"><span style="color: white;">TOTAL LIABILITIES OF $7,306,000</span></span></div>
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<span style="background-color: black;"><span style="color: white;">NET BOOK of: $16,213,000 (or, $2.39/share)</span></span></div>
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<span style="background-color: black;"><span style="color: white;">There is obviously no chance of the company running out of cash. In this weird time in the oil market, that is of the utmost importance, and could really play into the hands of SPND, <a href="https://www.usatoday.com/story/money/2020/06/29/coronavirus-oil-industry-troubles-could-fuel-chapter-11-filings-2020/3249794001/" target="_blank">given the bankruptcies that are coming in the oil and gas industry</a>. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">This is a company that is generating cash flow, but had a decline in book value last year of around a 1/2 million dollars. If the price trades up to book value, there is 30% upside... Even though the company is loosing some money, the price of oil has not been nearly what it could be. Especially if there is a bit of inflation. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">BUT WAIT!</span></span></div>
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<u style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant-caps: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="background-color: black; border: 0px; box-sizing: border-box; color: white; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">HIDDEN ASSETS?!?!</span></u></div>
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<span style="background-color: black;"><span style="color: white;">Look at their Oil and Gas Properties- they are on the books, using the full cost method, of $27mm, but net out to $2.12mm, because of $25.7mm in accrued depreciation. Now, I have no clue what these assets are worth, but, I am guessing that it is a lot more than $2.12mm, since the company produced oil and gas revenues of $4.63mm, $5.85mm, and $4.49mm in the past few years... The company seems to have a fair bit of natural gas rights, which in my mind, is preferable given the amount of plants that use natural gas, right now. Natural gas is kind of the "in popularity" form of energy. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">On the company's balance sheet, their office building is carried at $1.276mm (net of depreciation). </span></span></div>
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<span style="background-color: black;"><span style="color: white;">Here is the card from the Tax Assessor. The County has it assessed for $1.55mm. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">Given that the building was purchased in 2004, I am assuming that it is worth significantly more than it is on the books, or the tax rolls for. The main reason being, that generally, assessors use cap rates to assess property. SPND has a unique setup, in that they reside in their HQ (occupying 12,759 sq ft of the 46,286 sq ft building), but lease out a significant portion of it. As such, they only get 248,000 a year in rental revenue. If they leased out their part of the space at the same rate of the lease out 33,527 sq ft, at the rate of $7.40/Ft, that would bring rental revenue up to $342,500/year! Thats a nearly 40% upside! tack that on top of the assessed $1.55mm value of the building that has a below market total rent, and you get a value of $2.17mm! In all likelihood, this estimate is even low. I'm gonna guess that the building is worth in excess of $3mm, or, in excess of ~1/4 the market cap.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Controlling shareholder: Chris & Michelle Mazzini, own an astounding 86.65% of the company's common stock, so, the public float is relatively low. This makes me think that it would make a ton of sense for them to take this private, which, even if they don't pay a premium to book value, will reward shareholders decently well, based on today's prices. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">The company also will take advantage of buying back shares from time to time. In the 4th quarter of 2018, the company bought back over $250K in shares at $2.13/share! That not only represents a significant amount of outstanding shares, but, also represents a premium to where they are trading now. In the 2nd quarter of 2020 (in the subsequent events section of this <a href="https://www.sec.gov/Archives/edgar/data/867038/000101738620000151/sog_2020mar31-10q.htm" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;">10Q</a>) SPND also repurchased over $50K in stock for $1.25/share. Again, a hefty amount of the float.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">If that isn't enough, the company also raise their high cash levels even more, with a PPP loan of just over $400K...</span></span></div>
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<span style="background-color: black;"><span style="color: white;">This company really starts to do some impressive things financially with oil revenues the higher oil goes, which also makes its property worth more. Let there be no doubt about it. The reserves of the company are being depleted. They recently reassessed their BOE to under 1 million barrels, and, it would stand to reason that the fewer barrels left in the ground, the harder they would be to get out of the ground making their cost go up, and margins go down. I am under the impression that the quality of the company's assets are not the best, but that they are excellent at extracting value out of them. With the coming <a href="https://www.bizjournals.com/houston/news/2020/06/07/haynes-boone-lawyer-says-more-bankruptcies-to-come.html" target="_blank">wave of oil and gas bankruptcies</a>, this could be a compelling play, because of them being able to pick up assets on the cheap. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">In this crazy time, I can think of worse things than owning this company that has a HUGE cash cushion (providing a margin of safety), real estate worth around 1/4 of the market cap, and a controlling shareholder who is pretty incentivized to take the company private. PLUS, you get a lot of other items thrown on top, for free.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Disclosure: I am long SPND.</span></span></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8100616554240982358.post-61839554116902419572020-06-25T20:02:00.000-07:002020-06-25T20:16:05.094-07:00Innovative Food Holdings (IVFH) 2 of 2<div style="border: 0px; box-sizing: border-box; font-family: roboto, sans-serif; font-size: 13px; font-stretch: inherit; line-height: inherit; margin-bottom: 5px; padding: 0px; vertical-align: baseline;">
<span style="background-color: black;"><span style="color: white;">Innovative Foods (IVFH) is a storied company, with a complicated past. Between this, and the effects of COVID-19, the company's share price has been absolutely destroyed- lingering around .55 cents at the end of 2019, in the mid to high .40s just before COVID, going as low as the TEENS, but generally trading in the high .20s and low .30s for the spring and early summer. Even with some price recovery, the current price is down ~40% from it's pre-COVID levels. I believe that this is unwarranted. Strictly on a valuation level, it appears almost assured that the business will survive this pandemic, and, somewhat counter intuitively, <span style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: italic; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">has a line of its business GROWING</span>. For other items affecting the valuation, people anchor to their past perceptions of a company, and that gets a stigma working against a stock for a long time. This seems to be the case for IVFH. Let's investigate why I do not believe that the stigma is relevant, and that the company is set up for great success in the future.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">For the TL;DR crowd: This is a well established company with a multiline (and further diversifying) revenue base, conservative debt, and ample cash, and a GREAT workforce. The quality of the workforce is manifested in the volume of transactions AND the positive reviews from customers on their online sales channels. <u style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant-caps: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">It is presently trading for around my estimation of liquidation value. This liquidation value is easily WAY LOWER than the current replacement cost of the company.</u> You also get 2 neat business lines <u style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant-caps: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">totaling nearly $58mm in revenue thrown on top of that, for free</u>. Before COVID, one of these was growing handsomely (specialty food services grew ~9%), and the other, more rapidly (ecommerce grew ~16%). Since Covid, the former got hurt, but will come back with restaurants opening again, and the other has recently experienced <u style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant-caps: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: italic; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">TRIPLE DIGIT revenue growth.</span></u> I'm talking triple digit percent growth too... not hundreds of dollars.