ShadowStock: Exploiting Market Anomalies with Neglected Data

Debt Free Operational Reset, Innovative Food Holdings IVFH

noreply@blogger.com (ShadowStock) — Tue, 26 Aug 2025 04:10:00 +0000

Innovative Food Holdings (IVFH) is a nanocap specialty food distributor undergoing a more focused asset-light model. Shares trade at $0.82 with 54.8 million shares outstanding and a market value of $44.9 million. Public float is 28.7 million shares or 23.5 million.

By selling their Pennsylvania warehouse and closing the unprofitable cheese business in 2025, management proved they can make difficult pro-shareholder decisions. Eliminating the Pennsylvania warehouse will yield quarterly savings of approximately $200,000 in interest, while closing the unprofitable cheese business will enhance gross margins.Further, management is growing the Digital Channels business, which adds more products and vendors without inventory. Their use of AI helps accelerates onboarding,jumping from 13 items historically to 400 items added in just four weeks. Meanwhile, the airline catering segment grew 26% year-on-year.

A debt-free balance sheet, margin recovery, a scalable platform, and multiple expansions create a higher stock price.

Business Overview:
Innovative Food Holdings (IVFH) distributes specialty foods through an asset-light digital network (Sysco, US Foods, Amazon) and a fast-growing airline catering arm (+26% YoY, Q2 2025). Recent acquisitions (Golden Organics, LoCo) have expanded regional capacity and fed into its digital catalog. Meanwhile, the airline business is consolidated in Chicago for efficiency.

Recent Developments (Q2 2025)
IVFH posted $21.1M revenue (+27% YoY) with airline catering up 26% and Amazon triple-digit growth; the remaining improved sequentially. Reported gross margin was 21% but ex-cheese margin expanded by 66 bps. OCF turned positive (+$575K vs. -$977K in Q1), net income swung to $59K, and the cheese exit plus the pending PA warehouse sale (Sept. 2025) set up lean, higher-margin operations.

Catalyst:
The following two quarters, ~$9M of debt is retired by Q4 2025, reducing ~$200K/quarter in interest expense and leaving IVFH nearly debt-free. The exit from the unprofitable cheese business removes a structural drag, while the Chicago consolidation unlocks SG&A leverage and pushes margins toward the mid-20s. At the same time, AI-driven catalog expansion accelerates growth, with onboarding speed cut by ~80% and thousands of high-margin SKUs ready to launch. Airline catering continues to compound (+26% YoY) with embedded recurring revenue and ongoing customer wins adding upside. With valuation at just 0.66× EV/Sales-well below peers at 1-2×-and normalized EBITDA power set to re-rate sharply, the timing offers investors a rare window before cleaner results and balance sheet optics force the market to close the gap.

Ownership
Activist shareholders with skin in the game on the board is a game changer.Innovative Food Holdings has unusually aligned ownership for a turnaround.

Pappas owns 18% of the company's shares and has been on the board since 2020. His background in restaurants and distribution makes IVFH an easy fit for his playbook. He's a proponent of "growth activism" - fixing capital structures, installing operators, and aligning governance with customers.

Bandera Partners holds ~12% and Denver Johnson Smith ~9%. Inlight Wealth (~5%) and Intelligent Fanatics (~5.5%) add to the institutional sponsorship. Collectively, these funds control >45% of equity. Insider alignment is meaningful: CEO Bill Bennett owns ~4.5%, COO Brady Smallwood holds option grants based on performance, and director Hank Cohn retains ~5%. The result is a concentrated, shareholder-friendly register where activists and management align economically. Active ownership is critical. The company misallocated and devalued assets for years. It anchors capital discipline, enforces board refreshment, and supports operating playbooks built for growth. Large value-oriented shareholders directly impact strategy and capital allocation. Value-based activist ownership will guide improved capital allocations, forcing a clear path to create long-term value.

Valuation:
At just 0.66× EV/Sales, IVFH trades at a steep discount to distribution peers Sysco (1.0×), US Foods (0.9×), and Performance Food Group (0.8×). A re-rating to 1.0× implies ~50% upside. At $0.82/share, IVFH offers material upside with multiple opportunities to accelerate growth and margin expansion.

Risks:
Margin and growth risks include accelerated catalog growth and recent acquisition integrations. Customer concentration remains a factor, with U.S. Foods still representing a large distribution channel and subject to competitive pressure. As a thinly traded small-cap, IVFH shares carry liquidity, risk and volatility. Finally, the expected synergies from the Denver acquisition have not yet been proven, leaving room for integration challenges if management falls short.

Conclusion:
IVFH is an overlooked micro-cap entering a turnaround phase. Multiple catalysts, including debt elimination, AI-driven catalog expansion, airline catering growth, and margin recovery, are set to re-rate the valuation. At just 0.66× EV/Sales, the stock trades well below its peers despite intrinsic value estimates pointing to 2-3× upside. A small, ignored company undergoing a balance sheet and operating reset, where execution through Q4 2025 and after creates potential for asymmetric returns.

Long:IVFH

Tandy Leather TLF: Dear Chairman

noreply@blogger.com (ShadowStock) — Tue, 31 Dec 2024 03:23:00 +0000

Today's post updates the risks and opportunities associated with the recent real estate sale and also contains a message for the Chairman of the board.

Business Summary:

Tandy Leather (TLF), founded in 1919, is the profitable leader of the leather crafting retail market.

TLF sells leather and leather craft-related items primarily through retail stores, websites, or direct account representatives.

Tandy has 101 stores in 40 states, six provinces in Canada, and one store in Spain.
Several smaller, privately family owned competitors exist, including Double Eagle Leathersmith, Montana Leather Company, and Weaver Leather Supply.

Tandy Leather announced on Dec 6th that its corporate headquarters was sold for $26.5 million before taxes/expenses. The expected closing date is sometime in January 2025. As part of its transition to new facilities in Fort Worth, Texas, Tandy will lease back the facilities until September 2025.

The announcement had a minimal impact on TLF's stock price. Before the announcement, the stock traded at approximately $4.20 per share over the trailing three months. Following the sale announcement, the price rose modestly to $4.75 per share. Given the stock’s limited trading volume, even this increase lacked significant momentum.

This muted market reaction is surprising, especially considering that the company’s liquidation value, by my conservative estimate, increased by 42%. This estimate assumes $15 million in additional net cash proceeds from the sale, based on a pre-announcement value of $35 million. My calculation factors in estimated real estate taxes and expenses of $11.5 million, leaving $15 million in net cash proceeds.

Dear Mr. Chairman,

I have been a dedicated shareholder of Tandy for many years, but I am increasingly concerned about the board’s operational oversight and strategic decision-making. My concerns stem from significant missteps, including the mishandling of inventory errors and the substantial expenditure on consultants, which squandered shareholder value.

The current CEO is 63 years old, and two CFOs have been hired and departed within two years. This instability raises serious questions about the board’s ability to identify and retain competent leadership for key positions. Why should shareholders trust the board to effectively replace a future CEO or CFO? Furthermore, how does the board intend to responsibly allocate proceeds from the headquarters sale, valued at $26.5 million?

Accountability for Inventory Errors
I believe the removal of former CFO Ms. Castillo following the discovery of inventory errors in Q4 2019 was a mistake. Despite this, the board has not taken accountability for the multi-year inventory errors or the lack of compliant systems that led to them. As a fiduciary body, the board is responsible for overseeing inventory management, ensuring system compliance, and approving budgets for improvements. Yet, the company relied on outdated, non-integrated systems—some stores even maintained paper records. These shortcomings culminated in regulatory penalties and significant value destruction, further eroding shareholder trust.

Financial Oversight Gaps
Since 2020, Tandy has recruited and lost two CFOs. These hires were ill-suited for the role, as evidenced by their short tenures. This reflects a glaring gap on the board—a lack of members with real-world corporate finance and operational experience. This deficiency has directly contributed to ongoing accounting irregularities. Why was Ms. Castillo removed in the first place, and how can shareholders trust the board to effectively select a new CFO given its track record?

Compensation Discrepancies and Shareholder Concerns
In FY 2023, Tandy, a $35 million nano-cap company, paid its CEO and a board member $1,181,280 in total compensation. The CEO now holds 439,285 shares, or 5.22% of shares outstanding, alongside generous annual stock options—such as 92,000 shares in 2022 with an exercise price of $3.52. These figures appear disproportionate to Tandy’s size and performance, particularly in light of the challenges faced since the discovery of inventory errors.

Cash Balance Decline and Cost Mismanagement
When inventory errors were identified in Q4 2019, Tandy’s audited cash balance stood at $25 million. By September 2022, when Tandy was relisted on NASDAQ, this had plummeted to $3 million. While inventory valuation issues did not impact cash directly, the precipitous decline reflects significant mismanagement. Currently, the cash balance sits at $10 million. What specific actions contributed to this erosion of cash reserves?

From 2019 to 2020, the company spent $5.5 million on restatement efforts and CFO transitions. Over two years, an additional $4.9 million was allocated to restatements, with $594,000 earmarked for CFO-related expenses, as disclosed in the 10-K. Despite these investments, the board failed to ensure the implementation of effective ERP and accounting systems, leading to ongoing inefficiencies and delays.

Relisting and Additional Costs
Tandy was delisted from NASDAQ in August 2020 after the board failed to prepare timely financial statements. It took nearly two years—and significant costs for financial consultants, ERP system advisors, and CFO transitions—for the company to regain its listing in July 2022. Between 2019 and 2022, millions of dollars were spent without clear disclosure of consultant costs, further frustrating shareholders.

The board must address these systemic failures and communicate a transparent plan for the future. As a shareholder, I urge you to take immediate action to restore confidence by improving oversight, ensuring accountability, and demonstrating a commitment to responsible financial stewardship.

Shareholders are not unreasonable in believing the upcoming cash infusion will evaporate. Furthermore, the proposed small dividend would do little to offer meaningful liquidity to long-term shareholders who have patiently supported the company for years.

Opportunities

The board must recognize that Tandy Leather Factory (TLF) is not suited to remain a publicly listed company. However, due to inertia, the company continues to bear unnecessary administrative and operational expenses, which serve no real benefit to shareholders or employees. A strategic sale of Tandy would unlock significant value and position the company for long-term health and growth under more suitable ownership.

Tandy's future lies with an entity capable of nurturing its potential for the benefit of all stakeholders. Based on NAV or EBITDA multiple valuations, Tandy could command a premium of over 65% above its current market value.

A new owner could realize over $1 million in annual savings by eliminating public company costs, including listing fees, audits, and legal expenses. These savings alone would contribute to immediate profitability improvements.

Since 2018, Tandy's EBITDA margins have averaged approximately 6.75%, generating an annual EBITDA of $5.4 million. However, for the 17 years prior, EBITDA margins averaged a much stronger 12.6%. If a new owner can drive modest revenue growth—boosting the current $76 million average revenue to $80 million—and restore historical EBITDA margins to 12%, Tandy’s annual EBITDA could reach $10 million.

This approach not only enhances operational efficiency but also provides a sustainable foundation for growth, benefiting employees, customers, and investors alike. The path forward is clear: a strategic sale would unlock Tandy's true value and secure its future.

Valuation using the Balance Sheet

These metrics all point to a much higher valuation over the current 38M.

Conclusion: NOW is the time to explore strategic alternatives.

I respectfully urge the Board of Directors to engage in a thorough review of strategic alternatives, including the potential sale of the company, to maximize shareholder value and ensure the long-term interests of all stakeholders are prioritized

The board must urgently develop and present a transparent plan to ensure shareholders have the opportunity to exit at a fair and reasonable price – no less than $7 per share. If the board cannot achieve this without pursuing a sale of the company, then it is imperative they explore and initiate a formal sale process without delay.

As Benjamin Graham wisely noted in Security Analysis:

"It is not the function of the corporation to make the market for its shares, but it should provide a fair and reasonable opportunity for stockholders who desire to dispose of their holdings to obtain an adequate price for them."

Currently, minority shareholders are being neglected and undervalued by Tandy’s board. This has persisted for far too long. Mr. Chairman, it is time to demonstrate goodwill and take meaningful action to address shareholder concerns.

Long TLF

HireQuest HQI: Asset-Light Franchising, Strategic Acquisitions, And Profitable Growth

noreply@blogger.com (ShadowStock) — Thu, 14 Nov 2024 05:21:00 +0000

HireQuest (HQI)

Price = $14.48: Market Cap = 200.16M : Enterprise Value = 215.19M

P/B = 3.04: EV/Revenue = 5.80 : EV/EBITDA = 19.26

HireQuest (HQI) is a fast-growing national staffing franchisor with a proven, profitable asset-light model. It has impressive historical operating margins and strong free cash flow. The CEO’s net worth is invested in +22% of HQI’s outstanding shares. His total HQI investment is 44 million, and he often makes open market purchases.

The staffing industry is highly fragmented. And HQI has aggressively made strategic acquisitions, buying smaller competitors and integrating them into its franchise model. Refranchising acquired companies boosts profits by lowering the capital requirements, costs, and operating risk.

Top-line growth is evident. Revenue per share increased by 126.22% from the 2021 balance of 1.15 to the trailing twelve-month balance of 2.61. Profitability has materially grown. Per share, retained earnings, and book value grew by 283.09% and 87.54%, respectively, from 2021 to the current trailing 12 months. These value-increasing attributes have significantly outperformed its stock price performance, offering a mean reversion opportunity in addition to expanding multiples and value from additional growth. HQI’s price per share declined -23.01 % from the year ending 2021 to the current price of $14.25, contrasted to the material per share value improvement in retained earnings, book value, revenues, and a forward dividend yield of 1.68%. HQI declared a .06 dividend for shareholders of record 12/2/24.

See the table below for historical financial performance.

Relative valuation using the NAISC code 561311 (employment placement agencies) for 14 companies.

HQI has the highest EBITDA margins, 30.11%, versus the NAISC (561311) average of -12.37%. The second-highest EBITDA margin was KFY at 12%. Sixteen insider buying transactions over the prior 12 months for HQI versus a medium of zero or three companies with one or two small insider purchases. Institutional ownership is 12.10% for HQI versus the average 60% for NAISC(561311). HireQuest's CEO purchased 18,459 shares in the open market in 2024 for $230,603 at an average price of 12.49. HQI directors purchased 7,000 shares for $89,080 at an average price of 12.73 in 2024. Since 2019, HQI insiders bought 346,889 shares for $3,216,348 at an average price of $9.27, with zero insider selling. Operationally, HireQuest consistently outperforms its peers!

A brief review of the most recent earnings for Q3 2024.

Revenue growth for Q3 2024 slowed to 1.60% year over year to $9.4 million, and sequential revenue growth was 8.5% compared to the second quarter of 2024. Temporary staffing brands grew by 3.6%, their first year-over-year growth since early 2023. Due to significant reductions in workers' compensation expenses, down 67% from last year, SG&A expenses dropped by +15% from Q3 2023.

Executive recruiting and permanent placement are long-term opportunities, but demand has been low. Due to a market downturn, MRI Network assets acquired in 2022 were impaired by $6 million. With the impairment charge removed, adjusted net income increased to $2.8 million. Adjusted EBITDA rose to $4.9 million with a 52% margin.

The company completed two small acquisitions in Q3. Management is actively looking for more deals, mainly in commercial staffing.

HireQuest expects better performance in 2025 due to market stabilization and cost control. Staffing market stability and disciplined expense management keep management optimistic.

Risk:

Economic downturns can reduce staffing demand.

Integrating acquisitions, such as MRI, introduces short-term margin compression and operational challenges.

