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Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com

Tuesday, March 21, 2017

Sometimes a Balance Sheet is the Simplest Idea



Since this is a company in transition, the business description ("We are a vertically integrated, advanced materials provider specializing in monocrystalline sapphire for applications in optical and industrial systems...") is meaningless.

the important disclosures are the Shareholder Letter dated 2/21/17 and the new CEO announcement dated 3/16/17

I summarize below the key points from the shareholder letter ...


  • decision was made to limit our focus to the smaller but growing optical and industrial segments of the sapphire market ... quickly exit the mainstream LED and mobile device segments of the sapphire market ... sell most of our plant capacity and generate cash to provide more opportunities to deliver stockholder value.
  • We are actively pursuing the sale of a 134,400 square foot manufacturing and office facility in Batavia, Illinois. Also, additional land in Batavia, Illinois we acquired in March 2012, Also the sale of  a 65,000 square foot facility in Penang, Malaysia. 
  • Our wafer patterning equipment in Penang was sold in the fourth quarter of 2016 for $4.5 million, and we are structuring an auction in the next 90 days to sell the polishing and fabrication equipment. Additionally, the real estate is currently on the market. 
  • We are in the process of consolidating operations into our leased space in Bensenville, Illinois and Franklin Park, Illinois and vacating our largest owned facility in Batavia, Illinois. 
  • planning a second auction for the excess equipment in the Batavia plant in the next 90 days ... also actively selling this property and our initial focus is to seek a buyer that is interested in both the building and infrastructure. 
  • reduce overall company headcount from 220 at the end of September to 40 today, significantly reducing current and go-forward cash-burn. We have been careful to maintain the employee knowledge base in our strategic markets built over the past 15 years.
  • we are actively evaluating the acquisition of profitable companies both in and outside of the sapphire market in order to accelerate growth and to utilize our substantial net loss carry-forwards. 
  • Because acquisitions are being given greater consideration, the Board of Directors [has a new CEO Tim Brog] with more extensive experience in mergers and acquisitions 
  • In addition to reducing costs, these changes will maximize accountability to stockholders and bring in a fresh perspective and new skill set to the executive team and the Board of Directors.
  • we are beginning to see a meaningful improvement in cash flow. 

The new CEO has had prior success unlocking value in turnarounds and in monetizing NOL's through acquisitions. It is impossible to say whether he can do that again but the cost of failure is somewhat limited by the valuation relative to the balance sheet and mgmt's efforts to stem the cash burn. 

-- END -- 

ALL RIGHTS RESERVED. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS. I MAY OWN POSITIONS IN THE COMPANIES MENTIONED HERE.

8 comments:

  1. They had 2.5m class action lawsuit settlement last year for the 2014 public offering. Potential future lawsuits and delisting lawsuit might dampen the safety. What are your thoughts regarding assessing its likelihood?

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    Replies
    1. Mr Patel -

      i do not know the future.

      you are talking about this 2016 settlement for something that happened in 2014 ...

      http://www.rubiconsecuritieslitigation.com/media/464385/dkt_no_64_settlement_agreement.pdf

      ... putting aside this company for a moment ...

      why should investors of any company at any time care about something that happened -3 yrs time under a different mgmt team?

      how should investors of any company at any time manage the potential for risk?

      ... the questions your asking about future risks, whether its the specific risk in this case of a lawsuit, of a delisting or more general risks of a going concern, of a collapse in sales, of the death of an executive, of a natural disaster, of technological obsolescence, of competition, of price, of margin compression, of dilution, of over leverage, of inflation, of poor capital allocation, etc. the likelihood of all these things exist with every company on every market at all times.

      my point is, the probability of these things happening here are no different from them happening with another company.

      rather than ask me your question, i encourage you to put on a "thinking cap" and consider ...

      1. what is the impact to the balance sheet if they delist?

      2. quantify how large a liability or loss they would have to endure so that investors here suffer a total loss of capital?

      3. consider how many $2.5M lawsuits can they afford to lose before my margin of safety disappears?

      ... and then you should ask yourself how much of the whipsaw of stock prices you can stomach how many days you can endure not knowing what's what how much your mind fills that not knowing with anxiety etc. Then reflect on whether or not deep value investing is an appropriate endeavor for you or if this company is the appropriate vehicle for that endeavor. those are things only you can answer. i mean that seriously and respectfully i believe deep introspection and self analysis are critical.

      i only know the balance sheet and that I respect this CEO and at least today i think i know what my comfort zone is.

      / Avi

      Delete
    2. "quantify how large a liability or loss they would have to endure so that investors here suffer a total loss of capital?"

      That is a really great way to think about this that I didn't give much notice to :)

      Delete
  2. This comment has been removed by the author.

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  3. They have 26 shareholders of record and are doing a reverse split of 90 to 95% of the shares. This feels like a take private which might be a challenge for some holders (e.g. folks with tax advantaged brokerage accounts)... thoughts?

    Still, it seems like this could a well capitalized company with a small operating business and lots of holdco potential.

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  4. On the other hand, one of the assets of the company is its public co listing, which might be attractive for private cos that the company may want to acquire.

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    Replies
    1. And the NOL's and in the hands of someone with experience monetizing such things.

      Bigger concerns for me - more than the reverse split and limited shareholders - are cash burn and what they actually get for the inv and RE.

      Def not for every investor

      Delete
  5. Yup - the NOLs are a clear advantage over say a SPAC listing, indeed better than an IPO, too. Reputation is probably also better vs. SPAC, maybe less good than IPO.

    This is for someone who loves Resource Conversion plays. definitely not for all investors. It is not a business that can grow NAV on its own. It needs a deal. But I do like buying assets for less than 50% of a near liquidation value. My own record with RC has been more mixed than just buying going concerns that were temporarily mispriced.

    This market is tough for finding cheap going concerns. Could be some good right tail risk on this one. Left tail risk does seem pretty backstopped by the large amount of discount to NAV.

    Cash burn is a very interesting question. Unhelpfully, they have not provided an income statement breakout for the various segments, just a revenue breakout. Also, the segment that they retained has gotten alot smaller over the past few years. CEO comp is about 8% of revenue, although this could reverse quickly if he acquires $50mn in revenue. Or maybe he does 2-3 smaller deals.

    My biggest issue is that I find myself investing in more of these Perm Capital holdcos (BTN and FRMO). Of course, with the right amount of capital commitment, each of them becomes as very interesting call option on smart allocation. They are also a means of converting security / brokerage based capital into ownership of effectively private businesses (where, for instance the holdco owns a minority stake).

    ReplyDelete