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Given the company price, in relation to book value, it would be impossible for you to simply "start up" this company for what you can buy it for in the marketplace. It would take YEARS to build the infrastructure, inventory, customer relationships, employee base, and US Food Contract. You get all of the infrastructure, experience, and the like, for free at the present price of the common stock.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Based on the current market price, and sentiment, people just seem to be angry that the company didn't do as well as they thought it should have in the past. A disappointed and apathetic shareholder base has led to a price decline. A common criticism of investors was that the ecommerce acquisitions (mouth.com, igourment) were an imprudent use of shareholder capital. Management has worked steadily on these ecommerce platforms and now the Covid crisis has shown the value of these sites AND their future potential. If you look at the actual results of the company, you'll see this stock should have performed quite well. It is not the stock, or the company's fault that investors had too many expectations for it. Management can't control expectations of the shareholder base, only how they execute their business plan. I believe they have been doing a great job.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">I currently see no reason why this company should not currently trade for it's pre-covid levels of more than .50 cents a share. Further, once their ecommerce operations fully execute on their true potential, this very well could trade for even more than a dollar a share. Due to the diversification of the business, from the acquisitions of Mouth.com and iGourmet, the company will be able to survive COVID, and be positioned to grow a ton. Other companies in this industry have been sold for more than .55x revenue, which would imply in excess of 2.7x upside for the stock- implying it could trade for more than $.80/share. With some growth, this could well be more.</span></span></div>
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<span style="border: 0px; box-sizing: border-box; color: white; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><u style="background-color: black; border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">Balance Sheet: Hidden Assets, Amortizing Items, and Cash.</u></span></div>
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<span style="background-color: black;"><span style="color: white;">When reviewing the company's balance sheet, there are a lot of goodies to look at... AND some HIDDEN GEMS! </span></span></div>
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<span style="background-color: black;"><span style="color: white;">From the <a href="https://www.sec.gov/Archives/edgar/data/312257/000118518520000646/innovfood20191231_10k.htm" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">most recent 10K</a>:</span></span></div>
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<span style="background-color: black;"><span style="color: white;"><span style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">$9.9mm in current assets</span>, consisting of $3.96mm in cash, $3.3mm in A/R (some of this may be written off from the restaurant businesses they deal with, but, I am not TOO worried about anything material), and $2.35mm in inventory (more on this, later). There is more though, that is not carried here. The company <a href="https://www.sec.gov/Archives/edgar/data/312257/000118518520000516/innovfood20200421_8k.htm" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">got a PPP loan, to the tune of $1.65mm</a>, <span style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">for a legit need</span>- while they are public, <u style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant-caps: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: italic; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">they don't really have the ability to just go out and raise capital by selling shares like a BIG company</span></u>. Additionally, their revenue from restaurants fell off a cliff, and they have certainly experienced uncertainty and risk. <span style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: italic; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">This is the type of company that these loans were made for</span>. It is a small business, employing dozens of people in different locations, including most notably, rural PA. Additionally, this will help them offset any lost A/R from restaurants that they sell to in larger cities (ie NYC). With the company's share price going as low as .15 cents, the market was clearly worried about the future of the company, further justification for them getting the loan. It is my understanding that they had legal council look at this too, and have confidence that the loan will be <u style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant-caps: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">forgiven</u>. <span style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">This brings the company's current assets to $11.55mm.</span></span></span></div>
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<span style="background-color: black;"><span style="color: white;">Going on to the other assets on the balance sheet, you will see $6.65mm in PP&E. I believe that this consists of 4 primary REAL assets:</span></span></div>
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<span style="background-color: black;"><span style="color: white;">1) A 10,000 sq ft Florida facility (headquarters), at <a href="https://goo.gl/maps/KvKTGphwQxG1KPKo6" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">28411 Race Track Rd in Bonita Springs, Florida</a>, which is <a href="https://www.leepa.org/Display/DisplayParcel.aspx?FolioID=10456599&ViewMobile=false&TaxRollDetails=True#TaxRoll" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">assessed at $820K</a>. The company paid $793K for it, and it sits on 1.1 acres of land in 2013 (HINT: THIS IS WORTH MORE NOW)</span></span></div>
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<span style="background-color: black;"><span style="color: white;">2) A nearly 28,000 sf building (Artisan Foods) sitting on 1.33 acres of land, at <a href="https://goo.gl/maps/sd7wWbxdC4zCsibc7" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">2528 S 27th Ave, Broadview, Illinois</a>. <a href="https://www.cookcountyassessor.com/pin/15212020660000" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">This is assessed at $240K, but the assessor estimates that market value at $961K</a>. (HINT: THIS IS PROBABLY WORTH MORE NOW)</span></span></div>
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<span style="background-color: black;"><span style="color: white;">3) The company's NEW 200,000 sq ft warehouse at <a href="https://goo.gl/maps/hgdsfeJuGYQ3KKR58" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">220 Oak Hill Rd, Mountain Top, PA</a>. This sits on 15 acres of land. The company made a substantial down payment on this piece of property, and has yet to move into it. <a href="https://gis.luzernecounty.org/portal/apps/webappviewer/index.html?id=66ddb7b1902e4178a27ee71fd9f6a342" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">Here is the tax parcel info</a>. Total purchase price was $4.5mm, but, it appraised for $6.15mm, as is, and $8.0mm with the improvements that the company plans to do. the total loan against the property will be for ~$5.5mm when the construction is completed. The company hopes to move into this facility before the end of the year. In the meantime, it is generating income through logistics services, and through a cell phone tower lease! Pennsylvania stopped most all construction projects because of COVID, but, things have resumed as of May 1st. (HINT: THIS IS THE TYPE OF ASSET CLASS THAT IS GAINING IN POPULARITY, as the <a href="https://www.wsj.com/articles/real-estate-firms-expect-coronavirus-driven-shifts-will-spur-warehouse-demand-11586806285" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">Wall St Journal suggests</a> that warehouse demand will pick up both from Covid and from a shifting economy)</span></span></div>
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<span style="background-color: black;"><span style="color: white;">4) Leasehold improvements at the company's CURRENT warehouse at <a href="https://goo.gl/maps/QAJNbujgBVwMpe8p7" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">508 Delaware Ave in Pittston, PA</a>. The company will be moving from this facility, into the new 200K ft warehouse, that is located ~30 minutes away. IVFH purposely bought a facility in this area, so that they could maintain their workforce. Both an ethical and an economic move on their part! More on this later.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">When looking at the earnings statement, you can see that a lot of the PP&E has been depreciated. In fact, there is just under $1.5mm in depreciation. Let's say that this just goes against the NON-Building items (vehicles, furniture, and equipment). That means that there is $6.2mm of real estate on the books, and then ALL OF THE OTHER ITEMS, are effectively being carried at just a hair more than $400K. Given that the company's real estate has gone UP in value, I think that the PP&E estimate is probably pretty accurate, at the net amount of $6.645mm, if not a bit understated.