Opportunities:

Through franchising, HQI can enter diversified staffing verticals and grow.

They can boost margins by buying and converting to their proven asset-light business model.

The expanded national network enhances HQI’s ability to secure large contracts.

Franchises make HQI resilient to economic downturns. Companies may prefer temporary staffing solutions to full-time hires.

Conclusion:

HQI investment is a long-term buy. HireQuest stands out in the staffing industry because it has a proven asset-light franchise model, an aggressive acquisition strategy, management talent, and material ownership in the common stock. The company has grown in key financial metrics and adapted to economic changes. Despite recent price underperformance, the company's impressive prior four-year profitable operations, solid balance sheet, cost controls, and disciplined approach to acquisitions present a compelling mean reversion and growth opportunity.

Long HQI

Transforming agriculture with innovative seed technology: S&W Seed Company

noreply@blogger.com (ShadowStock) — Tue, 23 Jul 2024 13:42:00 +0000

S&W Seed (SANW) is a global agricultural business focusing on alfalfa, sorghum, pasture, and sunflower seeds. It develops proprietary products using plant breeding and molecular techniques and sells over 600 seed products. Cleaning and processing facilities are located in Texas, New South Wales, and South Australia. S&W seed products are sold in over 40 countries, and management expects to introduce 20 new products during 2024.

In June 2023, SANW hired Mark Herrmann as their CEO. With a remarkable 35 years of experience in the seed industry, including a significant tenure at Monsanto, Mark brings a wealth of knowledge and a fresh perspective to our team. His recent role as the CEO/Founder of ACUMEN and AgReliant Genetics further underscores his leadership capabilities and his potential to steer S&W Seed toward greater success.

CFO Vanessa Baughman joined SANW on 05/2023. She brings extensive seed industry experience and insight into seed industry finances. Her financial tenure was as CFO at AgReliant Genetics, the largest North American seed company, from January 2000 to January 2019, and as a finance executive at Monsanto Company.

Initiatives and Financial Progress during Q3 2024

Double Team's proprietary sorghum trait technology will be planted on over 10% of all acres in the United States during 2024, double the amount planted last year. This is a 77% to 115% increase compared to fiscal 2023. Over the next few years, a gradual adoption increase will occur, with a 25 percent market share goal by 2027. Double Team is one of the fastest growing seed traits on the market because of S&W's sorghum technology. Farmers are realizing the benefits of improved yield enhancement through grass control and crop grazing safety technologies. YTD margins were 29.2% compared to 23.2% last year. The advantages are evident with Double Team gross margins of ~ 60%. Further, SANW expects them to increase due to efficiency and stacking technologies. S&W is the key technology provider in sorghum.

Several initiatives were implemented to improve efficiency, increase inventory utilization, reduce product SKUs, and cut outsourcing costs. Further, a plan was introduced to reduce seed manufacturing costs and rationalize certain low-margin forage product lines.

International operations face several headwinds, especially in the Middle East, Northern Africa, and the MENA region. They've gotten worse since February.

The Double Team technology platform by S&W Seed (SANW) improves profitability and productivity for sorghum grain farmers. Sorghum requires less water and energy than other crops like corn. The technology also helps farmers optimize their use of resources, leading to better profitability.

S&W Seed Company adopted a brand and licensing strategy to expand. They have signed licensing agreements with 15 independent seed companies, some of which offer Double Team under private labels.

Mexico, Brazil, Argentina, and Australia are some of S&W Seed Company's key international markets. The company plans to work with market leaders in these regions through license agreements, allowing it to carry and promote Double Team while paying royalties.

Within three years, the Double Team quickly gained market acceptance, capturing 10% of the U.S. sorghum market. This rapid adoption rate shows how valuable and practical the technology is for sorghum farmers. SANW is also working on DT2, which allows earlier weed spraying during the sorghum growth cycle. They also work on DT and Prussic Acid-Free (PAF) traits for weed control and livestock safety.

For fiscal 2024, adjusted EBITDA expectations are negative $6 million to $8 million. Despite the negative EBITDA expectation, the payments from Shell and Trigall are expected to cover operating cash needs for 2024. SANW received a $6 million payment from Shell in February 2024 and will receive a $1.4 million payment from Trigall. Beyond fiscal 2024, if growth continues in its sorghum portfolio and it achieves expense management initiatives, it will soon be near positive cash flow.

The table below provides additional quantitative value analysis.

Tangible BV is .53 per share versus the market's current price of .32. P/TB = .60, EV/BV = 1.25, trading at historical lows. My enterprise value is calculated as market value + total liabilities less cash. EV/GP is 3.97, down from 13.73 for 06/2022. EV/Sales = .94, down from the 2021 value of 2.11. Debt per share is significant at 1.19 and slightly improved from 1.24 for 2023.

Properties owned: Warehouse ( Moore County, Texas); Processing facility/Warehouse (Lubbock County, Texas); Research farm (Keith, South Australia)

Opportunities:

The new CEO and CFO have deep operational experience managing seed businesses and introducing new traits.

Management expects Double Team to be on over 10% of U.S. sorghum acres. Plus, licensing and partnerships for international growth.

A successful launch and growth of Double Team, DT Forage Sorghum, and Prussic Acid Free.

Investing in R&D to develop new traits and focus on non-GMO solutions. From 12/2019 to the MRQ, 30.23 million or .81 per share was spent on research and development for new products.

Material improvement and quickly expanding margins with Double Team sorghum. Management is focused on high-margin products. Quarter 3 2024 saw a 25% margin improvement over Q3 2023, with GM% of 23.56% versus 18.77%.

Partnership with Shell to develop Camelina for biofuels and explore strategic partnerships to diversify revenue.

Removing noncore programs and selling nonessential assets.

Risk

Geopolitical events, such as contract losses in the MENA region and supply constraints in Australia, negatively affected revenue and EBITDA guidance.

Agriculture market conditions are unpredictable, and SANW lacks the liquidity to wait another two years. Working capital must be managed efficiently to cover operational needs and reduce liquidity risks. Material negative surprises will likely result in dilution or bankruptcy to pay debtors.

Conclusion:

S&W Seed has demonstrated impressive growth with Double Team and its future product pipeline. Strategic partnerships and focusing on high-margin products with low-cost partnerships and associated royalties offer value for investors willing to take on the risk.

Despite this, we cannot predict droughts, floods, geopolitical issues, or market acceptance of their current or future products. This, coupled with current debt, makes SANW a HIGH RISK investment.

However, given the current valuation and current and potential value of existing seed technology, I consider SANW a POSITIVE EXPECTED VALUE INVESTMENT. So, I'm buying SANW.

Long SANW (S&W Seed Company)

Consumer Cyclicals: Kambi Group (KMBIF) is statistically cheap

noreply@blogger.com (ShadowStock) — Mon, 08 Jul 2024 04:30:00 +0000

Kambi provides sports betting technology worldwide. Over 40 operators on six continents are part of their partnership. From compliance to odds-compiling, Kambi offers a wide range of services through its in-house software platform. Over 1,000 employees work at eight global locations: Malta (headquarters), Australia, Copenhagen, the Philippines, Romania, Sweden, the UK, and the US.

My analysis is only quantitative and needs more work. I'm not making a recommendation but instead for additional research if interested.

Over the past few years, Kambi has lost its three largest customers. Kindred, Penn Entertainment, and DraftKings have purchased or developed internal solutions. However, the current price may offer an opportunity. The market may have overestimated the risk of Kambi's customers sourcing their sportsbook technology.

Enterprise value per share is 8.89. That's a decline of 71.12% from 30.77 at the end of 2020. Retained earnings per share rose 200.20% over the same period, from the MRQ balance of 4.66 versus the 2020 balance of 1.46. Ratios also improved, EV/Rev = 1.40 (85.46% improvement from 2020), EV/GP = 1.42 (66.60% improvement from 2020), and EV/Retained earnings = 1.91 (76.51% improvement from the 2020 balance of 21.11).

Kambi offers barriers to entry and switching costs. With its current low valuations, it could be an acquisition candidate.

Risks: Loss of customers when companies develop or buy existing companies with solutions. Changes in technology and government regulatory changes.

Click to see a small part of the discovery process.

No Position: Kambi Group (KMBIF)

Simple Screen: Discounted Real Estate, Share Buybacks, Debt Reduction, Transformation, Oversold

noreply@blogger.com (ShadowStock) — Tue, 11 Jun 2024 03:38:00 +0000

JACK: Jack In The Box

Jack in the Box was founded in 1951 and operates and franchises fast food restaurants, Jack in the Box and Del Taco, throughout the U.S. The company is based in San Diego, California.

Jack in the Box is transforming from an asset-heavy and barely growing to a faster-growing, asset-light franchisor that is shareholder-friendly by monetizing real estate assets, dividends and improving its capital structure with share repurchases.

In addition to 189 restaurant-owned land locations, JACK owns its corporate headquarters in San Diego, California. The headquarters is 70,000 square feet and contains approximately four acres of undeveloped land. Its fair market value is around 40 million. Rent is earned at the land locations owned by JACK and used by the franchisee.

IMO, at these prices, Jack in the Box stock is a weak intermediate-term buy and a stronger long-term buy. There's a high debt load, no obvious valuation discount to peers, and rising inflation for food and labor. Demand for fast food is weak, and the market is highly competitive.

Management is committed to maximizing shareholder value. Using the CF statement, over the past five quarters, debt payment was 91.73M, 45.60M was distributed as dividends, and 60.43M was spent on share repurchases.

Long JACK on 07/11/24

Click here to discover new ideas on 10,805 stocks listed in the USA exchanges for multiple countries. Use the filter on the right; if you want, export it to Excel for additional analysis.

Expensify: A busted IPO to an undervalued SaaS Micro-Cap

noreply@blogger.com (ShadowStock) — Mon, 06 May 2024 02:21:00 +0000

Expensify (EXFY) develops and sells Software-as-a-Service (SaaS) solutions designed to simplify expense reporting, receipt tracking, global payments, and company card reconciliation. The platform streamlines the financial expense management workflows. Expensify's features include payment processing, invoicing, chat, document management, global reimbursements, budgeting, and email notifications. Employees can easily report payments and receipts, allowing finance departments to track, analyze, and manage budgets more effectively.

Why Expensify (EXFY)? Expensify is a broken October 2021 IPO. Financially strong and valued at 125M as a Software-as-a-Service (SaaS). It's down 96% from its first week high as an IPO. However, EXFY trades at an EV/Rev of .83 with an average of 719,000 2023 paid members and $1,116,296 revenue per employee. FCF is projected to be between 10 and 12 million in 2024. Further, a clear road map and focus on dominating the untapped, underserved VSB (very small business) market that uses email and Excel to manage expenses and documents. New Expensify created a moat around payments and documents with real-time chat in 2024. In 2023 and 2024, Steven Mclaughlin (Founder / CEO / Financial Technology Partners) purchased 11,341,889 shares above the current market price.

Year-end 2023 results:

The full-year 2023 financial results were reported on 02/2024. Revenue was 150.70 million, operating cash flow was 1.60 million, and FCF was 600,000. GAAP net loss was $41.7 million, non-GAAP net loss was $500,000, and adjusted EBITDA was 13.20 million. Adjusted EBITDA excludes stock compensation, depreciation/amortization, interest expense, and taxes.

Quarter 4 revenue was 32.2 million, average paid members was 719,000, net loss was 7.50 million, and adjusted EBITDA was 5.90 million. The fourth quarter demonstrated material improvement over Q3, driven by expense reductions. Cash used in operations was $500,000. Free cash flow was negative at $3.6 million, and net loss was $7.5 million. Non-GAAP net income was $3.1 million, and adjusted EBITDA was $5.9 million.

Adds, Churn, Expansion (FY 2022 and 2023)

The slide above was taken from Q4 2023 earnings call

Key metrics, like churn and new acquisitions, averaged the same over the prior two years. However, customer growth fluctuated materially, with a decline in paid seats compared to the previous year. The contraction of paid seats among existing customers resulted from challenging economic conditions reported by management. Despite economic conditions, customers stayed; instead, they made fewer and smaller transactions.

Opportunities:

EXFY is Software-as-a-Service (SaaS) with a positive and growing free cash flow. The enterprise-to-revenue ratio is .82, and the staggering average revenue per employee was 1,116,296 in 2023. The number of paid customers averaged 732,000 in 2023. And, if the top line and free cash flow exceed expectations, the stock price will quickly rise from its historical and relatively low EV/Rev of .83. Quarter four's 2023 free cash flow improvement does not fully reflect the new cost reduction to be realized in 2024.

Strong financial position: debt per share was reduced from a 2022 balance of .82 to .34 in the latest quarter. The company has a cash balance of 47.50 million and a remaining credit line of 22.70 million. Portland, Oregon, headquarters' 38,500-square-foot office space is owned.

David Barrett, the company's founder, has a strong background in technology. Previously, he was the engineering lead at Red Swoosh, a peer-to-peer file-sharing company acquired in 2007 by Akamai Technologies.

Expensify sold 9.73 million shares priced at $27 at its October 2021 IPO, raising $262.7 million. In its stock market debut, the stock opened at $39.75 and rose 47%, valuing the company at $3.87 billion.

The company is rolling out New Expensify and leaning into its core functionality by creating a moat using real-time chat within expense management, document exchange, global payments, and additional functionality around expense reimbursement. The newly added chat function is free of charge. However, plans will begin charging in 2024.

For 2024, management forecast 10-12 million in FCF without expecting an improved macro environment. The current cash balance is $48 million, with a small amount left on their revolving credit line. Share buybacks make sense, with a projected 10-12 million free cash flow in 2024. They have $41M remaining on their share buyback commitment but have no plans to repurchase shares.

Recruiting and focusing on accounting partners and onboarding clients onto the new card to enjoy 50 basis points in revenue share. The new card program enhances revenue by earning more interchange per transaction, with existing customers transitioning by the end of 2024. All new Expensify Card customers are automatically part of this program, increasing reported interchange fees by 20%, now reported as revenue and not a contra expense.

New Expensify leans into real-time chat around every core function for document management, payments, and receipts. Chat is viral and makes AI a potentially more significant advantage. Chat surrounding each function offers a deeper understanding of what drives or destroys value.

Expense management can provide insight into business value drivers. Real-time chat around receipts/payments, documents, negotiations, travel management, payroll, and budgets will provide a deeper understanding of value creation or destruction. AI can be integrated into the analysis because AI is based on words (Chat). Conversations are attached to the file, report, task, or expense discussed.

Management reported a +35% month-over-month increase in global reimbursement customers with the new Expensify.

Cost cutting was implemented halfway through the fourth quarter. So, the full impact will be realized in future quarters.

Expensify focuses on billions of untapped and uncontested global VSBs (very small businesses). There are 1.3B underserved users in the VSB/SMB market using spreadsheets and email. EXFY is the only company actively pursuing this huge, untapped market. According to management, there is no organized competition. The USA has 33.20 million small businesses, accounting for 99.9% of all US businesses. Expensify is built from the ground up for seamless interoperability.

The chat design around all New Expensify functions enables AI. A clear roadmap for Expensify's success centered around a viral, bottom-up, word-of-mouth lead generation strategy leveraged on chat.

With Expensify's SmartScan technology, you can take pictures of your receipts. To simplify expense tracking, it automatically reads the vendor, date, and amount. It integrates with accounting and ERP systems. The updated architecture is React Native. With it, you can get a synchronous layout and effects, a concurrent renderer.

Expensify was built internally but now uses open source. With thousands of talented developers worldwide, open-source leverages Expensify's internal engineering team.

