Wednesday, February 24, 2021

Thryv Warrants and Thryv Stock- A Value Creating Positive Feedback Loop

Please reference the Thryv post on RagnarIsAPirate, which can somewhat catch you up on the situation at my favorite company. Also, a notable update is the Sensis acquisition, and debt refinance... Thryv has been busy!

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 (from here). That represents a more than 400% growth in SaaS subscribers in the coming years!

And while that is a HUGE deal... 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 give the stock some compelling upside AND downside protection.  In fact, I think that the presence of the warrants give the stock some “icing on the cake” so to speak. 🎂🍰🧁


As you can see below in the company's S1 filing, 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 most recent 10Q. Normally, seeing that a company is facing dilution of ~18% from warrants is reason for pause. Let me explain why it is not.

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.

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. 

Per a recent Bloomberg release, 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 Sensis. 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!

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.

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%!

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. 

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 pays off the remainder of their debt in the coming months. 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. 

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.

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 company's CFO. 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. 

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...

It gets even more interesting for the company's CEO, Joe Walsh:

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. 

Here is a link to a spreadsheet highlighting the option setup for the executive team, as well as a screen shot.

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. 

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 Dex Media had been in the past. 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.

Oh... and one last thing that just came out in the most recent earnings guidance from the company. They have released a large amount of the valuation allowance for the company's tax asset. 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.

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.

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...

Disclosure: Long THRY and THRY Warrants.

Wednesday, January 27, 2021

$PMD Psychemedics Corp: Trucking Along Into A Potential Big Catalyst ($21 PT)

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: @vanckzhu We are both long the stock, and think that it is a really good price, for the flows of cash that should be coming. :)

Here is his original post:

$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.

There’s four reasons for excitement today:
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.
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.
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.
4. Management was awarded 35K in options ($4.07 strike price) and 150K in RSUs on 11/11/20.

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.

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.

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 (

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.

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:
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.
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:

1) June 2012: MAP 21 act passed

2) April 2014: Public comment period opened (we’re roughly 4 months after public comment period opened for hair tests)

3) February 2016: becomes law

4) December 2017: early adoption allowed, beginning of 2-yr trial period

5) December 2019: electronic logging becomes mandatory

Disclosure: Long

Sunday, January 3, 2021

Thryv (THRY): Buy A Melting Iceberg; Get A SaaS Business For Free

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... Dex Media was a value play that ended up going bankrupt back in the day, so hear me out hear the company out 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 Global TMT Virtual Conference and the conference call for the last 10Q (transcript). Their Investor Day Presentation is also a good source.

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.

Two Businesses For The Price Of One

Thryv is 2 separately run businesses- the first, being the “shrinking iceberg” that is the Yellow Pages (doing over a billion with a “B” in revenue ~$1.1bb in the trailing 12 months) and the second is the SaaS business- Thryv (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 comparing to dial up usage

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 ice cube. Rather, iceberg.

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 (this is in their S1, page 138). 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.

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).

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:

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! 

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 even more 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. 


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 Cambium, that was taken out by a private equity firm... 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.

Check out the Cambium Learning chart, just before the buyout for 14.50 a share...  

More on Joe Walsh, here and here.


HERE IS THE KICKER... Thryv also has a Saas business, called “Thryv.” 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 their webpage), 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.

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. 

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. 

So, given that I like Thryv, and so do 45,000+ other people, what does Thryv do? 

*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.



*Conversation Tracking


*Website Support

*CRM database





*Marketing Campaigns

*Follow ups for reviews for various sites, that go out for distribution

*Payments*- The company just introduced Thryv Pay. 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!

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. 

Thryv also has different verticals where they are going- such as legal, and the like. Really compelling stuff...

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.

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 long articles 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 governments using inferior softwares for a very long time, 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. 

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.

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 they wanted to make sure that they were a good fit for us. 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. 

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.

Reducing Pension Liabilities

From the most recent 10Q, in the “subsequent events” section:

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 should be material though, as they did disclose the matter in their subsequent events. 

Subleasing Office Space In Dallas Fort Worth

Due to COVID, the company went to a “remote first” setup. As such, they impaired their office's value...

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 - in fact- they are trying to. 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...

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. 

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!

Effects Of The Pandemic

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). 

Valuation Ownership, And The Like

First- why is this cheap?

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. 

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:

Speaking of John Paulson, lets examine the ownership of the company:

*Only about 9% of the stock is really out there, in “float.” So who are the holders? A bunch of billionaires. 

~60% is owned by Affiliates of Jason Mudrick

~15.5% is owned by Affiliates of Goldenree- Steven Tananbaum

~10.5% is owned by Affiliates of John Paulson.

~6% is owned by Yosemite Sellers Representatives- Stephen Feinberg

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.

On top of that, CEO Joe Walsh 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.


First and foremost, CEO Joe Walsh, going back to his Cambium days, seems to know a thing or two about selling companies... 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?

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. Check out this tweet, for reference, and explanation.

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, 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... not exactly the same scenario, but, it certainly rhymes.

As John Paulson noted in the conference call (here is a video of JUST the Paulson part of the call): Hubspot (HUBS) gets a premium valuation to THRY. Of note, HUBS only has about 2x the number of customers that Thryv does, but also gets about 50x the valuation...

So What’s It Worth?

With about 31 million shares outstanding, the company is valued at $13.50/share, or, a market cap of ~$420 million. John Paulson suggested in the last conference call, 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!

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.