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Now, the depreciation against property isn't all that is obfuscating the true earnings power of the company. Last year, IVFH had OVER $1.4mm in depreciation and amortization. This is largely coming through the amortization of intangibles, from acquisitions that have been made. These earnings charges are going against the income that the purchased entities have produced. Generally you would anticipate for there to be revenue declines or something that would "justify" the economic reasons for this depreciation... Well, revenues from ecommerce and such, have been going UP... so, this "charge" probably doesn't reflect the true earnings power of the purchased entities. At the time of this writing, these charges from last year represent ~12.1% of the company's market cap ($11.56mm)... as you can see from the screenshot below, these charges are going to be running out in the near future, and will in essence go straight to the bottom line. So, the P/E ratio you see on Yahoo Finance of ~46 will become a smaller number. Earnings numbers should start to converge somewhat, to their EBITDA numbers, as you can see in the screenshot below. In 2020, they will be about 1/2 what they were in 2019; in 2021, they will be cut in half again; in 2022, they will again be cut in half, until almost totally disappearing in 2023. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">Continuing along with the analysis, there are some other items, like intangibles, some lease assets, and goodwill, but, these go with the earnings power of the business, so, for the sake of argument, let's say that they are worth their stated amount.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Total assets = $20.87mm + $1.65mm of PPP Loan = $22.52mm</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Now, onto the liabilities of the company. All are pretty standard things: leases, interest, deferred revenue, accounts payable, and the like. Carried at $9.86mm</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Net Book Value: $12.66mm | price to book value: .91</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Let's say that you want to take out the intangibles, of $3.5mm. Ok, we can do that, but, if we impair them, let's add in a bit of money for taxes. Since the company pays taxes at a rate of 27.6%, I'll value these $3.5mm of assets at $966K.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">This brings us to an effective tangible book value of $10.13mm. This is 87.6% of the company's market cap of $11.56mm, makings its price to book value 1.14</span></span></div>
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<span style="background-color: black;"><span style="color: white;">I think that the best way to think of this, is that at the current price of the stock, it is essentially trading for an "orderly" liquidation value, and then you get this neat business thrown on top, for free. PLUS you get any growth, and coming operational efficiencies for FREE. And this is nothing to snub your nose at. Last year, the company was doing a whopping $57.9mm of revenue (which grew 9.45% year over year).</span></span></div>
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<span style="border: 0px; box-sizing: border-box; color: white; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><u style="background-color: black; border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">But WAIT, THERE'S MORE! </u></span></div>
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<span style="background-color: black;"><span style="color: white;">*The company has a net operating loss of $682K. While not huge in and of itself, it is not insignificant, and these things do add up. It seems that the company will (unlike most others) actually utilize this asset.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">***Ownership: Insiders own a fair bit of the company as you can see from the chart below. A few items need to be pointed out:</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Denver Smith recently purchased shares, now owning 2.7mm shares, totaling 7.9% of the company. JCP has bought more, and now owns 4.35mm shares, for 12.7% of the company. This is probably the most interesting development. JCP is run by James Pappas, in Texas. <a href="https://www.houstonchronicle.com/business/retail/article/Houston-investment-firm-seeks-changes-at-owner-of-6851725.php" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">He pushed for the sale of Corner Store</a> (CST BRANDS) <a href="https://www.cspdailynews.com/mergers-acquisitions/activist-stockholder-opens-about-cst-pantry" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">to Circle K in 2016</a>. He was also on the board of Jamba Juice, which was <a href="https://www.streetinsider.com/Corporate+News/Jamba+%28JMBA%29+to+Be+Acquired+by+Focus+Brands+for+%2413Share/14465452.html" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">bought out for $13.00/share.</a> While buying more shares and having an interesting history with other companies, Pappas now<a href="https://www.sec.gov/Archives/edgar/data/312257/000118518520000100/innovfood20200130_8k.htm" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank"> has a board seat, with another appointee</a>. I think that this is a very interesting development, as it seems to be his view that a company should grow until it can't, and then be sold. This is a welcomed development not just for this, but also because the company voted in a non-binding resolution, or an advisory vote, to have independent directors approve any SIGNIFICANT transaction- see below, from the most recent proxy:</span></span></div>
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<div style="border: 0px; box-sizing: border-box; font-family: roboto, sans-serif; font-size: 13px; font-stretch: inherit; line-height: inherit; margin-bottom: 5px; padding: 0px; vertical-align: baseline;">
<span style="background-color: black; border: 0px; box-sizing: border-box; color: white; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">THE FOLLOWING TRANSACTIONS SHALL REQUIRE THE APPROVAL OF A DESIGNATED BOARD COMMITTEE COMPRISED OF INDEPENDENT DIRECTORS: (I) AN ACQUISITION IN WHICH 20% OR MORE OF THE COMPANY’S OUTSTANDING COMMON STOCK, OR 5% WITH RESPECT TO A RELATED PARTY TRANSACTION, ARE PROPOSED TO BE ISSUED, (II) ISSUANCES OF COMPANY COMMON STOCK WHICH WILL RESULT IN A CHANGE OF CONTROL OF THE COMPANY, AND (III) A PRIVATE PLACEMENT INVOLVING COMMON STOCK EQUAL TO OR GREATER THAN 20% OF THE PRE-ISSUANCE OUTSTANDING COMMON STOCK AT A PRICE LESS THAN THE GREATER OF BOOK VALUE OR MARKET VALUE.</span></div>
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<span style="background-color: black;"><span style="color: white;">I think that this puts shareholders in a very unique position where they can feel comfortable that management is hearing them- and, it gives Pappas a fair bit of sway in the boardroom. At current prices, unless management thumbs its nose at shareholders, a large dilutive acquisition with stock, is unlikely unless there is board consensus believing that it will create value for shareholders.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Presently, I think that IVFH has a lot of room to grow, as recent rates of growth indicate. Additionally, as the retail environment continues to shift from in person, to online, IVFH will be a beneficiary of that shift. The composition of the Board hints this company is destined for revival! </span></span></div>
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<span style="background-color: black;"><span style="color: white;">**SG&A Costs Have Been Higher As Of Late-</span></span></div>
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<span style="background-color: black;"><span style="color: white;">This is because of them hiring for growth, and for more back end support. I think that if this was a company with the attention of Blue Apron, Amazon, Chewy, or any other ecommerce company, they would have a sky high valuation, because of investments like these. As a side note, APRN is currently using ~660K of warehouse space to produce $454mm in revenue or ~$687/sq ft, whereas IVFH uses ~105K sq ft (this doesn't include the new facility that is nearly 3x the size of their current leased warehouse) to produce $58mm in revenue, for ~$552/sq ft. Chewy is very close as well, with nearly 6.3mm sq ft of space producing 4.85bb in sales for a total of $758$/sf ft. <u style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant-caps: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: italic; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">IVFH is very close to being as efficient as APRN and CHEW are with their use of space.</span></u> Based on my conversations with management, the company will be getting more efficient with the utilization of their space, from the coming move to the new warehouse. If IVFH is more efficient with their current choppy setup of the leased warehouse- just how much more efficient can they become? I am betting quite a bit, as I will note later.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">***New Location Efficiencies</span></span></div>
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<span style="background-color: black;"><span style="color: white;">As noted earlier, the new location kept substantially all the workers of the company employed. This is FANTASTIC from an operational perspective. It explains why they have been able to scale up their ecommerce business with the onset of Covid. I showed a map, showing that the locations are about 1/2 an hour apart. BUT CHECK THIS OUT... </span></span></div>