Institutional Ownership is only 14.10%, with 66.53% of shares in public float.

Insider buying:

Steven J. McLaughlin, founder and CEO of FT Partners, a fintech-focused investment banking firm, has aggressively accumulated shares and is now a 10% owner. Starting in August 2023, McLaughlin purchased 1,659,105 shares for 8,262,909 at an average price of $4.98. In October 2023, an additional 168,894 shares were purchased for 418,857 at an average price of 2.48. In November 2023, 1,014197 shares were bought for 1,845,840 at an average price of 1.82. The total shares acquired in 2023 were 2,842,198 for 10,527,606 at an average price of $3.70.

During 2024, McLaughlin began adding more shares. January 2024, shares purchased were 237,532 for $418,471 for an average price of 1.76. February 2024, shares purchased were 182,941 for $290876 for an average price of 1.59. April 2024, shares bought were 1,016,612 for 1,545,595 at an average price of 1.52. The total number of shares purchased in 2024 was 1,437,085 for 2,254,942 for an average 2024 price of 1.57.

So the total for 2023 and 2024 was 4,279,281 shares purchased at the cost of 12,782,548 for an average price of $2.99

The slide above was taken from Q4 2023 earnings call

Risk:

Customer activity is down, and management gave no guidance on revenue retention.

In Q4, the average paid membership dropped to 719,000, down from 732,000 in 2023. Expensify's new features took longer than expected, and Q1 2024 could be tough since January is traditionally a slow month, as discussed on the Q4 earnings call.

Competition is intense with many private companies.

Capital structure: Expensify has three stock classes. Class A stock has one vote per share; privately held LT10 shares of 7.3 million (ten votes per share); and privately held LT50 shares of 7.3 million (50 votes per share). The owners of the LT10 and LT50 shares control 17% of the economic interest and 86% of the voting power in Expensify.

The CEO is betting on viral and SEO strategies for sales/marketing. These have execution risks. A weak economic outlook for existing customers could again be blamed for consistently missing expectations.

Cost cutting is responsible for the dramatic Q4 improvements over Q3, not operational or top-line improvements. On the recent Q4 earnings call, management didn't provide long-term growth guidance outside FCF for 2024.

Conclusion:

I'm optimistic about $ EXFY's long-term value based on the product's customer reviews, talented management/board, and a founding CEO's focus on the long term. Furthermore, the deep value is based on sales and FCF to EV for a SaaS microcap. Also, the low public float and tiny institutional ownership will quickly increase the stock price if they beat expectations or show customer growth.

Long: EXFY

TANDY LEATHER FACTORY (TLF): Intrinsic Value Discount.

noreply@blogger.com (ShadowStock) — Tue, 26 Mar 2024 06:02:00 +0000

Tandy Leather, symbol TLF, founded in 1919, is a consistently profitable leather crafting retail leader. Tandy sells leather and leather craft-related items primarily through retail stores, websites, or direct account representatives. Tandy has 101 stores in 40 states, six provinces in Canada, and one store in Spain. Several smaller, privately family owned competitors exist, including Double Eagle Leathersmith, Montana Leather Company, and Weaver Leather Supply.

The table above illustrates a few of Tandy's unique values and attributes. Such as EV/OI = 8.8, P/NCAV = 1.13, and 85.50M cumulative EBIT over the prior 15 years and 121.28M for EBITDA. This is versus an enterprise value of 39M.

Opportunity:

Tandy Leather reported fourth-quarter and year-end 2023 results on 03/22/24. For the year ending 2023, Tandy shows continued profit growth and cash in a difficult retail environment with high inflation. Net income was $3.80 million, an increase of $1.20 million compared to the year ending 2022. Gross profit was relatively flat as margins improved from 57.90% in 2022 to 59.30% in 2023. Operating expenses declined 9.70% to a stable operating expense of 40 million. Cash grew to 12.20 million from 8 million in 2022. After adjusting for stock compensation, EBITDA was 6.50 million.

TLF is an intrinsically and relatively cheap investment based on consistent profitable FCF and growing margins. Deep value-based and long term owners provide a margin of safety and offer constructive activism. Bandera (Jeff Gramm) owns 34.40%, JCP Investment(James Pappas) 10.04%, and First Foundation (Eric Speron )10%. CEO Janet Carr owns 4.50%.

Over the past two years, investors have overlooked hidden value creation, including implementing new systems, shuttering unprofitable stores, and improving online distribution processes. Additionally, optionality exists as their fully owned corporate headquarters has been listed with a broker for sale. A +12 million net profit is a reasonable expectation if they sell. The sale of their headquarters will likely increase the price per share after a special or continued commitment to dividends.

On a relative valuation basis, only 33 industry specialty retailers reported positive EBITDA out of 47 USA-headquartered companies. The industry average EV/Revenue was 1.92 versus TLF's .49. And an average EV/EBITDA was 52.46 versus TLF's 5.15.

Positive Yelp reviews

The picture above is from a Yelp review (Carol I from San Antonio, TX): "Staff has always been friendly and helpful the couple of times I've stopped in.".

"Great customer service, they even gave me a demonstration on how to use the splitter I bought." Johnny G.San Antonio,

"Amazing customer service, …was patient and helped me to understand all the necessities in order start this project." Ashley P. Austin, TX

"Definitely 5 stars. I have used this store 2 times once in person 1 time on the phone. The people here are GREAT!" Kenneth S.San Francisco, CA

Tandy operations have favorable unit economics and the resources to grow. Return on investment after opening a retail store in a few years with a cheap lease off the main strip and $200K in inventory.

Catalysts:

Sale of corporate headquarters now listed or secure a loan on the debt free headquarters worth ~ +15M to initiate a dividend.

Continued profitable cash accumulation with the market shift towards buying smaller profitable companies.

RE per share increased 12.30% from the year ending 2021 to MRQ versus an EV per share decline of -19.22%. Tandy generated 35.61 million in FCF in the last fifteen years and 22.40 million in the last ten years.

A tiny 40% of the shares outstanding are in the float.

Activist shareholders could force a sale, go private, or other strategic alternatives. Bandera (Jeff Gramm) owns 34% of the shares outstanding and is Chairman of the Board and a proven capital allocator with an average purchase price of 7.03. JCP (James Pappas) (Outside Director) owns 10.40% at an average price of $4.67/Share. FIRST FOUNDATION ADVISORS (Eric Speron) Average Price $4.69/Share. First Foundation (Eric Speron) Total Return Fund Average Price $4.82/share director of Compensation Committee. CEO (Inside Director) Janett Carr owns 4.40%.

Risks:

Continued inflation and weaker retail environment.

Conclusion:

Strong financials, debt-free, consistently profitable free cash flow, and a margin of safety. The company is undervalued based on its consistent FCF (free cash flow) and unlocked real estate value. Additionally, the CEO and board are incentivized with skin in the game with stock purchases above the current price.

Long TLF

Illiquid SPECULATION; Karnalyte Resources (KRN.TO / KRLTF)

noreply@blogger.com (ShadowStock) — Mon, 11 Mar 2024 01:14:00 +0000

Karnalyte Resources (KRN.TO / KRLTF) was founded in 2007 and listed on the Toronto Stock Exchange in December 2010. The $65-million IPO raised $14 million more than expected.

KRLTF : Price = .15, market cap = 9.86M, enterprise value = 7.47M as of 03/11/24

Based on the 2016 National Instrument 43-101 Technical Report filed at sedar.com their Wynyard Project is projected to mine 2.125 million tons of potash annually. Additionally, a nitrogen project exists. Approximately 700 metric tons of ammonia and 1,200 metric tons of urea per day can be produced. Nitrogen's target customer is independent fertilizer wholesalers in Central Saskatchewan. The 43-101 report covers geology, mining, recovery methods, required infrastructure, mineral resources, and mineral reserves estimations.

Further, Fortune India 500 Gujarat State Fertilizers & Chemicals (GSFC) is Karnalyte's largest shareholder. As of 2024, GFSC still supports Wynyard Potash and Proteus Nitrogen projects. Gujarat State Fertilizers & Chemicals has contractually guaranteed a long term availability to purchase Karnalyte's potash. Detailed engineering has been completed, and all environmental permits remain valid. Funding and market conditions determine Karnalyte's progress.

Karnalyte Resources' investment potential is impressive.

Karnalyte's largest shareholder is Indian agribusiness giant Gujarat State Fertilizers & Chemicals (GSFC). A placement happened in January 2013 for 8.15 Canadian Dollars per share. Karnalyte's current enterprise value is 5.74M, and its market cap is 7.51 M. This compares favorably to the 19.80% ownership or a 40 million GFSC 2013 investment.

Additional evidence of GSFC's commitment was participation in the rights offering on August 3, 2022. In this offering, GSFC acquired an additional 9,100,000 shares at $0.35 each. GSFC owned 38.73% before the offering, but ownership is now 47.73% with this purchase. This strategic move boosted Karnalyte's capital by $3.862 million. The additional investment allowed GFSC to increase its board representation.

Potential valuation:

In June 2016, Karnalyte received the National Instrument 43-101 Technical Report for its Wynyard Potash Project. The report verified a staggering amount of mineral assets.

Potash Project (Bankable Feasibility Study in Canadian dollars)

“NPV (8% ) $3.39 Billion for all 3 phases (after tax), IRR 19.1% for 3 Phases, 2.125 million tpy project (after tax), CAPEX for Phase 1 $789 Million ($2.396 Billion for all 3 phases) Cost per installed tonne of Capacity $1,262 for Phase 1 ($1127 for all 3 phases)Proven & Probable Reserves of 147 million tonnes KCl, Estimated Mine Life over 70 years for 3 Phases, 2.125 million tpy project”

Magnesium Project (Preliminary Feasibility Study)

"Considers annual production of 100,000 tonnes of MgCl2 brine and 104,000 tonnes of 99+% Hydromagnesite (BMC). Construction assumed after phase 1 of potash)"

"NPV (10%) $512 Million (after tax), IRR 26.1% (after tax),CAPEX (additional to Phase 1) $171 million,OPEX for MgCl2 Brine $7.01 per tonne,OPEX for Hydromagnesite $302.01 per tonne,Probable Reserves for MgCl2 694.6 million tonnes of carnallitite @ 22.1% MgCl2, equivalent to 153.3 million tonnes “mineable” and 7.9 million tonnes of product"

Click here to review the National Instrument 43-101 Technical Report. The 43-101 report details property data verification, metallurgical testing, mineral resource/reserve estimates, recovery methods, market studies/contracts, capital/operating costs, and economic analysis.

Karnalyte's mineral assets have staggering potential. There is a possibility of billions in potash and magnesium before operation costs. "There's enough potash there to sustain the world for I don't know how many years," said Dave Van Dam, a prominent Kenora businessman and Karnalyte shareholder. "It's monstrous."

A Karnalyte board meeting was scheduled for November 2003 in Saskatoon, Canada. However, GFSC's executives abruptly canceled their flights from India over the government's public disagreement with the killing of a Sikh leader on Canadian soil. KRN's board has two Indian executives from GFSC and one Indian banker.

"We were preparing to welcome our board colleagues from India for a visit to Canada this week. However, they canceled their trip due to tensions that arose and escalated last week," Karnalyte's Interim Chief Executive Officer Danielle Favreau said in an email. "We hope to reschedule their visit soon."

Karnalyte's chairman is Vishvesh Nanavaty, Gujarat State Fertilizer's (GFSC) chief financial officer. Director Dilip Pathakjee is a senior vice president at GFSC. Another board member is Indian international banker D.C. Anjaria.GFSC is financially committed and counting on future potash supplies despite recent diplomatic disagreements over Sikh Nijjar's slaying.

As of June 30, 2023, Karnalyte has zero debt and $2.7 million in cash and net working capital.

Opportunities:

In March 2016, Karnalyte Resources announced a deal with GSFC to finance the construction of its 625,000 tons per year potash mine in Wynyard, Saskatchewan. Besides that, Karnalyte plans to spin off its secondary mineral assets and unexplored lands into separate companies so shareholders can profit. The GFSC partnership aims to finance Phase 1 of the potash mine while leveraging Karnalyte's non-potash assets.

Unfortunately, the 2016 $700 million financing deal failed. The negotiations ended without agreeing on the governance issues and the terms for spinning out Karnalyte's secondary minerals, including magnesium into a separate entity. Further, KRN did not agree to give up 51% of the voting power to GFSC.

Tiny Insider buys from board member Ritu Malhotra 51,000 shares for .19 on 07/20/23.

As of June 30, 2023, the company had $2.7 million in cash and positive net working capital of $2.7 million, with no debt. No debt eliminates bankruptcy if short-term financing is needed next year.

Karnalyte is sitting on potash and magnesium resources that are worth billions before construction costs.

Risk:

GFSC can hold up the project for years. And KRN likely needs cash around +1 years.

Illiquid

Need for financing.

Karnalyte (KRN.TO KRLTF) has been distracted by lawsuits alleging governance irregularities and improper lobbying.

Conclusion:

Karnalyte's investment thesis is simple. GFSC wants Karnalyte's Potash and Nitrogen assets. So, GFSC initiated a position in 2013 when it acquired 19.80% of Karnalyte's outstanding shares at 8.15 per share or 40 million Canadian dollars. GFSC's average cost exceeds the current market price of 7.50 million USD. GFSC now controls 47.73% after an August 2022 secondary offering.

GFSC's CFO, Vishvesh D. Nanavaty, is now Karnalyte's board chairman. Dilip V. Pathakjee (an Indian executive at GFSC) and D.C. Anjaria, an Indian banking executive, are also board members. Canadian business leader Ritu Malhotra is the latest board member. The board construction supports the thesis that GFSC will finance current operations as they attempted with a failed 2016 700M finance proposal.

The 700M USD 2016 financing agreement fell through because GFSC wanted 51% of KRN and access to a spin-off of their nitrogen assets. This disagreement is likely resolved.

The technical report demonstrates billions of dollars worth of assets before construction costs. Detailed engineering has been completed, and all environmental permits remain valid. Funding and market conditions determine Karnalyte's progress. KRN is not a venture-listed company but instead listed on the Toronto exchange, Big Four auditor (KPMG), and is currently working with UK global consulting and engineering company Wood PLC to evaluate additional cost savings on an ongoing basis to ensure maximum value for investors.

GFSC didn't spend ~$45 million without seeing its investment return in potash and minerals or serving on the KRN board. The sleeping giant KRN has a possible billion dollars of assets supported by the National Instrument 43-101 Technical Report. And $100 million had already been invested in the project.

Karnalyte is SPECULATIVE!!

Although the current attributes compare favorably to KRLTF's current price = .15, market cap = 9.86M, and enterprise value = 7.47M

Catalyst: Financing

Long KRN.TO KRLTF

Joint Corp (JYNT): From Growth to Deep Value

noreply@blogger.com (ShadowStock) — Tue, 24 Oct 2023 03:48:00 +0000

Description:

The Joint Corporation (JYNT) is the largest domestic franchisor and operator of chiropractic clinics. The company aims to provide affordable chiropractic services in this fragmented market using a private pay, noninsurance, cash model. Joint has 900 locations in the USA and plans to open 100-120 newly franchised clinics in 2023.

Overview:

With double-digit top line growth, Joint is also undergoing financial and strategic changes. As the largest chiropractic provider, it's positioned to capture a significant share of this fragmented market. A strong investable opportunity exists due to dramatic oversold conditions, financial improvements, and operational flexibility. Management is committed to selling nonperforming assets, franchising, and reducing expenses.

