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Highly optimistic viewpoint
Particularly given the conversion price is in the money and there's another feature in note 4 that is concerning. We'll see if you're proven correct.
Good pipe dream
Unfortunately, the conversion feature makes that illogical among other reasons.
I suspect this might be used to finance Nutribrands. Cost of capital is very high, so this deal better deliver.
What more do you expect them to say?
Anshu laid out the plan in early January. My question is why resort to this type of capital if they have an expanded credit facility in the works?
Perhaps they needed the money on such expect expensive terms to finance equipment purchases for the Houston facility? If so, why not get cheaper equipment financing?
This deal raises a lot of questions.
You should read up on what an OID means
The effective interest rate is well north of 4%. The conversion option is not good either relative to what we saw in some notes last year.
Response
I've been involved with this stock for three years (as Woodleigh will attest) and am well aware of how the OTC "works". To your point about "all it takes is one piece of news", think about all of the positive news updates that have happened in the past six to nine months. BLF, Nutribrands, credit agreement, full time CFO, aggressive revenue guidance and yet the stock is down 50% from its peak early last summer. What positive news are you expecting on top of that?
At this point, there are structural issues with the stock and approach that have to be addressed for it to achieve full value, whatever you believe that to be.
Probably not going to be the most popular post
But since we go way back and I've enjoyed communicating with you and appreciate your insight, here's my take (in no particular order):
1. General malaise in microcap land. I've seen it with one of my other stocks and if you read my post from over the weekend, the author talks about the LD Microcap index underperforming other segments of the equity markets. There are many possible explanations for that which go beyond the scope of this Board.
2. Aggressive timeline to "uplist" suggested by Anshu has hurt the stock much more than it's helped. The logical conclusion of a RS, in isolation, is an overhang on the stock. I've been advocating for one for a while given the bloated share structure, but there will be some short-term effects that have to be navigated given all of the share issuance at very low prices (not here to debate the necessity of those actions as it's water under the bridge).
3. The investor update communicated a lot of the upside catalysts in one fell swoop, which was a mistake. Not sure why Anshu did that other than to possibly boost the stock price given some frustration (which he exhibited on the last earnings call), but he should have done that on a piecemeal basis IMO.
4. No discussion of margins anymore. One of the differentiating aspects of VRUS was the positive margin outlook communicated up until last summer. They've backtracked from that and now want the markets to reward them exclusively for revenue growth. That doesn't work unless there's at least some understanding of the gross margins and even then, the revenue growth at all costs narrative stopped working when the "unicorns" lost their luster starting last year. Moreover, as I've repeatedly communicated, they need to give a more granular breakdown of revenue. I suspect the vast majority is still coming from the original beef distribution deal, which shouldn't be rewarded with a multiple comparable to the comp group that was shown in the most recent presentation (unless they can deliver EBIT margins in the mid to high single digits at least). If they can show meaningful revenue from BLF, then that will help, but we're probably a couple of quarters away from that.
5. Delayed 10-K. In my opinion, it's highly unlikely that the 10-K comes out on time. I say this for a couple of reasons. First, they changed auditors at a very busy time of year and it's probably unrealistic to think they can get their work done in a short period. Second, as far was we know, they haven't received Nutribrands' audited financials. Given VRUS will be the majority owner, I believe they will have to consolidate Nutribrands (particularly given the deal closed prior to fiscal year end). I have no idea if Nutribrands' accounting was done under US GAAP or IFRS (or perhaps Brazilian GAAP if there is such a thing), but that could create additional complexity if it doesn't conform. Given these factors, I have a hard time believing that Cutchens can get the filing done on time. This probably isn't that big of an overhang, but certainly not a positive either (but it can be overcome quickly if the numbers and outlook are good).
6. Share overhang from a big seller (s). This one has been discussed ad nauseam on the Board, so no need to delve further into it.