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<span style="background-color: black;"><span style="color: white;">While the company's primary facilities are within 50 miles of a little more than 1/2% of the nation's population, it is within 125 miles of New York City, and Philly... which makes it 175 miles of 14.2% of the population... this is part of what makes the area very attractive to the company as it continues to scale- it is close to numerous population bases, had access to cheap real estate, was able to keep its workforce while moving its facilities, AND should see the asset price of its warehouse go up as warehouse space becomes more in demand. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">Additionally, the new 200K ft. space is laid out a lot better than their current facility. The old location was choppy, and hard to use different parts of. They will have a much larger slicing room for charcuterie, cheeses, and the like. The company will be better able to use this to continue launching house brands of foods. Increasing house brands will help them scale up and provide more of a competitive edge. You will notice that the company also acquired a cell phone tower lease, with the purchase of the property. This lease should be in the range of $20K a year, and will provide stable, near 100% margin revenue! There are some other great aspects of this building, but, that is for discussion at a later date.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">If you look at the unemployment rates in the area, it seems that it would also be easy for the company to have better chances for hiring workers, or, even getting better deals on wages. This could be a great way to reduce expenses, while also expanding capacity.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">*New Products & A New Website...</span></span></div>
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<span style="background-color: black;"><span style="color: white;">The company has been experimenting with new products. Recently, the company introduced <a href="https://www.igourmet.com/shoppe/shoppe.aspx?cat=Dinners&subcat=Dinners" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">frozen prepared meals</a>, on the iGourmet website. When asking about this, management told me that they would "NEVER" have a kitchen on site again or anything of that nature. The production of these meals is outsourced to other firms, thus the inventory risk is minimal, and margins are in line with their ordinary expectations. The company is looking at other offerings in this realm, along the lines of Gold Belly, where they can use their extensive back end facilities, to help link restaurants directly to consumers. This is a pretty interesting business, that has a HUGE opportunity to grow in the coming years. One thing that I found interesting was this 10 pound crawfish kit. It comes already seasoned and such, so, all you have to do is reheat the 10 pounds of crawfish! <a href="https://www.igourmet.com/shoppe/prodview_prod.aspx?prod=M827&orderid=373490288&cat=&subcat=&cf=usp_ListSearchResults_Sel&cprod=" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">At $89 dollars, for 10 pounds of food that you can't screw up</a>, that seems like a deal compared to <a href="http://www.lacrawfish.com/Live-Crawfish-By-The-Pound-P1232.aspx" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">$75.90 from Louisiana Crawfish Co</a>, for UN cooked and UN seasoned food. Interestingly, it seems like IVFH has partnered with Louisiana Crawfish Co, to sell these items.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">This entry into the frozen prepared food business is NOT to be confused with the company re-entering the prepared food business, where they take on the duties of actually making the food... The company's acquisition of Fresh Diet is now referred to by management as "the acquisition that shall not be named". I am have confidence that another acquisition of this nature will NOT be happening in the future.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">People are allowed to make mistakes, especially if they learn from them. I believe that to be the case here.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">The new website should be up in a few months, and will be MUCH better than the present one. Similar in nature to the hip and sleek <a href="https://www.mouth.com/" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">mouth.com</a> site.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">** Uptick In Online Sales:</span></span></div>
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<span style="background-color: black;"><span style="color: white;">The company smartly expanded from US Foods to a Direct To Consumer Model, and has grown that business from $0 to what I expect to be GREATLY in excess of $10mm this year (maybe $20mm+?!), and done so in a little more than 2 years! A great aspect of this business shift, is that the company's accounts receivable risk becomes virtually nonexistent, since customers pay BEFORE delivery! Regardless, because of managements shrewd acquisitions, they were uniquely ready for COVID, and are already showing the benefits of a diversifying revenue base. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">Operationally, the company is going super fast, but is far from firing on all cylinders. Their online sales have seen substantial increases, as had their US Foods business, until COVID. However, the key here is to remember how hard it is to simply "shift" from one aspect of the business to another. <a href="https://ivfh.com/press-releases/reports-financial-results-for-fourth-quarter-and-full-year-of-2019-and-provides-business-update-related-to-covid-19/" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">Their online sales were up to the tune of 150% in March and 400% in April. Orders increased from 7,500 to 35,000 in April!</a> Check out their eBay sales, as an example.... </span></span></div>
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<span style="background-color: black;"><span style="color: white;">Their feedback has ramped up in a huge way. I am guessing that they have a feedback rate of ~20%.. So, in the past month, they probably had 4,000 transactions on ebay, alone. Of those, only 2 people were "meh" enough to leave neutral feedback, and only 1 person was so incensed that they left a negative feedback. The rates of neutral and negative feedback seem similar for other time periods, as well. That strikes me as pretty amazing and evidence of good operational systems and workers. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">Furthermore, let's say that they did get 4,000 transactions in the past month, based on the feedback rate I mentioned. and, let's also assume that the average transaction is $30... which, I think is low, because someone can spend that much on <a href="https://www.ebay.com/itm/Dried-Cannellini-Beans-10-LB-10-pound/254215082773?hash=item3b30665315:g:u9IAAOSwaXVcxxJk" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">a few pounds of beans</a> (and they have sold 117 of them!) from IVFH. That equates to revenue of $120K/month! Or, $1.4mm per year... and that is JUST ON EBAY. When I received my package from their ebay store, they had included a discount card, that was driving me to their website, where I would assume their margins would be higher, but with the same price per product for the customer. If they can migrate customers from various websites such as amazon or ebay to their website- all the better. Here is a chart that I made, of data collected from 4/19/2020 - 5/20/2020 to track their Ebay sales. This shows that even AFTER the end of April, they were STILL seeing large surges in ecommerce!</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Now, this growth has subsided some, but it is still UP HUGELY. on 6/22/2020, they had 736 positive feedback left in the prior 30 days! That's pretty amazing- especially if they have been efficiently migrating customers from ebay to their own websites. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">I was curious to test this experience, that the company provided, with their online sales. Anytime that you increase a revenue line by HUNDREDS of percent in a short period of time, systems break. So, I ordered product from both their Ebay store, and their website, and received both orders super quickly. Everything was done correctly! THAT is a FEAT when experiencing huge revenue growth. Few companies can do that. Everything showed up in a matter of days (36 hours in one case), was packed well, and the like. In fact, I liked the experience so much, that I have started to buy the company's gift baskets for gifts (Mother's Day) and for gifts to sellers for real estate closings, when buying properties. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">**Expanded the board- was formerly 4 members, 2 of which were independent. Now, it is comprised of 7 members. They also have all the necessary committees to have good governance- Compensation, Audit, and a Nominating and Corporate Governance committee. These things may seem minor, but, they are actually a big deal.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">On the note of directors, Mr Wiernasz, who is also the Director of Strategic Acquisitions, was with US Foods for 13 years. He is very familiar with Innovative's primary customer, which is a HUGE plus, and a mitigating factor to the risk of losing them as a main customer- in 2018, the companies amended their contract so that it automatically renews. That is always a good sign. This said, it appears that US Food accounted for ~72.8% of the company's Specialty Food Service revenues and a total of ~56.9% of the total revenue of the Innovative in 2019. In 2018, US Food made up ~73.2% of Specialty Food Service revenue, and ~57.4% of total revenue. So, the company is taking steps to mitigate this risk- Granted not HUGE steps in the past year or so, but they are there- in 2017, US Foods accounted for an astounding 75% of TOTAL revenue of the company... so, you can see that they do take this seriously- the well timed acquisitions on iGourmet and Mouth.com played a huge roll in this, as the company greatly diversified its revenue streams. Again, while main customer risk is there, the company has been (smartly) taking active steps to remedy this issue.