Valuation Of The SaaS Business

*A recent valuation for (another software that I use, and love) who boasts around 100,000 users, came in at a whopping $2.7bb. A year before, their valuation was $1.9bb, 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.

*Airtable, around 2 years ago with 85K customers, was valued at $1.1bb.

*Notion was recently valued at $2bb with 4mm users.

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. 

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. 

Disclosure: I am long THRY.

Tuesday, June 30, 2020

Spindletop Oil & Gas Co (SPND): Tons Of Cash, No Debt, and Optionality

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).

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.

Current market cap is ~$12.5mm ($1.88/share)

As of the most recent 10Q:
CASH AND CDS OF $17,282,000 ($2.55/share) and this is BEFORE a PPP Loan.
Total assets of $23,519,000
NET BOOK of: $16,213,000 (or, $2.39/share)

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, given the bankruptcies that are coming in the oil and gas industry

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. 


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. 

On the company's balance sheet, their office building is carried at $1.276mm (net of depreciation). 

Here is the card from the Tax Assessor. The County has it assessed for $1.55mm. 

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.

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. 

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 10Q​) SPND also repurchased over $50K in stock for $1.25/share. Again, a hefty amount of the float.

If that isn't enough, the company also raise their high cash levels even more, with a PPP loan of just over $400K...

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 wave of oil and gas bankruptcies, this could be a compelling play, because of them being able to pick up assets on the cheap. 

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.

Disclosure: I am long SPND.

Thursday, June 25, 2020

Innovative Food Holdings (IVFH) 2 of 2

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, has a line of its business GROWING. 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.
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.  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.  You also get 2 neat business lines totaling nearly $58mm in revenue thrown on top of that, for free. 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 TRIPLE DIGIT revenue growth. I'm talking triple digit percent growth too... not hundreds of dollars.

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.

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 (, 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.

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 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.


Balance Sheet: Hidden Assets, Amortizing Items, and Cash.

When reviewing the company's balance sheet, there are a lot of goodies to look at... AND some HIDDEN GEMS! 
From the most recent 10K:

$9.9mm in current assets, 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 got a PPP loan, to the tune of $1.65mmfor a legit need- while they are public, they don't really have the ability to just go out and raise capital by selling shares like a BIG company. Additionally, their revenue from restaurants fell off a cliff, and they have certainly experienced uncertainty and risk. This is the type of company that these loans were made for. 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 forgivenThis brings the company's current assets to $11.55mm.

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:
1) A 10,000 sq ft Florida facility (headquarters), at 28411 Race Track Rd in Bonita Springs, Florida, which is assessed at $820K.  The company paid $793K for it, and it sits on 1.1 acres of land in 2013 (HINT: THIS IS WORTH MORE NOW)
2) A nearly 28,000 sf building (Artisan Foods) sitting on 1.33 acres of land, at 2528 S 27th Ave, Broadview, IllinoisThis is assessed at $240K, but the assessor estimates that market value at $961K. (HINT: THIS IS PROBABLY WORTH MORE NOW)
3) The company's NEW 200,000 sq ft warehouse at 220 Oak Hill Rd, Mountain Top, PA. 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. Here is the tax parcel info. 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 Wall St Journal suggests that warehouse demand will pick up both from Covid and from a shifting economy)

4) Leasehold improvements at the company's CURRENT warehouse at 508 Delaware Ave in Pittston, PA. 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.

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.

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. 

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.

Total assets = $20.87mm + $1.65mm of PPP Loan = $22.52mm
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

Net Book Value: $12.66mm | price to book value: .91

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.

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

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).



*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.

***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:

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. He pushed for the sale of Corner Store (CST BRANDS) to Circle K in 2016. He was also on the board of Jamba Juice, which was bought out for $13.00/share. While buying more shares and having an interesting history with other companies, Pappas now has a board seat, with another appointee. 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:


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.

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! 

**SG&A Costs Have Been Higher As Of Late-
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. IVFH is very close to being as efficient as APRN  and CHEW are with their use of space. 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.

***New Location Efficiencies
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... 

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. 

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.

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.

*New Products & A New Website...
The company has been experimenting with new products. Recently, the company introduced frozen prepared meals, 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! At $89 dollars, for 10 pounds of food that you can't screw up, that seems like a deal compared to $75.90 from Louisiana Crawfish Co, for UN cooked and UN seasoned food. Interestingly, it seems like IVFH has partnered with Louisiana Crawfish Co, to sell these items.

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.

People are allowed to make mistakes, especially if they learn from them. I believe that to be the case here.

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 site.

** Uptick In Online Sales:

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. 

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. 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! Check out their eBay sales, as an example.... 


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. 

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 few pounds of beans (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!

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. 

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. 

**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.

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 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.

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 (here is an article predicting a 25% decline, 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.

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.

Other Catalysts:

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.

***Show the true profitability of iGourmet, and other online systems. 
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 $2mm of cash EBITDA for the year of 2019... 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.

***** Normalization of EBIDTA/Earnings.
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.

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.


What's this worth? Well, for a business that should have LOWER margins than IVFH, 
US Foods paid .56x revenue 
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. The fixed costs of being a public company are VERY substantial, and start to not eat away profits, as a company scales up.

This said- I am merely doing this as a valuation exercise. I am NOT suggesting a sale of the company. There is much growth for management to continue to oversee.

Anyway, to reiterate the TL;DR thesis:

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. 

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.

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 and iGourmet, the company will be able to survive COVID, and be positioned to grow a ton.

Disclosure: I am long IVFH. Assume everything that I wrote here is wrong.