The valuation has materially improved, mainly driven by JYNT's drop in market value. This price decline is in the face of consistent double digit top line growth. This progress and a decline in the company's market value creates an investable opportunity. Many low hanging operational levers remain to enhance shareholder value.

A closer look at Q2 2023 reported in September.

In Q2 2023, The Joint Chiropractic revenue grew double digit. Yet, management recognizes they needed to make operational changes. To partially address these concerns, Lori Abou Habib was appointed to lead marketing.

Joint Chiropractic focuses on short appointments and affordability. This distinct approach attracts new patients. They also emphasize providing treatments like standard adjustments rather than complex clinical diagnoses. And they don't accept insurance.

While JYNT is making internal changes. External accolades from reputable franchise publications and rankings affirm its strong market position. JYNT's mix of operational flexibility and market recognition suggests undervaluation.

Preliminary revenue for Q2 2023 increased by 18% compared to the prior year quarter. Growth improved performance in franchised and company owned clinics. Company owned clinics (+23%) and franchise operations (+11%) drove the revenue increase. Preliminary adjusted EBITDA reached $3.2 million, a 23% increase over the same period last year. Cost control measures such as a hiring freeze, reduced travel expenses and canceled nonessential projects were implemented. Further, the divestiture of specific corporate clinics optimizes productivity and reduces SGA. The financial guidance for 2023 has been revised downward due to changes in accounting, divestiture plans, and economic factors. A renewed focus on cost reduction helps prepare for economic uncertainty and lower revenue expectations.

Clinics had a negative 1% decline in sales for clinics operating beyond 48 months. Management expects these challenges to persist in the second half, but options exist to counter them. Their key metrics - new patient count, conversion rates, and attrition - show promise, with attrition and conversion improving. However, their new patient count is slowing. To address this, Lori oversees their marketing efforts, focusing on two key sources of new patients: referrals and local marketing initiatives. 30% of new patients come from referrals. Their clinics cater to those within a 5- to 15-minute radius, and they must educate this local audience about their services. Through traditional means like coupon outreach to schools and gyms.

In summary, The Joint faces challenges but is working to overcome them.

Opportunities:

The Joint faces internal (underperforming owned locations) and external challenges (economic/ inflation). But the market undervalues their growth, unique niche, flexibility, operational leverage, financial stability, and mean reversion.

The company is transitioning and adjusting its strategy on a large book of business of 111.74M in revenues for the trailing twelve months. Lori Abou Habib was appointed Chief Marketing Officer. Prior to this, she worked at the SONIC Drive-In Franchise Brand. Her franchising expertise complements the refined strategy.

The Joint Chiropractic moved up to 52nd on Entrepreneur Magazine's 2023 Franchise 500 from 57th in 2022. This ranking evaluates cost, growth, and brand strength. The Joint is recognized by Forbes, Fortune, and Franchise Times for its growth and approach. In 2023, it was 18th on Franchise Times' Fast & Serious list. The Joint was also 1st on Forbes' 2022 Best Small Companies, 3rd on Fortune's Fastest-Growing Companies, and consistently ranks high on franchise lists. In 2023, it was named a Top Franchise by Franchise Business Review and was in their 2022 Most Profitable Franchises report.

Operating leverage is powerful with little or no costs for each new patient.

Aggressive insider buying from Bandera. In 2023, Bandera purchased 1,472,047 shares for $15,476,620 at an average cost of $10.51 per share. In total, Bandera owns 3,937,296 shares, or 26.69% of shares outstanding or 37.28% of float.

Mean reverting attributes such as a decline of -86% in EV per share from year end 2021 to today.

Valuation ratios have improved significantly. EV/Revenue at 1.26 improved 89% from 2021 amount of 11.89. The Price/ Operating cash flow is 7.72, an improvement from the 70.86 balance for 2021.

F score of 8 is a historical high. An increase in the following drove the F score of 8. Positive change in ROA, cash flow return on assets (CFROA) > ROA, positive change in return on assets, cash flow return on assets greater than the return on assets, positive change in working capital ratio, increase in gross margins, positive change in asset turnover. Two points were lost on the F score due to a slight increase in shares outstanding, and a long term debt to average total assets increase.

Opportunities for cost reduction. Hiring freezes, selling/closing corporate own locations, reduced travel expenses, and canceled non-essential projects will positively impact the bottom line. These steps are vital in curbing general administrative expenses. SGA per share increased 47.37% from 6.36 for the TTM versus 4.32 for 2021.

The Joint is transitioning toward an asset light franchise model. Asset depreciation and cost inflation will improve after the sale or closing of nonperforming corporate owned locations.

Risks:

Several factors drive investor's concern and has a significant short position at 6.26% of the float. In 2021 and 2022, the Joint had to restate its financial statements. And reported a material weakness in their internal controls. Further, implementing updated accounting methods may impact reported earnings. The accounting change is tied to the reacquisition of regional developer rights and transfer pricing. Also, there are concerns about the saturation of JYNT's clinics in certain areas.

Competitors might replicate JYNT's business model. However, JYNT doesn't compete with regional or national entities. A short report forecasted a decrease in the company's stock price. This report negatively influenced the stock price. However, the short report has been challenged as misleading.

Skepticism about chiropractic care may contribute to unfavorable stock valuations. There are concerns about new market entrants and regulatory changes.

Compared to prior years, stock compensation has grown 23% from 2021, and financial liquidity using the quick ratio declined 28% from 1.37 in 2021 to current balance of .90. SGA per share grew +47.37% from 2021 to TTM versus revenue per share improvement of +40%.

JYNT has a promising model. However, increased competition is real if other chiropractors adopt the same business model.

Valuation.

A valuation analysis can help determine JYNT's expected price by analyzing its intrinsic, relative, and historical value.

I used a DCF to calculate intrinsic value. It shows a market price slightly above the estimated intrinsic value using historical earnings. But the current market value is significantly discounted if we use average earnings from 2019 to 2021. Also, using free cash flow for a DCF shows a discounted market price to its intrinsic value. Historical earnings have not been consistent or predictable. This lowers the intrinsic estimate compared to using relative and historical valuations.

Earnings Power Value (EPV) exceeds the current price. EPV uses current earnings without considering growth. The assumption is the business will maintain its earnings forever, with no growth/change.

Using historical multiples like P/E, P/B, P/FCF, P/S, coupled with consistent double digit growth shows JYNT market price trades at a material discount.

I believe JYNT's stock price is trading below its fair market value. For me, this high risk stock is a buy. However, I will add on weakness given the economic challenges and operational changes. Because in the next six months, we won't see the full benefits of their operational changes.

Conclusion:

The Joint Corporation is the largest domestic chiropractic clinic franchisor. JYNT is a risky stock. But, with double digit consistent top line growth, near profitability, and financial stability, the stock is a buy after the irrational 86% decline in EV per share from 2021.Along with that market decline, revenue per share grew 40% from 2021 and 86.38% from 2020. Further, valuation ratios are at historical lows and relatively cheap. Entrepreneur Magazine's rankings and accolades from Forbes, Fortune, and Franchise Times have recognized the Joint's accomplishments.

With aggressive buying from Bandera, cost cutting measures and growth, their future looks promising.

Don't forget JYNT is a high-risk stock. Past financial restatements for 2021 and 2020, local market saturation, and weakening financial position present risks. However, the company's move towards an asset light franchise business model underscores its optionality. While valuation analysis suggests JYNT is undervalued, the full benefits of their recent changes and changes over the next quarter will likely be more visible in the longer term. JYNT is a potentially rewarding investment opportunity.

Supporting data:

Alpha Pro Tech (APT): An Intelligent Investment

noreply@blogger.com (ShadowStock) — Tue, 27 Dec 2022 07:35:00 +0000

Summary

Alpha Pro Tech is an intelligent deep value investment in the tradition of Ben Graham. It has a $50 million market capitalization with an enterprise value of $36 million. Debt is a small lease.

The stock offers a unique investment opportunity - a strong financial position supported by 10 years of FCF profits and selling below its NCAV.

The company derives its revenue from two segments -- building supply products(~60%) and disposable protective attire(~40%). In most industries, disposable protective apparel is required.

The current valuation more than accounts for potential slowdowns. Management offers shareholders a satisfactory return through consistent share repurchases.

Company Description

Alpha Pro Tech (NYSE: APT) develops, manufactures, and markets building supply products. Their other segment is disposable protective attire (DPA). Technology, industrial and medical industries use protective apparel garments such as coveralls, face masks, gloves, and shields. Historically, the building supply segment accounted for 60% of total revenue—the remaining 40% is protective apparel. In addition, management noted many products develop through direct communication with end-users—coupled with FDA-approved facilities required to manufacture their products, creates a modest barrier to entry.

Alpha Pro Tech is an intelligent deep value investment in the tradition of Ben Graham. It has a $50 million market capitalization with an enterprise value of $36 million. Debt is only a small lease. APT offers a unique investment opportunity - a strong financial position supported by 10 years of FCF profits and selling below its NCAV.

I started an APT position. Although, an expected slowdown in the housing and protective garment industry may depress the stock price. But I will use market weakness to add to my existing position. Investors can expect a generous shareholder yield while holding the stock with a history of aggressive share repurchases. Management recently announced more funds committed to stock buybacks.

Note the sharp increase in sales during 2020,2021 and the reduction in 2022. The increased sales were from their Disposable Protective Apparel products. Now the effects of COVID-19 are normalizing. But government and company requirements may change. In addition to being a cheap BS and high earnings yield stock, the current valuation more than accounts for potential slowdowns. And to repeat, management offers shareholders a satisfactory return through consistent share repurchases.

The table below shows net income for the three- and nine-month periods ending 09/2022 as per their 10-Q. Note the year over year profit contribution decreased from their disposable protective apparel line. Most importantly, the $4.2 million unallocated overhead expense (C-suite) for the nine months ending 09/2022. The annualized unallocated expense of ~$5 million is saved if acquired by a larger entity/competitor such as Lakeland Industries (LAKE). The considerable C-suite savings makes for an even more attractive acquisition candidate.

Opportunity/Valuation

The table below highlights Alpha Pro Tech as an investable value anomaly from a discounted net assets and earnings perspective. Notice the significant increase in book value and retained earnings per share. These positive results compare even more favorably to the decline in enterprise value per share over the same multiyear periods. Book value per share increased 110.74% from 12/2018 to MRQ. Retained earnings per share increased 129.75% over the same period. This contrasts with an enterprise value per share declining -69.72% from 12/2018 to the most recent quarter.

Net current assets trade at 75% of enterprise value. Additional value metrics are the low enterprise value to gross profit, tangible book value, earnings before interest and taxes, and revenue. These measures are at or near low historical and relative valuations.

Risks

The building supply segment (home repair and construction) faces a challenging macro environment with rising interest rates and a potential 2023 recession.

Labor and material inflation is likely to impact margins.

Personal protective equipment (PPE) may see less demand and increased competition after COVID normalization.

Donna Millar, the deceased co-founder's wife, owns 10.26% of the shares, amounting to 1,284,603.

Years of zero insider buying; CEO Lloyd Hoffman sold most of his shares during the 2020 irrational market price run-up from COVID impact on demand for protective disposable clothing. CEO Lloyd Hoffman sold 1,251,574 shares at $31.65, or $39,608,120, in 2020.

A rising day sales outstanding is indicative of inventory buildup. The average days in inventory were 217 for the trailing twelve months compared to the historical average of 123 days.

Excessive executive compensation for a tiny company. Annual compensation, CEO Lloyd Hoffman 2020 = $1,632,000, 2021 = $1,079,000: Senior VP of Manufacturing = 2020 = $791,826, 2021 = $626,382, CFO = 2020 = $505,250; 2021 = $378,000

Conclusion:

Alpha Pro Tech is an intelligent investment in the tradition of Ben Graham. It's cheap on historical FCF earnings, break-up value, reproduction, or sum of its parts. Further, investors get paid to wait with a high historical shareholder yield from share repurchases and increasing BV.

Catalysts

The company continues to create shareholder value with share buybacks.

A stable high free cash flow yield over the prior ten years with the expectation to continue.

Double-digit increases in book value, retained earnings, EBIT, and revenue per share versus a declining enterprise per value share.

A revised government and corporation mask requirement is possible with new variants and diseases. In addition, N95 masks require a more complex FDA-approved process and specialized materials.

Additional product international sales are likely by leveraging its investment in Indian manufacturers.

A company sale to a larger entity is possible. Management has long-term multi-decade service so that senior management may be open to the company sale.

Disclosure: Long APT

Nautilus: Priced below Liquidation

noreply@blogger.com (ShadowStock) — Tue, 26 Apr 2022 05:16:00 +0000

Description:

Nautilus (NLS) is a fitness solutions company. It designs and markets cardio and strength fitness products. Treadmills, ellipticals, stationary bikes, and weightlifting equipment sell under the Nautilus Bowflex, Schwinn, and Universal brands. And, offers a fitness digital platform, JRNY. My interest in buying NLS is quantitative. I won't speculate on the supply chain, inflation, competition, or online strategy. Or how Peloton's (PTON) race to the bottom on price affects NLS near-term stock returns.

Valuation:

The market is pricing Nautilus for distress/bankruptcy at $3.02 or a market cap of 98.432 million. But NLS has a margin of safety with their valuable brand names in Nautilus, Schwinn, and Universal. Further, per-share values of 4.09 for inventory, 3.25 for receivables, 5.64 retained earnings, gross profit 6.61, revenue 21.17, and equity of 5.78. The NCAV is 2.38. And asymmetric returns if the online strategy proves mildly successful. The 52-week price change is -82%, a three-year return of -41%, and no change in the shares outstanding from 12/2015 to MRQ.

Trailing tangible book value for the TTM per share is 4.70. An increase 152.19% versus the average value of 1.86 from 2015 to 12/2020. Per-share gross profit, revenue, and EBIT values increased 2.79%,64.13%, and 60.34%, respectively, versus the average values from 12/2015 to 12/2020. The stock price change over the same period declined by -76.65%!

Valuation ratios highlight the extremely oversold situation. For example, P/TB is 90.78% lower at .67 versus the average value of 7.27 from 12/2015 to 12/2020. Likewise, P/S is 85.17% lower at .15 versus the average value of 1.01 from 12/2015 to 12/2020.

The table below shows Nautilus' current discounted valuation metrics versus historical results. Comments on trailing ten years.

The table below shows the disconnect between value creation versus price declines and additional comparisons to Peloton and NAISC (339920) Sporting and Athletic Goods Manufacturing.

Book value and retained earnings per share changes versus the price over the same period show value creation versus stock price decline. Also extreme are the price to sales, price to book, and enterprise value to gross profit relative to PTON and NAISC 339920.

Risks:

Nautilus sells commodity products with growing competition. Equally important, management is pursuing a costly money-losing online strategy. The strategy has a high probability of falling short. March 2021, Nautilus acquired motion technology VAY to expand its uncertain profitable JRNY digital platform.

Management forecasts negative operation results until 2023. Further, the growing inventory balance may indicate deeper problems. Additionally, input cost inflation with steel, memory chip shortages, and the supply chain weighs on their future. Nautilus uses Chinese contract manufacturers and will face the uncertain impact of shutdowns and geopolitical risk. The larger Peloton is going all-in on their turnaround, coupled with Nautilus struggling to create an online presence with an inferior quality brand reputation to Peloton.

Conclusion:

Nautilus is balance sheet cheap with a market price below liquidation value. Current assets, brands (Nautilus, Bowflex, Schwinn, Universal) and leadership in strength training contribute to its estimated price below liquidation value. Further, the per-share increase in book value and retained earnings don't reconcile with the stocks dramatic price decline. Additionally, if management executes, the stock price will see asymmetric gains assisted by the 10.5% of the float that is short.