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Again, if we go with the assumption that e-commerce growth subsides from the 400% growth, to say, 100% for the year, that would make e-commerce revenue double to $21.4mm, which I think is very conservative. At that point, US Foods, with say, a 20% decline in revenue for the year (<a href="https://www.perishablenews.com/retailfoodservice/u-s-foodservice-revenues-to-decline-25-from-2019-but-will-rebound-by-2024-forecasts-new-report-by-packaged-facts/" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">here is an article predicting a 25% decline</a>, but I am guessing that the growth rate that IVFH has had, will help mitigate the overall decline of specialty food sales) would still make up just under 60% of revenues for the company. Under these assumptions, revenue for the entire year, would STILL BE UP, net, for the company. This said, New York City, which has seen the most draconian of US shutdowns, has seen the greatest decline in restaurant bookings; so, this is a little bit of a wild card. However, there are many points that mitigate, and outweigh this risk. I generally think that the workforce of IVFH is relatively nimble in the ability to reduce or increase hours as needed.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">It could be postulated that the company can be "amazoned." However, the niche market that the company works in, should prove to be resistant to this. Also, the amount of infrastructure that the company has invested in would be difficult to replicate quickly, efficiently, and in a manner that would disrupt their current and future relationships. So, while not non existent, I don't view this as a huge threat.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Other Catalysts:</span></span></div>
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<span style="background-color: black;"><span style="color: white;">The company has talked about this, and while it has yet to achieve this mark, it has made the right steps- such as adding independent board members, and the like. They also have an approved reverse split that has yet to take effect. If they uplist, you could expect an increase in the share price, which would be great for the company in the sense that it would be able to use more valuable stock in bolt-on acquisitions. This would be kind of a dream for this company, since they seem to have their back end operations set up to easily scale up, and do so with higher incremental margins.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">***Show the true profitability of iGourmet, and other online systems. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">A lot of times, you have to get scale before you can show real profitability. If you look at the purchase agreement between the company and the state of iGourmet, they were in essence incentivized to sandbag results. Whether or not they did, I don't know. But, I do know that IVFH has been investing in itself - via hiring people and the like. These expenses, much like low prices at amazon, don't show up as the Cap Ex that they really are- they show up as increasing SG&A and decreasing margins- hence, LOWER EBITDA. Even with these expenses, EBITDA has not disappointed, with the company posting <a href="https://ivfh.com/press-releases/reports-financial-results-for-fourth-quarter-and-full-year-of-2019-and-provides-business-update-related-to-covid-19/" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">$2mm of cash EBITDA for the year of 2019</a>... I am betting that this will be significantly higher in the coming years, as COVID subsides, the company grows, and its investments start to pay off.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">***** Normalization of EBIDTA/Earnings.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">The company noted in it's most recent release, about all the info that you need to figure out the profitability that it should have, should things normalize. In 2019, as noted earlier, the company generated $2mm of CASH EBITDA. Had SG&A only increased by the same percentage as revenue from 2018 - 2019, that would add $1.35mm to EBITDA, that would flow to the bottom line. I am using this hypothesis, because I generally think that the hiring and investments that the company made for future capacity, are showing up as SG&A, and thus, being expensed, rather than capitalized. All of a sudden, CASH EBITDA goes from $2mm this year, and $3.1mm last year, to $3.35mm for the year of 2019! Most all of the company's EBITDA is actually earnings, as the depreciation and amortization is not really economic. Let's be conservative, and say that normalized earnings (with adjustments) is $2mm... with a market cap of ~$11mm, the company is just 6, rather than the 55x that is presently showing from income of $.2mm in 2019.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">The company adjusted income in it's most recent press release, to $1.5mm- with my adjustment of just a paltry $500K, it seems pretty conservative, especially for a company with the revenue growth, and the earnings growth that the company should expect with normalization of it's business, as well as when accounting items quit needing adjustment.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Conclusion:</span></span></div>
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<span style="background-color: black;"><span style="color: white;">What's this worth? Well, for a business that should have LOWER margins than IVFH, </span></span></div>
<span style="background-color: black;"><span style="color: white;"><a href="https://www.foodbusinessnews.net/articles/12246-us-foods-to-acquire-sgas-food-group-of-companies" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: roboto, sans-serif; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">US Foods paid .56x revenue</a><span style="font-family: "roboto" , sans-serif; font-size: 13px;"> </span></span></span><br />
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<span style="background-color: black;"><span style="color: white;">for a much larger business.... so, you can extrapolate several things from that. They were probably expecting corporate efficiencies in the combined entities, greater scale, and the like. If US Foods would buy IVFH, then, they could save executive salaries, which would be a big bolster to earnings of the subsidiary, in terms of earnings and cash flow. Additionally costs such as audits and the like, just for being public, would likely go down due to the scale of US Foods- IVFH audit fees were .2% of revenue vs .01% of revenue for US Foods. ) The same extrapolation could probably be made for other corporate expenses. <u style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant-caps: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: italic; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">The fixed costs of being a public company are VERY substantial, and start to not eat away profits, as a company scales up.</span></u></span></span></div>
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<span style="background-color: black;"><span style="color: white;">This said- I am merely doing this as a valuation exercise. <u style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant-caps: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="border: 0px; box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">I am NOT suggesting a sale of the company</span></u>. There is much growth for management to continue to oversee.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Anyway, to reiterate the TL;DR thesis:</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Other companies in this industry have been sold for in excess of .55x revenue, which would imply a ~2.7x upside for the stock- meaning it could trade in excess of $.80/share. I currently see no reason why this company should not currently trade for its pre-covid levels of more than .50 cents a share, and even more than a dollar a share, once their operations show their true potential. We can see that they are delivering on this, as I type. </span></span></div>
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<span style="background-color: black;"><span style="color: white;">Given the company price, in relation to book value, it would be impossible for you to simply "start up" this company for what you can buy it for in the marketplace. It would take YEARS to build the infrastructure, inventory, customer relationships, employee base, and US Food Contract. You get all of the infrastructure for free at present prices of the common stock.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">As shown, IVFH is currently selling at a very compelling price with a great runway for growth. Due to the diversification of the business, from the acquisitions of Mouth.com and iGourmet, the company will be able to survive COVID, and be positioned to grow a ton.</span></span></div>