I would have suspected that if Anshu had drummed up a lot of investor interest at LD Micro, we'd be seeing that show up in the volume of the stock. It has picked up somewhat recently, but given the share structure, the stock needs to trade in the tens of millions of shares to show demonstrable investor interest from potentially large shareholders and sustained price appreciation IMO. Perhaps new investors are waiting for the results and willing to react rather than be proactive. I'd say that's the prudent approach if the upside is as great as management believes.
Actually, what they care about are FEES
And to a lesser extent, trading revenue.
But to your point, ALPP hit an inflection point in Q2 when it became EBITDA AND cash flow positive. No reason to expect that those metrics won't continue to be positive in Q4 excluding any one-time costs associated with closing the Deluxe Acquisition.
With respect to fees, ALPP represents a client that is acquisitive and will continue to do acquisitions, albeit at a likely reduced pace versus the past couple of years. Investment banks will also be attracted to Spectrum eBOS if it takes off as an opportunity for IPO down the line. As evidenced by the 8-K, there is also an opportunity to collect fees on a capital raise. Not sure what form the capital raise will take, but ALPP's debt service capability is only improving based on what we've seen the past two quarters.
Sounds like shareholders got a good deal instead of paying cash huh?
A little levity to cut through the tension on the Board.
There's a lot to clean up before an uplist
To their credit, they are taking some of the right steps like upgrading their auditor. That said, the financial reporting needs to become more granular, the Board has two members that own no stock, the share price is a long ways from qualifying (won't belabor the RS issue, but it's an overhang until completed) and now the market cap doesn't even qualify (at least for most tiers that I've seen, perhaps I'm wrong in that regard).
So let's not get ahead of ourselves, the company hasn't quite matured to the point of being able to uplist in many respects.
Let's also not forget, Anshu talked about uplisting in 2019 at this point last year and it obviously didn't happen (at least to the Big Board or Nazz). Uplisting OTC tiers isn't worth much IMO, but perhaps some were satisfied that constituted an "uplist". Please refer to the press release from March 2019 if you don't believe me.
https://www.globenewswire.com/news-release/2019/03/25/1767243/0/en/VERUS-INTERNATIONAL-INC-REPORTS-145-INCREASE-IN-QUARTERLY-REVENUE-ANNOUNCES-LARGEST-FUNDED-BACKLOG-IN-COMPANY-HISTORY.html
Are those your share price predictions Wood?
Bold to go on record given we know little about revenue composition, margins, capex, financing and a host of other factors that will determine the share price.
Interesting perspective from LD Micro
VRUS management and the Board could learn a few things. They haven't bought a single share in the open market since Verus was formed. Moreover, the bloated share count makes for an easy target as described below. Mark Forney, what's going to change this dynamic?
Christian Galatti
Phase IV Research
How Microcaps Can Beat the Quants
Every company on the Market goes through a daily price discovery war. Competing factions, both visible and invisible, vie for their version of the truth molded through the force of capital. On the major exchanges, and on the floor, the perspective is normally one of balance unless event-driven. Positive and negative forces push and pull within respected norms. But, that’s not how it is for microcaps.
How many in management have no clue where the selling is coming from. How many CFO’s wonder why nothing matters. How many in IR can’t explain the action unless it’s attached with news. As the small cap specialist to CalPERS for over a decade I have seen small caps go from considered an opportunity to becoming a universe of the hunted.
If there’s no estimates, no coverage, and growth in later years the quants will attack until they reach the bottom line where they know there isn’t one. The Market for microcaps is completely different than all of its relatives because there was never a balance to begin with. If nobody owns the stock, and nobody knows the story, then there’s nobody to buy if the quants sell, and they are smarter than you, so they keep selling into that lack of support to collapse the equity because they know nobody is coming to help. It’s too easy. Just like in the real world. It’s easy to attack the defenseless. An almost victimless crime because nobody knows the assaulted. So it goes on until there’s some sort of mathematical floor that is reached far lower than anybody could comprehend.