Activism and a company sale is possible. C suite is motivated by generous RSU and PSU compensation. "As of December 31, 2020, unrecognized compensation expense for outstanding but unvested stock-based awards was $7.2 million, which is expected to be recognized over a weighted-average period of 0.3 to 1.8 years". The equity incentive has increased since the 10K on 12/2020.

I recommend buying NLS for SPECULATIVE investors at current prices.

Long NLS

Scheid Vineyards: An Extreme Undervaluation Hiding in the Dark

noreply@blogger.com (ShadowStock) — Wed, 07 Apr 2021 00:03:00 +0000

Scheid Vineyards produces and markets wine. And, their operations cover around 4,200 acreages, with ten vineyards offering 29 grape varieties. For the first 15 years, Scheid was a grape farmer selling its harvest to wineries. The company was established in 1971 when Al Scheid acquired his first property in Monterey County.

SVIN went dark in 2016. Therefore, a 15-12G was filed with the SEC to avoid the cost and distractions of SarbOx compliance. The move was negative for shareholders as a going dark transaction causes illiquidity from a reduced float, larger price spread. And difficulty obtaining financial data from a majority-owned and managed family operation.

The investment thesis is simple but FAR FROM CERTAIN. The rationale, it’s a deep discount to the sum of its parts with a future focus on improving existing operations with a branded wine.

Price=$15.75 ; EV per share= 128.60 ;Market Cap=16.71M ;Enterprise Value=136.49M

52 Week Range= $13.79 - $23.25 ; 52-Week Chg = -25.00%

TB Per Share=29.12; P/TB=.52, EV/Rev=2.58 ; P/S=.25

I believe my numbers are accurate, backing into the market value using the shares outstanding. But multiple financial sites have different MC values.

Google finance Market Cap = 11.03M, Yahoo=32.881M, OTCMarkets = 11.461M,Morningstar = 15.36M, Reuters = 11.03M

I am bullish as it trades below intrinsic value. But, RECOGNIZE that offsetting the asset's fair value is a capital-destroying family-held company. For example, shareholder equity declined -30.33% or -11.206M over the prior 24 prior quarters. EBIT aggregated over the same 24 prior quarters was -10.564M, EBITDA +24.433M.

Below is an attempt at a fair market NAV per share estimate. I started with reported book values (04/06/21) to arrive at an estimated fair market value. No market premium was placed on the existing operation (modern winery) but instead, my guess at conservative market values in a fire sale.

Scheid Vineyards has much higher ownership of vineyard acreage to enterprise value versus their public peers.

Opportunities:

In addition to Vineyards and a state-of-the-art processing plant, there is an additional 123 acres of non-agricultural land now zoned for residential development in Greenfield City Monterey County, California. The market value (my guess) is around 10M to 15M.

Vision Statement: "By 2025, Scheid Family Wines will become one of the most recognized wine producers in quality, innovation, and sustainability in the world."

The assets trade at a fraction of market value. Appreciation from real estate and modern production facilities (new wind turbine power) provides an inflation hedge and cushion to help fund/stabilize as they further develop retail/commercial operations.

Strategic shift to a branded business, emphasizes finished goods over selling inputs. I wrote my thoughts above before Friday's 04/02/21 announcement. "Scheid Family Wines Announces Sale of Three Vineyard Properties." "announced today that it sold three of its vineyard parcels for $33,000,000 in consideration, which includes the buyer assuming $20,000,000 of the Company's debt that was secured by the properties. "

https://finance.yahoo.com/news/scheid-family-wines-announces-sale-100000205.html

A positive valuation discount compared to its closest public peers; CWGL, WVVI, New IPO NAPA, and Treasury Wine Estates ASX:TWE. Further, SVIN multiples are near historical lows for P/B, P/S and have a higher land and building ownership to its enterprise value.

The inventory book value is 53.08 per share. And, the recorded accounting value is below its fair market value. Scheid's wine retails from $35 to $185 per bottle. Further, lower margins sales for private labels sold in supermarkets such as Kroger, also cruise lines and airplanes.

https://www.scheidvineyards.com/Wines

Risks:

The grape business is risky; from planting to harvest, bottling and customer sale. Weather, supply, quality factors are out of Scheid's control.

The fair market value of existing tangible assets is substantial. Still, it's financially weakened from excessive debt issuance and interest expense over the years, Coupled with declines in gross margins, revenue per share, and multiple years of operating losses. The company continues to burn cash, reducing the terminal value of existing real estate holdings-a capital-destroying operation for the past decade.

No evidence of any self-dealing. But it's a risk.

Catalysts:

Management makes financial statements and operational transparency more accessible to the public. The market will slowly recognize its value.

After my original write-up, Scheid reported property sales on April 2. The press gave the stock visibility, and the price slowly reacted positively. "Scheid Family Wines Announces Sale of Three Vineyard Properties." A fraction of their total asset ownership.

https://finance.yahoo.com/news/scheid-family-wines-announces-sale-100000205.html

A continued focus towards selling a branded wine over Grapes. Hence, improving intrinsic value.

A lease buyback or sale of vineyards and relisting on NASDAQ to raise capital and improve market multiples.

LONG:SVIN

Tandy Leather’s delisting creates an extreme value opportunity

noreply@blogger.com (ShadowStock) — Sun, 15 Nov 2020 06:07:00 +0000

Summary

* Tandy Leather is an absolute, historical, and relatively cheap valuation anomaly. The only national brand in a highly fragmented industry.

* Two decades of reporting consistent profits, high double-digit ROIC, and a compounding book value. The progress was stalled by accounting irregularities from inventory valuation and Covid pandemic.

* Amazon-resistant as the customers want to touch, smell and feel the product.

* Ownership of unencumbered real estate with a tax assessment value of around 8 million.

* Retained earnings per share increased 80.10% over the prior 5 years from December 2013 (4.06) to MRQ (7.32). In contrast with these intrinsic value improvements, the market price declined -68.74% over the same time period.

* Friday (11/13/20) an 8k filing was published. Comments include the following, positive YOY growth in September and October, anticipating the completion of the audit, re-listing on the Nasdaq, significant progress on consumer-facing initiatives, systems improvements, new web platform, centralized eCommerce, digital marketing, and other investments.

Tandy Leather (TLFA) is an illiquid nano-cap specialty physical store retailer in the dying niche of leather crafting. TLFA sells leather, leather crafts, and related supplies. It's in 42 states, 7 Canadian provinces, 115 North American stores. Spain is the only remaining location outside North America.

Inventory errors impacting multiple years were uncovered during December 2018. This discovery forced the restatement of financials. NASDAQ delisted the stock in August 2020. Yet, Tandy's delisting caused selling and created an investable opportunity. The stock is oversold for a consistent historically profitable, and asset rich company. A new CEO hired at the end of 2018 with a prudent capital allocating board now drives the Tandy opportunity.

Opportunity: Tandy's deep discounted valuation is absolute, historical, and relative.

The liquidation value of existing tangible assets is enough evidence to invest. However, the opportunity is more significant. A talented new CEO, the return of safe retail store shopping, Amazon resistance, and the material company ownership by the board will help move valuation higher. Additionally, the current delisting eliminates around 1.5 million in annual costs. This change alone improves EBIT by double digits. Although, after the restatement, relisting is likely to occur on the NASDAQ.

Tangible asset breakup value, excluding the sale of their operation.

Notes on the above table.

In August 2020 the 8k reported limited financial data for the period ending 07/2020. Cash balance was 11.50 million or 1.28 per share. Inventory balance reported the year ended December 2018 was 30.57 million or 3.85 per share. I reduced the value by 50% for this analysis. Ownership of unencumbered real estate with a tax assessment value of 15,781,117 for 2018. But in 2020 they report 6,238,940. Strange, a large tax value drop for Houston. Source: Tarrant County Tax Office

Total liabilities were 12.68 million or 1.40 per share.

This simple analysis gives us an ultra conservative fair market value for net tangible assets of 2.35 per share.

TLFA has compounded intrinsic value for years. Yet, the enterprise value declined sharply. The table below shows the irrational market value disconnect.

Notes on the above table.

Ten years of consistently profitable operations for the table above. The opportunity is obvious. ROIC averages 14.36%, retained earnings per share increased 181.68% over the ten-year period from 2010. Tangible book value per share improved by 133%. Yet, the enterprise value per share DECREASED -32.82% over the same ten year period. See more with the above table.

Additional factors listed below impacting a future higher stock price.

Tandy is illiquid and ignored with no analyst coverage. Its the only national retail brand in a highly fragmented industry. Further, CEO Janet Carr developed a strategic path with reported tangible progress before COVID and accounting irregularities.

Tandy Leather is Amazon-resistant as the customers want to touch, smell, and feel the product. The stores offer a continuous flow of classes. Hands-on help with projects/repairs from skilled staff. Endless positive 4.75 average customer reviews on Yelp - "level of service is unheard of these days," "Never met more kind and helpful employees in retail," "people are fantastic". Also, management owns 42.20% of the shares outstanding. Board member and value investors Jeff Gramm/Bandera Partners own 32% of share outstanding at an average price of ~ $8.44. Board member James Pappas/JCP Investments (9.60% at an average price of $7.50).

June 2, 2020 Management Presentation

The presentation graph above shows the vast opportunities for growth that exist for Tandy with hobbyists and businesses.

Risk:

A Covid resurgence during winter 2020 weakens its financial position. Sales continue their slow decline as their niche shrink. Additionally, difficulty in finding skilled labor and higher associated payroll costs. The growing cost to maintain a national retail storefront.

The legal, consulting, temp CFO, severance, and accounting fees for the year-long financial restatement will cost millions. The actual amount is material and unknown.

UPDATE

News report released after the market closed on November 13, 2020, and the above writeup. No material changes to the financial numbers reported above.

Tandy must restate prior financial statements before full financial results are reported. Therefore, its not reporting regular financial results until the restatement is completed. But, limited financial results were reported on November 13, 2020.

Preliminary sales were approximately $15.8 million. A decrease of 3.1% compared to prior year's $16.3 million. As of September 30, 2020, the Company had $0.4 million of debt and $10.1 million of cash.

Janet Carr,CEO, said, "We were pleased with our third quarter sales performance following the shutdown of our entire store fleet from COVID-19 in Q2. In the third quarter, we were able to reopen substantially all of our remaining store fleet after the permanent closure of 8 stores. Strong web sales continued in Q3, even as stores have reopened. TOTAL SALES GROWTH IMPROVED THROUGH THE QUARTER WITH POSITIVE YEAR-OVER-YEAR GROWTH IN SEPTEMBER AND CONTINUING THROUGH OCTOBER. While the future remains hard to predict in the current economic climate and with COVID-19 case rates rising again, we have confidence in the overall trajectory of the business."

Financial restatement continues for the fiscal year-end 2018 10-K. And, financial statement audits for the fiscal year 2019 and the first three quarters of fiscal 2020. Tandy will apply to re-list its common stock on Nasdaq following the filing of all of its outstanding reports with the SEC.

Ms. Carr added, "We are looking forward to the completion of the audit of our restated financials, our re-listing on the Nasdaq, and a return to a regular, fulsome discussion of our financial results with investors. During this period, and despite the distraction and economic environment, we have made significant progress on our consumer-facing initiatives, implemented new comprehensive systems improvements, launched a new web platform and centralized eCommerce fulfillment capability and substantially increased digital marketing, and made other investments in building the foundation for our long-term growth."

Conclusion

TLFA offers a large margin of safety and a deep discounted extreme valuation in this overpriced market. Price alone would be enough due diligence. However, the opportunity is enhanced with the new CEO, NASDAQ relisting, investments in new systems, process improvements. Additionally, investors can wait for market recognition, mean reversion, continued profitability, or certain longer-term favorable corporate action.

Long:TLFA

Mohawk Grp (MWK) - The Renaissance Technologies of CPG E-commerce

noreply@blogger.com (ShadowStock) — Fri, 17 Apr 2020 04:38:00 +0000

Mohawk Group Holdings (MWK) is SPECULATIVE! Deloitte issued a going concern qualification raising doubt regarding MWK's ability to continue next year.

High risk with an asymmetric expected reward.

Recognized for exceptional growth and innovation (Inc. 5000 2019 as Fastest Growing Companies ranked 622, Financial Times ranked 114).

Google-backed technology-driven consumer products company. Insider ownership is 55%, showing management's interests align with shareholders.

Consistent high double-digit top-line growth selling for an enterprise value to sales of .37. TTM gross profit of 45.04 million versus prior year of 25.98 million with the current enterprise value of 42 million.

A lucrative SaaS opportunity exists for 2020, management priority.

Revenues increased 56% to $114.50 million from the prior year's $73 million. New 2020 product launch double prior year coupled with SaaS offering. Management projects 2020 revenue of $160 to $170 million. Positive estimated adjusted EBITDA for the third quarter.

Description:

Mohawk (MWK) is a Google-backed technology-driven consumer products company. The company leverages its proprietary AI research to automate eCommerce tasks - discovering new market opportunities, introducing new brands, and managing the fast-evolving complexity of marketing. MWK sells home appliances, kitchenware, dehumidifiers, air conditioners, related products, and consumer electronics. Products sold under the hOmeLabs, Vremi, Xtava, and RIF6 brands. Online consumers buy through Amazon and other e-commerce platforms, coupled with their websites.

Before Mohawk's IPO in June 2019, Mohawk was one of the fastest-growing private consumer companies recording +100% year or year revenue growth since founding in April 2014.

"Our proprietary AIMEE software ideation platform allows us to bring research-driven products directly to consumers quickly and we have a significant opportunity to continue scaling our portfolio and SaaS offerings as consumer online spending habits continue to shift." CEO Y Sarig

Founded= 2014 ; Employees= 156 ; CEO/Founder= Yaniv Sarig

Market Cap = 37.87M ; Enterprise Value = 42.64M ; Cash per share = 2.01 ; Debt per share = 1.97 Shares outstanding = 17.74M ; Float = 4.99M ; Revenue (ttm) = 114.45M ; 52 Week Chg = -78.60%

MWK develops proprietary technology, AIMEE™. AIMEE leverages millions of data points during the customers' decision-making and buying process. Artificial intelligence from AIMEE discovers new products and creates an optimal selling process.

AIMEE™ (AI Mohawk E-commerce Engine) is an E-commerce platform that grows Mohawk's owned and operated consumer product brands. Mohawk began Q1 2020 selling AIMEE™ as a SAAS offering. A rigorous data-first approach, coupled with their proven technology and collective experience, generates actionable executable opportunities for other third party brands. Google Ventures's investment in Mohawk is not an eCommerce consumer product vendor. The more in-depth story is their proven technology.

Slides are taken from January 2020 Investor presentation prepared by Mohawk.

Mohawk's opportunities exist for profitable high growth include higher-value products, broader markets (China), monetize AIMEE to third party brands, new products through acquisition, lower manufacturing, and supply chain costs.

AIMEE™ is the name of their proprietary AI/ML internally developed E-commerce platform.

AIMEE™ = Research + Financials + Trading

RESEARCH = AIMEE explores online channels to discover opportunities for new and existing products. NLP (Natural Language Processing) used to analyze customer feedback. This customer analysis delivers insight into product improvements. Further, AIMEE™ uncovers trends by monitoring the features and functionality of the top-selling products.

FINANCIALS = AIMEE™'s tracks new product planning, financial projections, inventory, media expenses, real-time income statements, and more.