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<span style="background-color: black;"><span style="color: white;">Disclosure: I am long IVFH. </span></span><span style="background-color: #141414; color: white; font-family: "arial" , "helvetica" , sans-serif;">Assume everything that I wrote here is wrong.</span></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8100616554240982358.post-55887921701020868062020-06-24T10:10:00.003-07:002020-06-25T20:04:20.018-07:00Innovative Food Holdings IVFH (1 of 2)<span style="background-color: black; color: white; font-family: "roboto" , sans-serif; font-size: 13px;">DTEJD1997 here: </span><br />
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<span style="font-family: "roboto" , sans-serif; font-size: 13px;">I am guilty of being disorganized, doing too many things at once, and not fully completing what I start. That happened with IVFH. Fortunately, I've known Jeff for a long time. He is MUCH more organized than I am. He wound up helping me with this research and idea, doing actual field work, and picking up where I have left off. I did the initial work and analysis, but Jeff carried on and did a lot of the work and some very detailed analysis. Thus, this is a two part analysis. I started it, and Jeff finishes it off. </span></span><br />
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<span style="background-color: black; color: white; font-family: "roboto" , sans-serif; font-size: 13px;">The opportunity in (IVFH) kind of fell into my lap. IVFH has been on my extensive watch list for a few years. It has been near the bottom for a lot of that time. IVFH has had some difficulties of late, a lot of shareholder frustration, and perhaps most importantly, shareholder selling and a declining share price. The price has recently been as low as $.15/share in the recent panic. It has since climbed up to just above $.30/share. </span><br />
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<span style="background-color: black; color: white; font-family: "roboto" , sans-serif; font-size: 13px;">A couple of years ago, IVFH has made some excellent money, good returns on equity and capital. IVFH also has a lot of assets, cash, inventory, intellectual property and some interesting real estate. They then made some acquisitions that they had a LOT of expenses with, margins narrowed, earnings & cashflow went down, investors got frustrated and fatigued, and the stock price collapsed....so down near the bottom of the watch list it went... </span><br />
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<span style="background-color: black; color: white;"><span style="font-family: "roboto" , sans-serif; font-size: 13px;">I sell items on Ebay, and have for over 20 years. Late one night, something unusual popped up on my Ebay feed. That oddball item was “All Natural Pure Bee Honeycomb by Ziyad “ This is a “honeycomb” with honey in it. Yum Yum! I found it to be kind of unusual. This is not something that I would be thinking about purchasing online. The instant I saw it though, it registered with me. I've actually seen this item for sale in a great grocery store (Al-Haramain) that I frequent in Hamtramck MI. Hamtramck is a very dynamic small city, with lots of recent immigrants and a vibrant business community. There are many tremendous grocers there, with Al-Haramain being my "go-to" favorite. As I am familiar with the Ziyad brand, I clicked on the Ebay link to find out more. Turns out, it is being sold by a seller with the name of “igourmet”. Igourmet? </span><span style="border: 0px; box-sizing: border-box; font-family: "roboto" , sans-serif; font-size: 13px; font-stretch: inherit; font-style: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">I've heard of that name before</span><span style="font-family: "roboto" , sans-serif; font-size: 13px;">...they are subsidiary company of IVFH! What a small world! I found it interesting that this item was being sold for $13.99 on Ebay, there is also a delivery fee of $5.99. I've seen that item for sale for less in Hamtramck....They are almost certainly making good margins (percentage wise) on that item. Perhaps most importantly of all, they have sold well over 100 of these honeycombs! That is pretty darn good for Ebay! </span></span><br />
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<span style="background-color: black; color: white; font-family: "roboto" , sans-serif; font-size: 13px;">So I did some more investigating....igourmet's feedback rating has been increasing quite substantially lately. Further, it seems to be accelerating in the last 60 days or so. Undoubtedly, a chunk of that is due to the Corona-virus pandemic as people are more likely to want to have food delivered to them. </span><br />
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<span style="background-color: black; color: white; font-family: "roboto" , sans-serif; font-size: 13px;">Igourmet also has a substantial offering of food items on Ebay, about 2,400 items. </span><br />
<span style="background-color: black; color: white; font-family: "roboto" , sans-serif; font-size: 13px;">Igourmet also has a very high feedback rating, well over 99% As a seller on Ebay, I can say that is quite an accomplishment. It is somewhat easy to get a 98% or 99% feedback rating over 100 transactions....try doing that over SEVERAL THOUSAND. Try doing that feedback over the course of a a year. That is NOT going to be easy, you are most assuredly going to have be doing something right in order to accomplish that. Whoever is running igourmet's Ebay store is capable and doing a good job. </span><br />
<span style="background-color: black; color: white; font-family: "roboto" , sans-serif; font-size: 13px;">As much feedback as igourmet has gotten on Ebay, not every transaction gets them feedback from the buyer. In my experience, I get about a 40% conversion ratio (buyer's who leave feedback). The items that I sell are usually very expensive technical items, usually bought by sophisticated, professional buyers. So I probably get a very high conversion ratio. I strongly suspected that igourmet is NOT getting a 40% conversion ratio. What if they are getting 25% or so? In order to get 1,000 feedback in a month, they would have to being at least 4,000 transactions monthly.</span><br />
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<span style="background-color: black; color: white; font-family: "roboto" , sans-serif; font-size: 13px;">What is the average dollar value of that transaction? $10? $20? $40? more? Is the average buyer, buying more than 1 item at a time? I am going to guess that there is a fairly high percentage of buyers who buy MORE than 1 item. Could their average transaction be about $30? Take 4,000 transactions at $30, and that comes out to about $120,000 a month in sales on Ebay. On a yearly basis, that is well over $1,000,000. Now part of this is an upswing due to the CV-19 pandemic...but igourmet has been selling actively on Ebay for a while. Igourmet's sales were decent BEFORE the Covid epidemic. During the Covid epidemic, sales have exploded. and they are building the business on Ebay as time progresses. I think in time, even after the CV-19 passes, igourmet will still be selling a LOT of things on Ebay. </span><br />
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<span style="background-color: black; color: white; font-family: "roboto" , sans-serif; font-size: 13px;">What if I am off in my assumptions? Could it be that they are actually doing 4-5 thousand transactions a month on Ebay? What if the average transaction is MORE than $30? Could it be $40? Maybe? That is not some crazy “pie in the sky” interweb type of thing. Maybe $200k a month in sales? If so, that could EASILY be $2mm a year in Ebay sales alone. </span><br />
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<span style="background-color: black; color: white;"><span style="font-family: "roboto" , sans-serif; font-size: 13px;">If you go back through IVFH's quarterly and annual reports, e-commerce is discussed. In the regulatory filings, Ebay sales are NOT mentioned. In 2019, IVFH did about $10mm in e-commerce sales, without mention of Ebay. If Ebay's sales are exploding higher, what about their selling on </span><a href="http://amazon.com/" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: roboto, sans-serif; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">Amazon.com</a><span style="font-family: "roboto" , sans-serif; font-size: 13px;">? </span><a href="http://wal-mart.com/" rel="noopener noreferrer" style="border: 0px; box-sizing: border-box; font-family: roboto, sans-serif; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">Wal-Mart.com</a><span style="font-family: "roboto" , sans-serif; font-size: 13px;"> ?, their own in house websites? I'm going to guess that they are all going to be SUBSTANTIALLY higher than last year, as what is going on in Ebay. </span></span><br />
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<span style="background-color: black; color: white; font-family: "roboto" , sans-serif; font-size: 13px;">So with these admittedly “rough assumptions” I bought a bunch of shares just below $.25/share. At $.25/share, the market cap of IVFH is about $8.6mm. I think that is pretty interesting for a company that was doing over $10mm a year in “e-commerce” and had not even discussed that they were selling on Ebay. That indicates to me that Ebay is a relatively small component of their e-commerce sales. However, $1,000,000 in Ebay sales is not insignificant for a company with a market cap of $8.6mm. </span><br />
