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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

Thursday, February 15, 2018

Investment Diary: Reflecting on IVTY ( + / - ) and why buying more despite frustration might be the right step

Asked recently what my thoughts were on IVTY, after meeting management at the Leerink Conference, my reflections belong in this investment diary:

Competition isn’t the issue.  The issue is the way the company is run: I observe that investors are attracted to the company's product, but the big spend is on developing a sales organization. It is difficult and expensive to do this from scratch. What frustrates me as well is that a native sales force seems so outdated but everyone says "that's the way its done".

Since I just had the science fair experience with my 5th grader it very much feels like we shareholders are the kids with the science fair project (cool product!!) and dad (Phil) has taken it over to force a costly & time consuming sales org down our throats, while also taking all our babysitting and snow shoveling money.

So what do we do from here?

As always I like to look at history. Sawyer's last company was Fusion, which was acquired by Baxter in 2002. The story I've heard a lot from two sell side analysts who cover this industry is that "Phil sold Fusion too early and doesn't want to make the same mistake with IVTY" 

A few screenshots tell us something that offers perspective, a potentially different narrative and certainly a cautionary tale.

First, look at FSON's volatility / awful stock market returns!!! When it comes to the pain of stock ownership, Invuity shareholders have nothing on FSON shareholders.



Consider that the company was eventually sold for $10 / share. What a tremendous destruction of shareholder capital by Mr. Sawyer. And it begs the questions: Did he really sell too soon or was he forced to sell from frustrated investors?

Concurrently, look at how much stock Phil was taking on top of his salary compared to everyone else. It sort of looks comparatively the same relative to the colleagues but still a fraction of the +$1M he paid himself last year.



(it's a bit interesting / weird / tidbit to note that no one from the board or the executive team from FSON appears to be involved in IVTY. this could be totally meaningless and arbitrary but if you asked me to start a company tomorrow I'd hire people I've worked with in the past.)

and finally, look at how much they spent on sales / marketing relative to flat R&D and consider that IVTY doesn't even have a head of R&D anymore


All of it reinforces what's really going on here: they're building a sales force and the early steps are costly and is not going at the expected trajectory. but is it failed? 

A few things to keep in mind ... 

if history is a guide, stock market volatility should be expected  
there is value in a good sales force, even if they haven't built it yet. and maybe they are learning / adapting as they go? 
we originally bought this company b/c they were narrowing the gap between sales / marketing, here they have finally bridged it while growing (more slowly than expected) accounts and procedures. 



... at less than 2x sales, why shouldn't we buy more? 

two things have changed 

our frustration
the balance sheet. and this is where I erred months ago. i should have re-evaluated (and maybe sold) when they levered up, b/c that changed the valuation

... but standing here today the reasons for initially owning this have only improved 

Investing is a very hard business. And let me stress it is preferable to become part owners of companies with master capital allocators at the helm. But I have found myself in certain frustrating situations and this is one. This is where research and due diligence come in. Information provides a reference point no matter what the market tells you day to day. For me, it's these three charts and a low valuation that of course could get cheaper still. 

-- END --

ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. 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 IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.



5 comments:

  1. we got what we wanted. CEO out. Stock up 25%. Am glad the PR mentioned "move forward towards profitability" b/c there's no reason this company should behave in a capital destructive manner, other than "that's what the prior CEO has always done."

    am continuing to seek information on what i'm missing if anyone cares to share

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  2. two articles aobut the new guy ...

    Mr. Scott D. Flora served as the Chief Executive Officer and President of OmniGuide, Inc. from November 1, 2011 to April 2, 2014.

    https://www.massdevice.com/omniguide-saddles-some-scale/

    http://www.cafepharma.com/boards/threads/omni-guide.269139/page-2

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  3. Good news! Congrats on getting the analysis right and sticking with it. Given the leverage, how steep does that ramp need to be before they have to go and sell equity?

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    Replies
    1. they will have to figure out some cash situation in next 12-18 months.

      should I be optimistic? it's gonna be great!! i'm rarely optimistic though, more playing the odds.

      b/c reality is that current debt is with MidCap Financial. to comply with covenants they need to do at least $50M revs in 2018. guidance is "at least $46M", so 8% below that. if they achieve $50M, they'll have options (debt or equity). if they don't, depending on why, that will drive the decision, but with likely fewer options.

      no doubt decisions by prior management narrows the near-term success pathway - a lot needs to go right - but even with those parameters, if the PhotonBlade product is good and can manufacture at scale efficiently, you can win even by losing (ie in a sale)

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    2. Yeah ... I hate these sorts of decisions. Too hard for me, usually. Guidance seems plausible - maybe at this point give them a few weeks to report on 1Q and reassess?

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