TRADING = AIMEE™'s automates marketing strategies and improves with each iteration. The result is an algorithmic solution to maximize product sales.

For more information and a video demonstration visit Mohawk Group.

Operating results discussed on the March 10, 2020 year-end conference call.

For the fiscal year ended, 12/31/2019 revenues increased 56% to $114.50 million from $73 million for the prior year. Thirty-two new products versus eleven for the previous year. Eighteen new products launched in the fourth quarter of 2019. Also, revenue increasing by 26.6 million or 30% compared to the prior year's fourth quarter. In Q4 2019, 18 new products, though the majority in late December versus three for Q3 2019.

The fixed cost for 2019 was 19.3% as a percentage of revenue or $22.1 million versus 28.70% or $21 million in 2018. The automated business model led to improvement as a percentage of revenue. EBITDA for the fiscal year 2019 improved to a LOSS $19.5 million from minus $28.6 million loss in 2018.

The year 2019-year end cash balance was $30.4 million versus December 31, 2018, a balance of $35.7 million. Operation cash affected by inventory increase from Chinese New Year and potential tariffs. The debt was $37.9 million from a revolving credit facility and a $50 million term loan as of December 31, 2019. Compared to the debt of $30.1 million at the end of the third quarter of 2019. The expected change reflects a planned increased inventory.

A separate SaaS revenue line item reporting in future periods. CEO Yaniv promising comments on their SaaS opportunity.

"very,very excited about the SaaS opportunity, it is - and it's very much of high priority for us

We're having active conversation and negotiations with approximately 46 different companies across a variety of product categories that include large - larger brands and some digital native brands.We already signed a couple of contracts in the first two months of the year. And we really are going to continue to invest in the side of the business and expect to see the base picking up in Q2 and beyond. So very much a priority. We're investing in edge. We've made again a few changes to our product and offering and on the conversations, we're having so far is exciting."

Management expects 20 new products in the first quarter of 2020. And double the products launched in 2019. For 2020, management is projecting revenue of $160 million to $170 million, and expects a positive adjusted EBITDA in the third quarter of 2020.

Conclusion:

I'm bullish on speculative Mohawk Group. They push past the auditor's negative opinion with their double-digit growth, unique proprietary artificial intelligence coupled with management's industry expertise.

Future dilution is possible to secure management talent and finance growth. However, the predicted value is an asymmetric payoff: short term, contingent on corona's impact on timely manufacturing and new product launches. The fiscal 2020 goal is to reach positive EBITDA.

Note: The April 29, 8k published after article.

“FURTHER, WE ARE CURRENTLY SEEKING TO PRESERVE OUR LIQUIDITY AND CAPITAL RESOURCES THROUGH VARIOUS ACTIONS WHICH MAY INCLUDE NEGOTIATING THE DELAY OF PAYMENTS TO CERTAIN VENDORS THE EFFECT OF WHICH COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS, INCLUDING OUR RELATIONSHIPS WITH THESE VENDORS.”

This significantly raises the risk of holding or buying the stock!

Long: MWK

Spark Networks SE (LOV) Contrarian Musings

noreply@blogger.com (ShadowStock) — Thu, 19 Dec 2019 17:56:00 +0000

Introduced to LOV through my ownership of JDate/Spark Network symbol LOV. Affinitas GmbH merged with Spark Network(NYSE:LOV) in 2017. Then, LOV acquired Zoosk in 2019 for $258 million.

Affinitas GmbH was a small, fast-growing private European company. Affinitas's past financial success financed the merger. It listed on NYSE as Spark Networks (LOV). LOV before the merger known for Jdate. Jdate (LOV) had historical periods of outsize free cash flow. During the ~ two years before the merger financial performance faltered from outdated technology. Zoosk was a private, mismanaged, and failed future IPO. But, when managed, online dating is an asset-light FCF machine. Now NYSE: LOV is the second largest online dating company in North America. The new organization has experienced,talented,proven management.

LOV is a falling knife that doesn't screen well. A nano cap,low p/s and down 59% over the past six months with a historical record of strong outsize free cash flow. Spark Networks, NYSE: LOV is now German based headquarter after the merger.

The price decline began after the initial positive reaction for the Zoosk acquisition. LOV stock price crushed from Affinitas and Zoosk few but substantial long term initial investors sold after accruing years of long term gains. Management released an open letter on the stock decline (click). The six-month ~60% price drop creates an excellent buying opportunity.

Spark Networks has over one million global monthly paying subscribers. It also expects to achieve more than $50 million of adjusted EBITDA in 2020.The current 111.84 million market capitalization undervalues those customer metrics. Headquartered in Germany, Spark Networks is now America's second-largest dating company.

Spark Networks (LOV) is a portfolio of dating sites. Zoosk, EliteSingles, Jdate, Christian Mingle, eDarling, JSwipe, SilverSingles, and others encompass the company (click). Spark Networks formed when Affinitas GmbH and Spark Networks merged in 2017. Zoosk added in 2019. Affinitas GmbH a small German startup with no presence in North America. But, over the last few years created an NYSE-listed business with over $300 million in total revenue. Its now the second-largest player in North America.

Value institutions purchased shares above the current price during the third quarter of 2019.

Peak6 adds 1,763,185 shares during November 2019 at $5.60. Increase the position to 2,272,485 shares at an average price of $6.99.

Canaan Partner purchased 4,077,777 shares at an average price of $8.23 during quarter 3, 2019. Down -47.14% from current price. LOV represents 70% of its total portfolio value.

HARBOURVEST PARTNERS new holding during 2019, Q3 502,576 shares acquired at an average price of $8.21.

Osmium Partners added 166,332 shares to raise its stake to 1,412,284 shares at an average price of $7.14. Represent 9.77% of its portfolio and or 5.43% of shares outstanding.

Deer VII own 2,045,318 shares at an average price of $8.21 or 7.86% of shares outstanding or 13.06% of their portfolio.

Spark Networks (LOV)could use further analysis, such as the Zoosk financing details(click). But at this time I'm comfortable with the odds of a future higher stock price.

Spark story from their website.

Long: LOV

Internet Proof Retailer Trading at a Distressed Price Creates Opportunity.

noreply@blogger.com (ShadowStock) — Mon, 16 Dec 2019 04:19:00 +0000

Build-A-Bear Workshop (NYSE: BBW) is an Amazon resistant hands-on interactive retailer offering "make your own stuffed animal" and related products. The company is managed into three segments: direct-to-consumer, international franchising, and commercial. BBW operates 371 stores globally and 104 franchise locations. Also, products sold on the company, third-party, and franchisee e-commerce sites, including retail locations under wholesale agreements. The hands on interactive experience makes Build A Bear Amazon/internet resistant.

Summary

Build a Bear is moving the correct levers (productivity+ profitability+ capital structure)to drive a higher future ROE and stock price.

Historical and relative extreme deep value discounts for sales, book value, and gross profit coupled with an oversold -82% mean-reverting price drop from year end 2016 and -39% over the prior 52 weeks.

A continued successful business strategy push toward lower capital requirements and revenue diversification by leveraging the brand. This profitable plan to be fully realized during 2020 includes the sizable addressable market, growing commercial segment, international and domestic franchising, Walmart expansion, store within a store concept, vacation spots, eCommerce, and others.

Lower future lease costs and impact on EBITDA expansion is material. The opportunity is driven by a 70% expiration of existing store leases over the next three years. Further, negotiating strength is from BBW as a marquee tenant, Walmart expansion, and store within store strategy all reduce or eliminate many lease expenses.

Year-end tax-loss selling and temporary pressure from opportunistic shorts create buying opportunity.

A Yelp search shows countless detailed positive reviews from fanatical fans. Parents and kids love their BBW experience. Build-A-Bear brand awareness is in line with much larger companies without the same market value. A staggering over 90% of the BBW brand recognized by Mothers.

Fundamentals are improving from their evolving strategy. Fiscal 2020 should recognize returns from investments and strategy focus versus current extreme negative valuation. The current value is priced for near term death.

Motivated shareholder-oriented owners, David Kanen filed 13D reporting a 9.70% ownership and now sits on the board. Multiple years of favorable insider activity. Point72 reduced its 14% position to 6%.

Capital structure was improved, reducing the share count by 12.50% from December 2014 balance of 17.37 million to the most recent quarter, 15.22 million. Total liabilities during the same period declined by 26.30% or 114.43 million as of December 2014 to 84.34 million (excluding long-term leases) for the most recent quarter.

Valuation:

The current stock price is $2.69, with an enterprise value of 189.30 million or 58.90 million excluding lease obligations. Market capitalization is 40.94 million.

Summary comments on the table above include the obvious fifteen-year low valuations. The current market capitalization of 40.90 million compares favorably to 142.20 million in trailing twelve months of gross profit, 335 million in sales, 81.90 million in equity, 6.20 million in cash, no debt or credit line borrowings. The current tangible and intangible value does not reconcile with negative -43.01% twelve-month stock return trading near a 52-week low for a successful differentiated brand name retailer.Also note the negative attributes of the Z and F score.

Third Quarter 2019 and related valuation commentary:

The third quarter of 2019 reported sales growth in direct consumer and commercial segments, coupled with improved gross margins. Operating loss improved by 2.3 million, zero debt, no credit line borrowings, and six million in cash.

The Build-A-Bear brand has remarkable brand recognition, with over 90% of Mothers. Further, over eight million joined their email club, and four million active loyalty members represent 20 million customers. Retail locations attracted 45 million visitors and have an added 110 million digital connections.

The profitability strategy includes diversification beyond the traditional retail model. Commercial revenue from third parties requires no startup store capital, rent, and labor, coupled with the opportunity to leverage retail in tourist locations. Additional diversification includes shops inside shops,select Walmart locations. These business moves supports leveraging real estate plans and expands the brand to a broader consumer base, with approximately 60% of the shoppers newly registered to the bonus clubs. Walmart has 22 locations in operation, with additional locations planned during the next fiscal year.

The company's goals are to continue building revenue beyond the traditional retail model, diversify retail locations to broaden consumer accessibility, outbound licensing, wholesale, and entertainment. Nearly 70% of store leases expire over the next three years, providing additional negotiating leverage is the Walmart and store within a store relationship.

For the current third quarter ended, 54 locations with third-party retail relationships include Carnival Cruise Lines, Great Wolf Lodge Resorts, Landry's Inc., and Beaches Family Resorts, first two locations within a military base, among others. Only the portion paid for the products, supplies, and fixtures reported as revenue.

Additional monetization of the BBW brand includes commercial revenue segment increased by nearly 20%, and continue to execute against recent agreements tied to entertainment and content development. Warner Music, Sony Pictures, Hallmark Channel, iHeartMedia, they expect to realize financial gains from these new entertainment initiatives, starting later in 2020.

Conclusion and Investment thesis summary

Build a Bear is moving the correct levers (productivity+ profitability+ capital structure)to drive a higher future ROE and stock price. The evolving brand strategy requires fewer assets, diversifies revenue sources, and retail locations. The plan includes expanding international franchising, Walmart, store in store, lower lease costs, deemphasizing the direct ownership of retail stores, vacation spots, eCommerce, outbound licensing, wholesale, and entertainment.

The 12.5% share count reduction from December 2014 and 26.30% total liabilities over the same period demonstrate shareholder-friendly and management’s awareness of capital structure critical role for shareholders. Insider ownership is around 7% coupled with insider buying. The largest shareholder David Kanen at 9.70% is now on the board.

The main short term risk is continued trouble in the UK, Walmart roll out fails, further decline in mall locations.
Long BBW

Nautilus (NLS), Extreme Value Opportunity

noreply@blogger.com (ShadowStock) — Fri, 12 Jul 2019 06:55:00 +0000

Nautilus established in 1986 is a consumer fitness products company. Business activities cover designing, developing, sourcing and marketing cardio, strength, and accessories. Equipment sold in the U.S.(88%), Canada(5%), and international(7%)under recognized brands. Nautilus ®, Bowflex ®, Octane Fitness ®, Schwinn ®, and Universal ®.

The direct business offers products to consumers via television, internet, and catalogs. The retail store sells through a network of independent companies. Further, revenue realized from licensing brands and intellectual property.

Nautilus long-term strategy is marketing to consumers and retail customers by leveraging existing brands. Improve product lines by using engineering to reduce production costs. Continue investment in research activities directed at acquiring or building new technologies. Increase international retail sales. And, maximize royalty revenues from licensing intellectual property.

Product listing below is taken directly from the 10k.

Nautilus ® is corporate umbrella brand and is also used to differentiate certain specialized cardio, treadmills, ellipticals and bike products.

Bowflex ® brand represents a highly-regarded line of fitness equipment comprised of both cardio and strength products, including the Max Trainer ® , TreadClimber ® , HVT ® and LateralX ® specialized cardio machines, PowerRod ® and Revolution ® home gyms and SelectTech ® dumbbells.

Octane Fitness ® brand is known for its innovation around low-impact cardio products, including the perfection of the traditional elliptical machine, along with the creation of new categories of exercise, including the xRide ® recumbent elliptical, the LateralX ® elliptical, and the Zero Runner ® .

Schwinn ® brand is known for its popular line of exercise bikes, including the Airdyne ® , as well as Schwinn-branded treadmills and ellipticals.

Universal ® brand, one of the oldest and most recognized names in the fitness industry, currently offers a line of weight benches.
Source 10K

Opportunities:

New CEO reported last week is a tested digital innovator. His digital strength can prove critical to a significantly higher NLS valuation. New entrant Peloton exercise bike grew into a 4.15 billion enterprise with streaming online subscription workouts after just five years. Peloton valued at $4.15 billion after its latest funding round of $550 million in August 2018 confirmed to CNBC Make it. Peloton projects $700 million in revenue for the fiscal year ending in February versus $370 million prior years. A potential Peloton IPO could arrive this year. But, Peleton declined to comment on the IPO to CNBC Make It.. Peloton IPO provides visibility for the extreme unsustainable valuation discount on NLS. Further,a digital platform is now offered on several Nautilus products.

The investment story is simple. It has an extreme low historical and relative valuation. No investing advantage from including graphs or statistics on the industry's favorable trends for consumers, growing obesity, disposable income, or forecasted potential competition. These add little or no value to the investment buying decision process. It's all about the price.

Deep valuation discount

Risks:

Alternative fitness choices may negatively impact future growth. For example, budget gyms such as Planet Fitness and new competitor, Peleton.

The present financial position and flexibility materially reduced after several negative quarters of declining revenue and margins. But even with the double-digit decline in YOY revenue comparisons inventory ended up significantly. Inventory to revenue is up 30% from 2015 to the TTM. Negative results attributed to a failed marketing campaign. Management blames the inventory issue on failed advertising resulting in low awareness and insufficient communication of the platform's digital capabilities.

Summary/Catalyst

Mean reverting valuation trading for a 28.30M enterprise value with a TTM revenue of 366.34M, gross profit of 158.71M, and retained earnings of 174.50M. Patents and world recognized brand where the value of the parts are higher than the current enterprise value. Nautilus ®, Bowflex ®, Octane Fitness ®, Schwinn ®, and Universal ®.

New CEO leverages his digital experience to offer subscription-based exercise programs. Subscriptions made a name for Peleton and their expected 4.1B IPO. A Peleton IPO will favorably impact NLS's valuation.

Long: NLS

Idea Discovery using insider activity for the two-year period ending 06/14/19.

noreply@blogger.com (ShadowStock) — Wed, 19 Jun 2019 01:28:00 +0000

The database contains fundamental supporting data. It's for the NYSE, OTC, NASDAQ, and AMEX.