<span style="background-color: black; color: white; font-family: "roboto" , sans-serif; font-size: 13px;">I suspected that investor pessimism had gone too far, and perhaps everybody is/was fatigued, and no investor was paying much attention? Could it possibly be an inefficient market for IVFH, something not being properly priced? This is exactly the type of situation where I think I can get some interesting results? </span><br />
<span style="background-color: black; color: white; font-family: "roboto" , sans-serif; font-size: 13px;">Of course, there are lots of moving parts, and IVFH has some real estate and other interesting things. </span><br />
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<span style="background-color: black; color: white;"><span style="font-family: "roboto" , sans-serif; font-size: 13px;">So I took my initial research and passed it on to Jeff. Jeff evaluated my initial work, and he thought to do some things that I didn't do or even consider, </span><span style="border: 0px; box-sizing: border-box; font-family: "roboto" , sans-serif; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">and here are his thoughts/insights....</span></span><br />
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<span style="background-color: black; color: white;"><span style="border: 0px; box-sizing: border-box; font-family: "roboto" , sans-serif; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><br /></span></span>
<span style="background-color: black; color: white;"><span style="border: 0px; box-sizing: border-box; font-family: "roboto" , sans-serif; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">Disclosure: I am long IVFH. </span></span><span style="background-color: #141414; caret-color: rgb(255, 255, 255); color: white; font-family: arial, helvetica, sans-serif; font-size: 13px;">Assume everything that I wrote here is wrong.</span>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8100616554240982358.post-66943451108912941282020-04-12T21:18:00.002-07:002020-04-12T21:28:30.916-07:00Sachem Capital (93.5% Upside) and Sachem Baby Bonds (~18.5% YTM) (SACH | SCCB | SACC)<div class="yiv6942213658" style="margin: 0px;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><a class="yiv6942213658" href="https://www.sachemcapitalcorp.com/" rel="nofollow" target="_blank">Sachem Capital</a> (common: SACH) and Sachem Baby Bonds (SCCB | SACC)</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">For the TL;DR crowd:</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The baby bonds (SCCB | SACC) trade for a hair more than 2/3 face (~$18 of $25), and have very little risk. Yield To Maturity is about 18.42% and 18.75%, between price appreciation to face at maturity, and their interest rate. They are about as safe and cheap an investment as I can imagine.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The common stock (SACH) trades for ~63% of book value (market cap of $52mm vs book value of ~$83mm), and seems really cheap as well. If Sachem Capital traded like the recently beaten down Manhattan Bridge Capital (LOAN) a REIT/hard money lender, very similar to them financially and geographically, SACH stock would trade for ~$4.40, providing for an upside of ~93.5% (compared to LOAN with a p/b of 1.17) . The two company's financials are pretty similar, as debt (the thing that creates the most risk here) makes up ~40% of LOAN's assets, and ~42% of SACH's</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">As such, even with potential write downs of assets (I don't think this is a huge risk), the equity should have significant upside, with minimal risk of capital impairment. The bonds (SCCB and SACC) have a VERY high probability of trading at face, and I don't see any real risk of capital impairment with them.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">If everything gets back to normal, the common stock could trade for $7.30/share, given the valuation that LOAN had JUST 2 MONTHS AGO! Their market cap of $62.6mm represented a p/b of ~1.95.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">################</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">For some more detail:</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">A lot of investments I make are based on the ideas of other people. This one is no exception. I love talking ideas with others, and a lot of time, bouncing ideas off one another is much better than doing so individually. You can come up with some really good stuff, and have a sanity check, to make sure that no one is doing anything stupid.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The common stock was found by DTEJD1997, an attorney/investor from Detroit that I've known for years. After I bought the common, another person suggested a look at the baby bonds (I just didn't think to buy them... facepalm), when they saw I was buying the common. DTEJD1997 and I both worked on the thesis, which was really fun. :)</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Sachem Capital is a hard money lender. Sachem capital is set up a Real Estate Investment Trust (REIT). Sachem is a subset of REITS known as a "mortgage REIT/mREIT", as such, SACH's primary assets are 1st lien mortgages on real estate. SACH does own and lease out a few properties, but the vast majority of it's assets are mortgages.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">If someone wants to buy a piece of real estate, they can get more leverage (and less headache) by going through a sort of short term financing (1 year or less), with a hard money lender, rather than a traditional bank. Everyone always bitches about the rates that hard money lenders charge, but, to get a good deal done, it’s more than worth it. A lot of deals need to close quickly, and property sellers are willing to take less money for a quick closing. Banks can not close a loan in a week, whereas hard money lenders can. After the buyer of the property fixes up and “seasons” the property, where it has been rented for some period of time, a traditional bank will refinance the loan, at a lower rate. If everything is done right, a borrower can get into a house for a lot less than the 20% down that a bank would require. This is on top of the deal actually being able to close for them! Just getting across the finish line is a big deal!</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Having used hard money loans in the past, and present, I am very familiar with the process. For me, I generally borrow enough to buy the house, and renovate it. This very week, I will be using a hard money loan to buy a house across the street from the home that I reside. It is a win win for both me, and the seller (a story for another time, maybe).</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">For those of you that know Manhattan Bridge Capital (LOAN), Sachem is in the same line of business. Manhattan Bridge Capital has been in business for a longer time and also has track record which has been good. Manhattan Bridge Capital is known quantity to investors, and trades for a premium. Sachem Capital is not as well known, and trades for discount. Will this always be the case? I doubt it.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">With that being said, there are some big differences. Manhattan Bridge Capital has its loans in the New York City metro area. In comparison, Sachem has more geographic coverage primarily CT, but also small amounts in Texas, South Carolina, and Colorado. Sachem Capital has <u><i>substantial</i></u> cash on hand ($20mm), whereas LOAN has a paltry $118K... this is 9.8% of their SG&A of $1.2mm for last year; granted, they have some room on their line of credit, but that isn't a great situation to be in- those lines of credit can be yanked away from you... compare that to the $20mm of cash that SACH has on hand (per their conference call), being 1,000% of their annual Compensation, Fees, Taxes, G&A (to be extra conservative).....</span></div>
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<u class="yiv6942213658"><i class="yiv6942213658"><b class="yiv6942213658"><span style="font-family: "arial" , "helvetica" , sans-serif;">Who's gonna have the money to keep the lights on? Sachem.</span></b></i></u></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Sachem seems to be more conservative than my personal lenders: SACH lends a max of 70% LTV, and have recently adjusted that down to 50% LTV, in light of the crisis.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Looking at their balance sheet, after this <a class="yiv6942213658" href="https://www.sachemcapitalcorp.com/news-media/press-releases/detail/46/sachem-capital-achieves-record-revenue-of-12-7-million-and" rel="nofollow" target="_blank">barn burner of a quarter</a>...</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">This is a critical part of the analysis. A great deal of mREIT's have complicated capital structures. Complicated capital structures are NOT what you want in a time of crisis. Sachem Capital went through a few moves restructuring their capital structure in late 2019. Management was very lucky to have done this at the time. Those moves included:</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">A). SACH sold 2.3mm common stock in late summer of 2019 at a price of about $5/share, raising a little over $11mm.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">B). SACH floated two series of bonds, SCCB & SACC.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">C). SACH used the proceeds of these capital raises to repay and retire their bank debt. The result was a greatly simplified capital structure, and increased flexibility, as well as just not having to rely on banks.