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This is written with serious investors in mind, though sometimes they're just drafts in progress. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Tuesday, September 8, 2015

$ARIS: Response from CEO on letter sent earlier this summer

Earlier this summer I sent a letter to the CEO and board of $ARIS regarding my optimism with the forward outlook for the company, tempered with my concerns about continued share dilution.


As the letter indicated, the company had grown substantially over the last seven years but on a per share basis - the only metric that matters to shareholders - growth was negligible and I'd hoped they would stop the dilution going forward.

I received the reply just below. Talk is cheap of course and no commitments were made, but if mgmt and the board are aware of and equally burdened by the dilution, then there's potential for behavioral change going forward. My takeaway is that access to less expensive debt is more likely to provide growth capital going forward, nothing that hasn't already been publicly disclosed.

As a small investor with a nascent investment management firm, I enjoy focusing on smaller companies for three primary reasons ...

1) offers opportunities to compound growth faster, not available with larger companies due to "the law of large numbers"
2) offers opportunities to engage with mgmt, which due to scale is not available with larger companies
3) tends to be less efficient. since size and liquidity govern AUM causing otherwise intelligent investors to seek alternative markets. a patient investor can benefit from inefficiency on the purchase and reap rewards on the eventual harvest, or simply own great businesses forever.

... I believe $ARIS exemplifies all three attributes of smaller market companies and I hope to own it for a long time.


Thank you for your letter of August 11th. We have forwarded your letter to the Board of Directors and appreciate you taking the time to share your perspective.

When I became CEO of ARI in 2008 it was clear to me that ARI’s lack of “scale” was a driver of the then share price of under $0.50 and a market cap of under $5M. We recognized that we needed to grow the business and that our overall objective of growing shareholder value could not be obtained in the markets we served, with the two products we offered. As a result, we began executing a plan to grow the total addressable market we served both organically and through acquisitions. We also undertook an initiative to increase the number of recurring revenue products that we could offer to those markets while also looking for products that had a higher price point. In summary, our plan was to increase the total addressable market, increase the number of products we offered into those markets, and increase the average recurring revenue per dealer for those offerings organically and via acquisitions.

From a financial perspective, early on it was difficult to drive acquisitive growth using debt as our overall EBITDA levels were low and our lending relationships were such that to increase our debt levels would come with a significantly higher interest rate and more restrictive loan covenants. In addition, we took advantage of a unique opportunity to purchase 50 Below out of bankruptcy and had to finance that acquisition knowing it would take some time to generate positive EBITDA. As you know, we have completed several acquisitions and two capital raises in recent years. In addition, in the last 15 months we have experienced a significant increase in our EBITDA. I believe that these events have put the company in a much better position to finance acquisitions with debt than we were just a few years ago. Our ability to obtain that debt is primarily tied to our ability to generate EBITDA. Our current banking relationship has expressed comfort in allowing us to borrow up to three times our adjusted EBITDA with an interest rate that caps out under 5%. We are now realistically within striking distance of $50M in sales and have seen EBITDA improve by over 50% on a trailing twelve months basis compared to our prior fiscal year. With our scale, we are now generating more EBITDA than we have in the past and this dramatically improves our ability to complete acquisitions using senior debt. For example, if ARI generated $7.5M in EBITDA we could then borrow up to $22.5M in addition to 3x the target's EBITDA. This gives us a great deal of capacity to complete acquisitions without raising equity capital and it is our intention to take advantage of this capacity in the future. We have also adjusted our acquisition criteria to look for businesses that are immediately, or in a short time, accretive to the company’s EBITDA results. As the business scales and we continue to improve our operating results I believe the EPS will also improve. I do agree that the key to this is scaling the business from here without significant dilution.

We do plan on improving our subscriber reporting, starting with our Q1 FY16 results and appreciate your feedback on that item.

We continue to promote buying to our board and executive team and we will continue to encourage our management team and board to invest in the company using their own funds. As you know we did have 3 board members purchase another 49,000 shares on the open market in our last trading window (July 15). While I did not purchase in July I own over 150,000 shares the majority of which I purchased on the open market (these are outside the stock options or the restricted stock I have).

Again, thank you for taking the time to share your views with the board and me. We take your feedback seriously and we will carefully consider your comments as we grow ARI to the next level. We all agree, it is an exciting time to be an ARIS shareholder!

If you have any questions please feel free to contact me anytime. 

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