Hover over the values to view fundamental data such as ; Sector,Industry,Exchange, InsiderSharesTrans/Shares Float, Shares Purch, Shares Sold, $ Total Insider Trans, Insider Trans Price, Market Price, ShrsOuts MRQ / ShrsOuts2016, TtlLiab-AccrMRQ / TtlLiab-Accr2016, %Above52WkLow:, %Below52WkHigh, %BelowHighEV/Rev: 1yr Rev Growth Rate, Debt per ShrMRQ / Debt per Shr2016, Financial Strength, 12MonthRet%, Crnt EV/EV 2016, Z Score:, EnterpriseValue$Mil: Market Cap $Mil

InsiderSharesTrans/Shares Float = Sums up the insider shares transacted for the selected year and month and divides by the shares in the float. The ratio measures the insider's conviction.

ShrsOuts MRQ / ShrsOuts2016 = Takes the shares outstanding for the MRQ and divides by shares outstanding for the fiscal year ending 2016. Useful ratio to remove ideas with excessive dilution or focus on companies buying back shares with insider buying.

TtlLiab-AccrMRQ / TtlLiab-Accr2016 = Takes the total liabilities less accruals for the MRQ and divides by the total liabilities less accruals for the fiscal year ending 2016. Useful ratio to remove ideas with excessive accumulation of liabilities or focus on companies reducing liabilities with insider buying.

Crnt EV/EV 2016 = measures the increase or decrease in the enterprise value from the year ending 2016 to 06/14/19.

Buffet Would Buy this Specialty Retailer

noreply@blogger.com (ShadowStock) — Mon, 10 Jun 2019 02:58:00 +0000

Its an extreme value opportunity in this overpriced market. Buffet along with most institutions cant. The barriers to entry for institutional investors help create this unique opportunity.

Tandy Leather Factory (TLF) is an illiquid (286 shareholders) micro-cap. A specialty physical store retailer in the dying niche of leather crafting. But, I see a consistently profitable, ignored and oversold opportunity driven by a new CEO with a board of prudent patient strategic capital allocators. TLF sells leather, leather crafts, and related supplies. It's in 42 states, 7 Canadian provinces, 115 North American stores. Spain is the only remaining location outside North America.

Note the extremely low valuation not just today but over the profitable past + ten years. Price alone would be sufficient due diligence. However, opportunity enhanced with the new CEO discussed below.

Summary comments, why Tandy is Deep Value Cheap:

The book value per share increased from 2.83 at the end of 2010 to its recent quarter's balance of 6.63. Further, retained earnings balance at the end of 2010, 26.42M versus the most recent quarterly balance of 66.189M. These results achieved with consistent positive cash flow,48.436M in cash flow from operations over that same multi year period and 30.43M in free cash flow. Debt reduction, and share buybacks. Yet the stock trades at the current EV per share price of $3.12 versus $4.47 EV per share at the end of 2010.

Undiscovered, ignored, illiquid, with zero analyst coverage. A few conference call questions from individual investors, no institutions.

New CEO Janet Carr after six months develops a logical, strategic value enhancing path with reported tangible progress.

Tandy is the sole retail national brand in their highly fragmented industry. Small enterprises and commercial entities often buy inventory from Tandy.

Amazon resistant as the customer wants to touch, smell, and feel the product. Stores offer a continuous flow of classes, hands-on help with projects/repairs from a skilled staff - endless positive 4.75 average customer reviews on Yelp. "level of service is unheard of these days", "Never met more kind and helpful employees in retail", "people are fantastic."" "Go-Tandy-Go-Tandy!"

Years of compounding intrinsic value versus a falling price/enterprise value.

Management owns 42.20% of the shares outstanding. Board member and value investors Jeff Gramm/ Bandera Partners( 32% at average price of ~ $8.44): Board member James Pappas/ JCP Investments (9.60% at average price of $7.50).

During the most recent reported quarter, the outstanding debt of $9 million paid and bought back $714,000 of outstanding shares. Actions bring cash to $17.68 million at the end of the 2019 first quarter. On June 4, 2019, the Board of Directors expanded the Company's stock repurchase plan to increase the present size of the plan to 1 million shares.

Deep absolute,historical and relative valuation discount. Price/Net Current asset value = 1.22, EV/Revenue = .34, EV/EBIT = 8.29, EV/GP = .56

CEO, Janet Carr's updates rationale, progress and actions on strategic initiatives to drive longer term earnings growth in the short two months since her first call.

Initially, my investment in TLF solely based on price, discounted absolute,historical and relative valuation. But after six months on the job, CEO Janet Carr's presented and implemented an impressive strategic plan. I'm persuaded Tandy can transform into an unexpected highly profitable / growth success story.

Commentary taken from the Q1 2019 conference call.

Two different business models now developed for commercial and retail. The infrastructures, processes, talent, data, and systems built. "The how-to" as they are calling it is to make it all happen with an optimal economic return. The strategy will re-establish brand credentials, build a compelling leather crafting retail experience, and create the right proposition to entice business customers back.

The initiatives begin with pricing. They are calling it "Everyday Honest Prices," phased in globally over the last six weeks. It simplifies earlier complex and confusing price tiers. Pricing is now transparent to customers and makes prices more competitive for every customer.

Competitive benchmarking on every skew proved regular retail pricing complicated and many items too high. For this reason, prices lowered on every skew for both retail and manufacturing customers. A commercial division launched to serve the most significant customers with pricing targeted against Tandy's wholesale competitors. Further, a reseller license agreement implemented for the resellers that helps maintain brand and price integrity.

The new pricing program launched with a full marketing campaign with in-store, direct mail, digital, social, and even direct personal outreach to the largest customers. Longer term expectation for increased sales, gross margin dollars and positive brand perception. The goal is to increase customer spend and to bring lapsed customers back into the brand.

The second major initiative since the March call is launch of a commercial division. This division is targeting the most significant commercial customers. These customers need products not carried in retail stores but can quickly source. A consistent supply and quality required with tailored shipping options. Consequently, a small team now focused on shifting larger customers from retail store relationship to the commercial account representatives. A dedicated Operations Manager is handling leather choice, order management, and selling support. Customer feedback is especially positive.

Management is appraising the 4-wall cash flow performance of stores as a critical metric in developing the fleet of stores. Bonus target set for inventory turns. But, opportunity with inventory requires merchandise planning capabilities not currently available. They need to evaluate product development, merchandising, merchandise planning, sourcing, and in-house manufacturing capabilities and figure where to invest and divest. When these tools and capabilities in place, inventory managed to the right levels.

Factory workforce reduced by 75% with assigned inventory positions in products produced in the factory. Management is evaluating lower cost outsourced options. Unfortunately, they could not support the factory staff at current levels. Difficult decisions needed on the path to growth and improved profitability. A critical, crucial senior leader is now overseeing the merchandising and commercial functions.

Financial commentary from the first quarter 2019 earnings call provide additional color to current and future value.

Progress and profits for Q1 2019 include rightsizing the store fleet realized by closing three underperforming stores. Sales improved 2.40% year over year - the launch of a new sewing machine contributing $500,000 in new sales. And, higher clearance and promotional activities, including inventory sold from closing the Australia store. Gross profits declined, and operating earnings fell 34% as progress made towards strategic initiatives intended to provide future earnings growth. The new operating model may continue to impact results for 2019. Promotional activities favorably impacted sales. But, a $400,000 decline to gross profit due to promotional events, customer/product mix, and higher freight costs. Onetime cost of 155,000 for closure for three underperforming stores and 100,000 related to eliminating positions at the corporate office. Further, an increase of $156,000 in noncash share-based compensation.

Gross profit declined $400,000 and operating expenses increased $200,000. This negatively impacted operating income by $600,000 to $1,169,000 compared to 2018, $1,769,000. The expected 33.9% decrease in operating earnings was significant. As reviewed in the prior earnings call, 2019 will be a year of significant investment. Painful in the short term, but these investments needed for long term earnings growth. During the first quarter, fully repaid outstanding debt, which helped reduce interest expense by $33,000 this quarter compared to the last quarter.

Cash flow from operations remains strong, which was $3 million for the quarter driven primarily from the $3.3 million reductions in inventory. This reduction in inventory was the result of 3 store closures this quarter as well as our efforts to clear out damaged/ excess inventory. Outstanding debt of $9 million paid and bought back $714,000 of outstanding shares. These actions bring cash to $12.7 million at the end of the first quarter.

Risk: Sales stagnate as niche continues to shrink. Difficulty in finding skilled labor and higher associated payroll costs, growing retail storefront lease expense.

Opportunity: Corporate action such as going private or sale if profitable growth not realized. Time is on the side of the new CEO as the company has a strong balance sheet and cash flow. Financial strength allows the implementation of corporate strategy. Special dividend, continued share buybacks and slow compounding of intrinsic value. Absolute, relative, and historical valuation is deeply discounted and will not go unnoticed forever. You can't ask for a better board and CEO in terms of capital allocation.

In conclusion,TLF offers a large margin of safety, deep discounted extreme valuation in this overpriced market. Price alone would be sufficient due diligence. However, opportunity enhanced with the new CEO. Additionally, investors can wait for market recognition, mean reversion, or certain longer-term favorable corporate action.

Long: TLF

Cheap Price Makes Francesca's Holdings (FRAN) a Good Asset

noreply@blogger.com (ShadowStock) — Wed, 23 Jan 2019 04:51:00 +0000

Francesca’s Holdings (FRAN) operates a nationwide chain of boutiques. A unique, diverse mix of apparel, jewelry, accessories, and gifts. The Company has 738 boutiques in 47 states with e-commerce.

Francesca is high risk! But, the price trades as if it's a going concern over the next six to twelve months. Francesca’s Holdings is a cheap one plus year option for the bear case but leans toward the bull case as a low probability turnaround.

Third quarter results reported 12/11/2018 — a net loss of $16.2 million, or a 47-cent diluted loss per share. The loss excluding noncash impairment charges was $6 million or 17 cents per share.One strategy offered during the conference call is to close 30 to 40 stores in fiscal year 2019, which begins 02/03/2019.

The non-apparel merchandise (Jewelry, Gifts, Accessories) makes up 50% of sales. It was up 1% compared to the prior year three quarters ending in 11//2017. Yet, apparel declined 14% over the same three-quarter period. Management recognizes the clothing business remains the biggest challenge. So, FRAN is moving fast to ramp up changes and seen positive customer responses.

The current focus is on expense control, strong balance sheet, real estate portfolio and slow new-store growth. One strategy offered on the conference call. Close 30 to 40 stores versus opening or relocating around ten new boutiques in the fiscal year 2019 which begins 02/03/2019. On a positive note, store remodels performance in 2018 outperformed but put on pause. Projected CapEx for 2019 is $10 million versus $30 million in 2018.

Immediate goal is to improve the business as fast as possible — marketing adjustments, expense reduction, apparel merchandise refinements, and real estate optimization. Impaired boutiques are 129 with 106 having a lease end over the next three years. Closed stores during 2019 reduce fixed boutique costs. But it is coupled with the recapture of the sales in the remaining boutiques. The plan is to close 11 existing boutiques in January 2019. A total of 81 refreshed boutiques during 2018 continue to outperform, but the program is pausing for 2019 until business stabilizes. January has been a seasonal clearance month and will speed up markdowns. Another positive cash impact for 2019 is capital expenditures forecasted at 10M and focused on e-commerce versus store enhancements during 2018 at 30M.

Current Valuation

Positive insider activity for 2018, only buys no sales. Insider shares purchased for 2018 were 47,000 shares purchased for $230,950 or an average price of $4.91 per share.

Value institutional ownership all adding shares for the most recent reported quarter ending 09/30/18.

PARADIGM CAPITAL (6.76%) ,VANGUARD (6.15%),Chuck Royce (4.81%), AQR CAPITAL (3.20%), HOTCHKIS (2.25%),Parametric (1.28%)

Relative Valuation: FRAN has the lowest valuation in its industry for price to BV, EV to Sales,BV growth, and best cash conversion that doesn't reconcile the industry's weakest stock performance.

Data in the above taken from Guru Focus

Risk and Opportunity

Risk:
The risk is clear with little room for error. Closing impaired stores, 14% YOY decline in their largest merchandise category apparel, troubling quick ratio,growing large short position. A low 10M cash balance with 50M in accrued expense and negative cash flow.

Opportunity:
The current price discounts the operational and financial uncertainty. FRAN is an industry outperforming for historical profits and free cash flow. Its unlikely to disappear because of the soft mall traffic. The 38M credit line, A/R from taxes, year end inventory clearance, store closings and other changes give investors a possible asymmetric payoff.

Long: FRAN

Deep Value with Barriers to Entry, Build-A-Bear Workshop

noreply@blogger.com (ShadowStock) — Wed, 26 Dec 2018 16:24:00 +0000

Build-A-Bear Workshop (BBW) is an Amazon resistant interactive retailer offering "make your own stuffed animal" and related products. The company is managed into three segments, direct-to-consumer, international franchising, and commercial. BBW operates 371 stores globally and 94 franchise locations. Also, products sold on the company, third party and franchisee e-commerce sites including retail locations under wholesale agreements.

:

The current stock price is $3.92 or an enterprise value 57.249M, market capitalization 58.63M.

Insider Activity:

Major Ownership: Note the 20% of the outstanding shares owned by S Cohen. Cohen is a known shorter term trader and likely sold over the past two weeks after the weak Q3 performance.

Worse than expected financial performance for the quarter ending November 2018 help create this investable opportunity. Three factors impacted the weak quarter three performance; redirected event promotion, continued poor UK sales, and lack of new kid-friendly films.

A strategic decision to limit planned marketing for September 2018 is redirected to a new event for January. The move motivated by unexpected overwhelming consumer response to July's "Pay Your Age" promotion. Massive consumer response created long waiting lines and increased media attention. Although, management believes there are long-term benefits from the 3 billion media impressions from the Pay Your Age initiative.The proximity and historical lines of prior National Teddy Bear Day promotion forced management to move September's event to manage potential negative consumer and brand-damaging event coverage. The changes made to National Teddy Bear Day resulted in lower third-quarter sales. Now the goal is to recoup lost business with a similar event on National Hug Day before this year's 2018 fiscal year end in January.

A deceleration in European revenues, driven by a double-digit decline in year-over-year sales in the United Kingdom. The overall UK market continues to be a burden by a challenging retail environment, driven by weak consumer confidence and Brexit, which has led to pound sterling volatility.

The third factor; reduced high impact kid-friendly films that translate into higher product demand. Further, management believes the weak mall traffic contributed. Although anticipated, the negative impact was greater than forecast.

Positives going into the last quarter of 2018.

Launched intellectual products include top-selling, Beary Fairy Friends, and Rainbow Friends. New tourist locations include FAO Schwarz NYC, four Great Wolf lodges, Gaylord Resorts ice event and more future launches. Holiday pop-up locations doubled. Sites expanded next to Santa’s Workshop, Bass Pro Shops and Cabela’s. These initiatives are tracking above expectations. Six full-service Build-A-Bear Workshop stores opened inside select market researched Wal-Mart locations.

Additional Positives for 2019 include a promising kid-friendly movie line-up, " How to Train Your Dragon," Aladdin, Lion King and the second installment of Frozen. New films drive family traffic to theaters located at the mall. Consumers attracted by “Pay Your Age Day” leveraged for future. It launched “Count Your Candles birthday." E-commerce sales are growing double digit for the last four consecutive quarters. This channel targeted for the fourth quarter and is up to 50% of our annual digital sales. New digital radio station introduced Build-A-Bear Radio with Dash Radio. Increase in commercial and international franchise revenue estimated to reach 5% of total revenues in the quarter. Progress realized to open the first store in India later this fiscal year and development plans in China. Expect franchise footprint of 120 locations in 12 countries by year-end.