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The end result is that at April 2020, SACH's capital structure consists of common stock, "baby bonds", and retained earnings. SACH has no bank loans, no credit default swaps, no perpetual preferred stock, no interest rate option spreads, no swaps, and so on. Very simple, very basic capital structure is to SACH's advantage. This is so incredibly important because most mREITs that get into trouble have over extended themselves into crazy complicated capital structures. Another INCREDIBLY IMPORTANT POINT is that SACH is not securitizing their loan portfolio. This is one of the primary reasons of the Great Financial Crisis . It is NOT in SACH's interest to have inflated appraisals being done- not just because of the balance sheet risk, but, insiders own almost 8% of the company (most of that being owned by the CEO. There is much less of a conflict of interest as compared to the large banks in the GFC, who really just want loan originations.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">So, <a class="yiv6942213658" href="https://www.sec.gov/Archives/edgar/data/1682220/000110465920039904/tm205279-1_10k.htm" rel="nofollow" target="_blank">as of the last 10K</a> we have assets of $141.2mm and liabilities of $58.6mm for a B/V of $82.6mm (20mm in cash) and a P/B of ~.46... Their historic P/E is 8.39, and the past dividend yield is 11.2%... not too shabby for a company that seems to be in pretty good shape.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">They are a REIT, and HAVE to pay out 90% of earnings to maintain this status. As long as they make income, which I am pretty confident they will... you get these payments. SACH's management does have a bit a leeway though. They do NOT have pay those earnings out quarterly, they can issue one large dividend at the end of the year. If/when there are net earnings in 2020 for SACH, this is what management is going to do, since they are differing this quarters payment. Generally, when REITs and MLPs get these large yields, there is more risk. I generally feel that there is LESS risk with this company, now, than there was 3 months ago, simply because of the reduction in price.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a class="yiv6942213658" href="https://www.webcaster4.com/Webcast/Page/2304/33917" rel="nofollow" target="_blank">On the most recent conference call, several interesting tidbits came out.</a> *THIS IS A GOOD CONFERENCE CALL TO LISTEN TO ALL OF* (if you don’t want to listen, <a class="yiv6942213658" href="https://www.sec.gov/Archives/edgar/data/1682220/000110465920043072/tm2014917d1_ex99-2.htm" rel="nofollow" target="_blank">you can read it</a>)</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">*The board is aware of the price of the stock, and bonds, and has discussed buying them back.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">*The CEO didn’t want to comment on if he would be buying stock personally. He mentioned that there were restrictions and blackouts...</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">*They have limited new loans to just the money amounts that come back in, through repayments and interest earned</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">*They temporarily deferred their common stock dividend, but are adamant to pay it out (end of 2020), necessary to maintain their REIT status</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">*Putting geographic expansion on hold</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">*Numerous competitors have stopped lending</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">*Sachem has gotten more conservative in their loans</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">*Sachem is committed to maintaining their REIT status going forward.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Presently, the baby bonds trade for ~$18, against a face value of $25. At the height of the recent panic, these bonds trades as low as $8!!! There are $55.4mm outstanding, meaning that of the company’s $58.6mm in liabilities, 94.5% are the bonds. Though, these bonds are presently worth ~$40mm. So, if the company were to totally cease operations, they could pay off ~1/2 of the present value of the bonds with the $20mm cash they have in the bank (per the conference call), and cough up the remaining $20mm from liquidating their loans and other assets (some REOs)... <u class="yiv6942213658"><i class="yiv6942213658">all they need is $0.20 cents on the dollar to cover the bonds at present prices and ~$0.33 cents on the dollar to cover in full. REMEMBER, that is for an asset that was originally loaned at 70% LTV. </i></u></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">As such, the actual appraised value of the asset, would have to drop by even more- less than $0.15 cents on the dollar, for the bonds to not get paid out at current prices!!!</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">This is a scenario that I do not think will occur. As SACH has the most senior position against the houses. If they were a mREIT that owned the property, had it financed, and was relying on the remaining equity, I would TOTALLY understand this valuation.... however, this is NOT the case.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">For the common stock to get hurt at its present price of $2.37, the loans/assets on their books would have to liquidate for ~$0.44 cents on the dollar, of what they are carried on their books for. Again, a scenario that I don't think is very likely, given that these loans were made at 70% LTV...</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Now, I know if it gets bad enough for liquidations, there are costs with this, and the courts are shut down. However, there are personal guarantees on these, so that helps. That guarantee may not be worth a lot in the coming months, but it is worth something. Also, with the underwriting standards of the company, I think their borrowers are relatively strong, as are the properties they lend against, relative to the loan balances.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Could it be that some of the appraisals are "optimistic"? It could be...BUT since the GFC, appraisers have had to tighten up. It is also NOT in SACH's interest to have "optimistic appraisals" being done. SACH holds the paper! They aren't reselling it! </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Sure, some loans are in default, but, some of those, were intentionally bought by the company, from other lenders. <u><i>They outlined their thesis, and how this works, in the <a href="https://www.webcaster4.com/Webcast/Page/2304/33917" target="_blank">most recent conference call.</a></i></u><a href="https://www.webcaster4.com/Webcast/Page/2304/33917" target="_blank"> Again, check that out for more info</a>. *THIS IS A GOOD CONFERENCE CALL TO LISTEN TO ALL OF* (if you don’t want to listen, <a class="yiv6942213658" href="https://www.sec.gov/Archives/edgar/data/1682220/000110465920043072/tm2014917d1_ex99-2.htm" rel="nofollow" target="_blank">you can read it</a>)</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Additionally, while there are some loans outside of maturity, I do not think that is a problem, as that is pretty common with this type of loan. Say that a loan is for a year: it may take 6 months to renovate the house, another 2 to rent, and then 3 to refinance. That takes you right up to maturity.... so, it’s easy to see how this could stretch out, past whatever date was set. If a loan goes past the maturity date, the interest rate goes UP, and the collateral is SAFER, as it has already likely been fixed up, making the 70% LTV a more concrete number.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Yes, the brother of the CEO recently left, and it seems weird that they have not talked... but, families can be weird, and I don't think this is a huge deal. Sure, a discount may be reasonable to apply here, but 50%?! nah... more like 5%... Plus, if you look at the covenants of their old bank loans, both brothers had to be employed by the company- that's one of the reasons why it would seem they got the bonds issued- to reduce covenants. So, this shouldn't be a TOTAL surprise.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Yes, it’s a REIT, and REITs are getting killed, especially mREITs. But, this one is different than all the rest, because of the simple capital structure, debt to asset ratio, and the value of the equity. Not only that, but, it isn't a REIT in a traditional sense. <i><u><b>They have 1st mortgages on the properties, and are the most senior lien holders... Most REITs just get what is left, AFTER notes like these are paid off.</b></u></i> If the company was more heavily levered? I would get the huge discount to book. But, there just isn’t that much leverage with SACH. AND IT ISN'T BANK DEBT... So, they aren't going to have to worry about covenant breaches like others, and modifications, where the banks get them for fees and such. This is just a fantastic setup! </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">SACH's common equity still too risky? One can mitigate their equity risk by buying the bonds (I am long both)</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Bottom line, is that I can think of no safer investments, with as much upside, as Sachem Baby Bonds. The equity ain't bad either.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Disclosure: I am long both SACH and SACC. Assume everything that I wrote here is wrong.</span></div>
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