Opportunities:

Trades at its historical lowest valuation for sales, book value, gross profit with no long-term debt and a forecasted year-end cash balance of 26M. Insider buying during 2018 at twice the current market value. Aggressive share buybacks reducing shares outstanding by 14% from December 2014. Trailing twelve month gross profit of 152.20M versus an enterprise value of 57.25M.

International franchising expansion realized with the recent addition of India franchisee. Shanghai and Beijing are areas management noted for development as the concept embraced. The concourse model shops are available for franchising.

Commercial, wholesaling , e-commerce, and outbound licensing revenue opportunities to diversify business model. Growth potential within wal-mart stores after six successful pilot locations.

Ongoing promotion of Count your candle gained full public recognition after the pay your age event in July. A database of over six million exists that can be leveraged to drive additional business over twelve months of the year.

Real estate diversification with more tourist locations, rent concessions exist as a good portion of leases up for renewal.

Toys“R”Us 6 billion liquidations negatively impacted sales during first half of 2018.

Long BBW

Datawatch’s Future Value

noreply@blogger.com (ShadowStock) — Thu, 27 Sep 2018 13:40:00 +0000

Summary

*)The turnaround for DWCH started quarter 4 2015. Near an average of 18% year over year quarterly revenue growth during the past two years. The accelerating growth was after costly strategic mistakes from 2013 to the end of 2015.

*)Intrinsic value is improving from the increasing percentage of recurring revenue now at 60% expected to grow to +70% next year.

*)The quarter 2 2018 acquisition of Agnoss completes Datawatch’s

data analysis offering. This addition presents Datawatch with cross/up-sell opportunities for larger deals. Datawatch now offers data prep, discovery, visualization and predictive analysis. Data can be at rest or in motion, structured, unstructured or streaming.

*) Non-GAAP revenue surging 42% versus prior year’s quarter (23% for GAAP revenue). License revenue improved 78% to the prior year's quarter. Subscription revenue increased 130% versus prior year quarterly results and 17% sequentially. Deferred revenue is 70% greater from the prior year’s quarter and 4% sequentially. Partner contribution grew 40% Q3 2018 versus Q3 2017 without Angoss.

*) The global data wrangling market projects a cumulative annual growth rate of 20%. Market value expected to reach 3.97 billion by 2024. Zion Market Research

*) Panopticon contributed two 6 figure deals in Quarter 3 2018. The market is now recognizing the need to analyze/visualize data in motion, streaming. Not just for investment banking but the internet of things.

*) Average deal size and the number of six-figure deals is growing.

*) Automatic executive stock sale program every quarter stopped for this most recent quarter. It may be a stretch but no insider selling could indicate outside interest or other material events that prevented automatic sales.

*) Trades at a valuation discount to competitors.

Why is the near-term double-digit accelerating growth preceded by two years of continuously failed quarters from around March 2014 to end of 2016? Investors watched in horror as DWCH stock destroyed quarter after lousy quarter. During this time DWCH hit $35 on Feb 24, 2014, only to drop in price $3.10 on 01/2016.

Let's briefly review the self-imposed dark years from 2014 to the end of 2016. What went wrong after a successful 53.60 million capital raise on January 2014 selling +2 million shares at $28.50 per share? The secondary was months after the acquisition of Swedish visualization software Panopticon on August 2013. After the Panopticon acquisition and the secondary Datawatch thought they could spend millions on advertising trying to compete against Tableau and other visualization software. This self-imposed mistake caused by marketing's leadership with no hands-on working knowledge of Panopticon. If they understood Panopticon software, the millions in advertising and strategic distraction nightmare would never occur. Further, during this time marketing management ignored their company's legacy strength/moat with data prep Monarch software. The marketing leadership rebranded Monarch and Panopticon. They ignored the tens of thousands of loyal companies using Monarch and the well-established brand recognition for two decades to rename Monarch to Modeler along with Gartner recognized real-time visualization Panopticon to Designer.

"Gartner inquiries also suggest a level of dissatisfaction in the legacy Monarch installed base as Datawatch transitions it to the new integrated platform" this from Gartner write up on Datawatch for the 2015 BI magic quadrant.

At the end of 2015 after wasting millions on an epic failed strategic plan Datawatch is forced to recognize their missteps. So with new marketing leadership, they changed Modeler back to the original name Monarch and refocused on their legacy strength. Additionally, Panopticon marketed as real-time fast visualization focused on the capital markets for now. To management's credit, they recruited back a talented hands-on technical leader from Panopticon, Peter Simpson. Peter Simpson is now the VP of Visualization strategy. I'm convinced Mr. Simpson in short time will have the team to support Panopticon as a must have application for IOT (internet of things) not just capital markets. Further, February 2016 a new CMO/COO Ken Tacelli hired. Mr. Tacelli is driving consistent growth and accelerating sales using specific industry case studies demonstrating real-world value. Tacelli is an important part of this exciting turnaround.

Monarch has improved functionality after a product upgrade slip, specifically V11 at the beginning of 2013. Panopticon is no longer sold as general visualization to compete against Tableau but instead, as the only programming free product that works with data in motion (real-time streaming), that's critical to Wall Street and IOT(internet of things). The market recognizes the unique advantage of the Monarch and Panopticon. Now with predictive analytics from Agnoss, DWCH offer a best in class complete data solution.

A deeper dive into Quarter 3 2018 highlights the improvements that will justify a higher multiple.

Datawatch continues to maximize revenue growth by deliberately running break even and investing efficiently. Non-GAAP quarter 3 2018 net income was 940,000 or .07 per share. The current closed quarter is the first full reporting period with Angoss. But, due to GAAP purchase accounting rules, a significant portion of the Angoss revenue due to contracts in place before the acquisition is not classified as revenue. The expenses associated with these transactions is recognized. At least cash from these transactions is collected and reported. The addition of Angoss predictive analytics completes the set of Datawatch's applications. Therefore, Datawatch offers a comprehensive set of data analytics and data science capabilities. The solution provided for data at rest or in motion in a structured, unstructured, or data streaming formats.

Twelve six-figure deals the highest in the company's history realized during Q3 2018. Six of those deals driven by Monarch/Swarm (data prep), two by Panopticon (real-time analytics/visualization) and four by Angoss (data science/predictive). The average deal size was $50,000 as compared to $39,000 in the prior years quarter. Notable wins were ADP and Black Knight for Monarch, Foxtel with Agnoss predictive analytics and global financial service firm Jefferies purchased Panopticon for real-time visualization.

On a non-GAAP basis, total revenue was $12.9 million (13.50 million total Bookings) versus prior year's period of $9.1 million, a 42% increase. Total GAAP revenue was $11.1 million up 23%. License revenue was $8.7 million versus $4.9 million a 78% increase from the prior year period. On both a GAAP and non-GAAP basis these are record high quarterly revenues for Datawatch. License subscription model continues to become more meaningful within overall results. Subscriptions contributed $2.5 million of the license revenue during the quarter representing 36% of our current quarter's license revenue. This improvement represents about 130% over the prior year's quarter and 17% sequentially. Cash position is strong with a balance of $13.6 million. Deferred revenues were $18.8 million at the end of quarter 3 FY 2018 the highest recorded and 70% from the prior year's third quarter and up 4% on a sequential basis. The partner contribution grew 40% versus the prior year period. Note, Angoss does not use partners but expected will start.

Improved future results are even more compelling given that they have yet to focus on Swarm and push the full potential of Panopticon. The current pipeline and proof of concept requests (Fortune 1000 type) have grown materially. There are now cross-selling, up-sell and complete package deals that offer higher deal size.

Valuation:

Datawatch is a small micro-cap recently growing at ~ 18% year over year the past two years with the revenue and gross profit at this time mainly generated by Monarch. But now with the addition of Agnoss, Swarm and renewed emphasis on Panopticon the growth rates should continue and improve. The company's shorter-term higher market value is from an acquisition. A larger software company that can roll Monarch/Swarm, Panopticon and Agnoss into their existing sales, research and administrative organization can realize a highly accretive acquisition. The other growing attribute is recurring revenue at 60% that will grow to +70% by next year even if no changes made. The company can materially accelerate growth but are focused on breakeven results at this time. Recurring software revenue historically valued at a higher valuation of around six times income. Also, Datawatch offers substantial valuable net operating loss carryforwards.

The recent Non-GAAP revenue makes DWCH a 50 million annual revenue company. This gives Datawatch a conservative valuation ~ (4)(50)= 200 million market cap versus the current 143 million or 40% higher from the current price. Recent acquisition valuations, in February 2015, Hitachi Data Systems acquired open source business intelligence and analytics specialist Pentaho. The acquisition value not disclosed. But, estimated between $500 and $600 million or 7 times Pentaho's annual revenue of 85M. HDS motivation is to gain market access to some of the data wrangling market as the much smaller Datawatch. Spring 2016, Qlik goes private by an equity firm for 3.40B with annual revenue of 3B, ~3.40 times sales. TIBCO goes private for approximately $4.3 billion or ~4 times sales. It's worth noting. Tibco uses Datawatch's panopticon for in-motion real-time analysis.

Relative: note the current higher multiples (P/S) for near competitors

Historical growth. Amounts in millions

Current DWCH Valuation
Market Cap = 145.79M : Enterprise Value= 150.86M
Price/Sales (ttm)= 3.62 : Price/Book (mrq) = 5.22 : Enterprise Value/Revenue = 3.74
Revenue (ttm) = 40.3 : Gross Profit (ttm) = 35.88M
Revenue Per Share (ttm) 3.25 : Gross Profit Per Share = 2.82
Quarterly Revenue Growth (yoy) = 22.50%
Total Cash (mrq) =13.58M Total Cash Per Share (mrq) = 1.07
Total Debt (mrq)= 9.1M : Current Ratio (mrq) = 1.22
Book Value Per Share (mrq) = 2.19
52-Week Change = 6.28% : 52 Week High = 14.20 : 52 Week Low = 7.70
Shares Outstanding = 12.73M : Float = 10M
% Held by Insiders = 15.11% : % Held by Institutions = 39.06%
Short % of Float (Aug 30, 2018) = 0.65%

Risks:
Limited resources that further risk overemphasizing Swarm than stay focused on Monarch with larger deal sizes to include Agnoss and Panopticon.

Need for additional capital if they decide to make the bet its better to put the foot on the gas now and gain greater market share. This could be a mistake especially if they think spending that money on Swarm because it will outsell Monarch for data prep.

Too many resources and time spent promoting Swam rather than focus on Monarch, Panopticon and Agnoss.

Dilution if they see the immediate need to raise the current 13 Million cash balance to grow faster in this fast-growing industry. I understand these growth rates will not last forever.

Opportunities:
Near-term company sale with a motivated shareholder-friendly management and board at near 13% insider ownership. My guess they don't sell out for less than 250 million. Its reasonable and management expects to be a 100 million annual revenue company over the next few years.
See the above summary for additional opportunities.

Long DWCH

Value with Material Growth Opportunities, Intevac (IVAC)

noreply@blogger.com (ShadowStock) — Tue, 03 Jul 2018 03:37:00 +0000

Intevac (IVAC) supports the electronic components industry with two business units, Thin-film equipment, and Photonics.

The Thin film equipment division designs, make, and services capital equipment that deposit surface thin films to produce magnetic disks. These magnetic disks are for hard drives and centralized cloud computing storage units. Additionally, other applications are key to material near-term growth. These are touch panels such as mobile phones, notebooks, smartwatch, tablets, automotive monitors. The solar power industry uses the thin film equipment division by maximizing solar cell efficiency/lower cost per watt.

The Photonics division offers digital night-vision products and services to the defense industry. Specific products include night vision cameras, soldier night vision, and integrated night vision.

Management presented the below slide forecasts at the 19th Annual B. Riley FBR Investor Conference on May 24th, 2018.

Quarter 1 reported on 05/01/2018 was within expectations, revenues of $18 million and a loss of $0.23 per share. The short-term outlook is disappointing. But, medium-term and longer the future is positive with new products supported by patents and a growing pipeline. The second half of the fiscal year management expects positive operating results. Buying IVAC shares at today's valuation offers a sound opportunity. I will add shares if the stock continues to weaken.

Two new Board Members are Kevin Barber and Mark Popovich. They both have deep experience in the cell phone and advanced packaging markets. Their key role will advise on the current pipeline and expected growth for mobile phones, touch panels, notebooks, smartwatch, tablets and automotive monitors.

Current Valuation for IVAC:

Value-Based low portfolio turnover institutions investing and invested in IVAC

Insider Buying YTD 2018 for IVAC

Relative Peer Valuation: The 14 peer companies taken from the 05/16/18 proxy were used to evaluate compensation were also used for my relative valuation.(ASYS,KOPN,ACLS,CLFD,IVAC,AXTI,NPTN,EMAN,XCRA,CYBE,PRCP,COHU,NANO,ESIO)
These 14 companies are in the Scientific / Technical Instruments, Electronic Components, and Semiconductor Equipment / Materials industries.

After an analysis of the 14 peer companies, I separated the financial metrics for both IVAC and ASYS. I purchased IVAC along with ASYS as both are value outliers.

Opportunities:

Mean reverting attributes such as -56.50% 12-month stock return for IVAC and -27.20% ASYS. IVAC enterprise value declined -45.65% from FY end 2016 to 07/02/18. ASYS increased +6.30% over the same period. Amtech Systems (ASYS) added 9.1 million in debt during FY 2016.

ASYS Median P/S is $12.10 versus the current price of $6.11. IVAC Median P/S is $7.62 versus a price of $4.85. EV/Sales and P/TB trade near historical lows. IVAC P/TB improved from 2016 ratio of 2.52 to its current value of 1.39, 44.84% improved valuation. ASYS P/TB was 1.26 for FY end 2016. This improved to 1.06 or 15.87 %. IVAC EV/Sales improved from 2016 balance of 1.68 to .73 or a 56.54% improved valuation. ASYS EV/Sales 1.26 for FY end 2016 improved to 1.06 or 47.36 %.

YTD IVAC material insider buying with no sales of $6,472,838 or 1,080,264 shares purchased at the average price of $5.99.

Value-based institution buying or holding IVAC shares such as activist Becker Drapkin Management, Royce, First Eagle, Simons, Tenton, and others.

A strong balance sheet with a P/NCAV = 1.83 for IVAC, P/Networking capital = 1.53, gross profit per share of 1.68, cash per share of 1.58, no long-term debt and trading near 52 Week low.

Strong growth opportunities with the current pipeline in new markets for display covers, SmartPhones, Tablets, Solar, and Night Vision technology.

Risks:

The main risk is that the medium and long-term projection for display markets and night vision are not fully realized.

Long IVAC: ASYS

Idea Discovery as of 06/21/18

noreply@blogger.com (ShadowStock) — Tue, 19 Jun 2018 02:03:00 +0000

Preselected Filters:

Market Cap(Mil)= less than 2Billion, Sector = All, Less Shares Outstanding YOY = All, Lower Leverage YOY = All, Exchange = All, Tangible Book/TangibleBook2015 per share = grtr than 1, RevTTM/Rev2015 = grtr than .90, SOTTM/SO2015 less than 1.08, 12Mnth stock return = less than 5%.

Shape size is contingent on TTM revenue change and shape type represents the sector.