For every success that has reached escaped velocity there are ten others that are being manhandled by the Kung Fu Grip. The lesson here is just as much for management as it is for investors. Insider buying by all on board is the only way to avoid this trap. This war that cannot be won. For the investor it gives confidence that if management is going all in, there must be something there. For the CEO, the CFO, what it does is bring a blaring spotlight of positivity, an instant event that is broadcast to every institution and retail investor on earth. When you have to fight the invisible it’s best to be obvious. Without a balanced book microcaps lose daily. The only way to beat the computer is to make the truth by buying in.
12 days into the decade and the LD Micro Index has gone on to underperform its larger cousins by quite a bit.
Microcap Perspective from LD Micro
Highlights the strong potential for manipulation in the absence of institutional ownership. On the positive side, management is doing what they can through information dissemination AND increasing their ownership of the stock.
Christian Galatti
Phase IV Research
How Microcaps Can Beat the Quants
Every company on the Market goes through a daily price discovery war. Competing factions, both visible and invisible, vie for their version of the truth molded through the force of capital. On the major exchanges, and on the floor, the perspective is normally one of balance unless event-driven. Positive and negative forces push and pull within respected norms. But, that’s not how it is for microcaps.
How many in management have no clue where the selling is coming from. How many CFO’s wonder why nothing matters. How many in IR can’t explain the action unless it’s attached with news. As the small cap specialist to CalPERS for over a decade I have seen small caps go from considered an opportunity to becoming a universe of the hunted.
If there’s no estimates, no coverage, and growth in later years the quants will attack until they reach the bottom line where they know there isn’t one. The Market for microcaps is completely different than all of its relatives because there was never a balance to begin with. If nobody owns the stock, and nobody knows the story, then there’s nobody to buy if the quants sell, and they are smarter than you, so they keep selling into that lack of support to collapse the equity because they know nobody is coming to help. It’s too easy. Just like in the real world. It’s easy to attack the defenseless. An almost victimless crime because nobody knows the assaulted. So it goes on until there’s some sort of mathematical floor that is reached far lower than anybody could comprehend.
For every success that has reached escaped velocity there are ten others that are being manhandled by the Kung Fu Grip. The lesson here is just as much for management as it is for investors. Insider buying by all on board is the only way to avoid this trap. This war that cannot be won. For the investor it gives confidence that if management is going all in, there must be something there. For the CEO, the CFO, what it does is bring a blaring spotlight of positivity, an instant event that is broadcast to every institution and retail investor on earth. When you have to fight the invisible it’s best to be obvious. Without a balanced book microcaps lose daily. The only way to beat the computer is to make the truth by buying in.
12 days into the decade and the LD Micro Index has gone on to underperform its larger cousins by quite a bit.
Good points and perspective
I'd also add that Kent can't easily sell stock given he's subject to insider trading restrictions. Thus, he can't afford to think short-term like most "investors" in OTC stocks. He clearly thinks the stock is worth much more than $0.15 for him to forego his salary in cash, which the company could have paid quite easily given the level of gross profit (even if it might have been spread out rather than a lump sum given the recent increase in capex).
As I mentioned previously, this move is also a strong positive signal for any upcoming meetings with institutional investors.
We like CEO's that increase their ownership stake
And I can assure any doubters, institutional investors that meet with the company will like it too. Minimal additional share issuance to further align the CEO's interests with other shareholders is a great move. We also like that the conversion price was at the market rather than in-the-money.
Cash flow
To close the loop on a discussion from yesterday, if you follow this link, you'll see confirmation for the cash flow numbers I provided yesterday (and have provided numerous times in the past). If you still aren't convinced, do the math yourself (you'll have to refer to the preceding quarter's 10-Q to compute the current quarter's cash flow). In summary, the company has done almost $0.01 per share in cash flow from operations in the past two quarters. If you annualize the last two quarters, it's almost $0.02 per share and that doesn't factor in organic growth and the incremental business ALPP will get from Deluxe (looks like they picked up ~ $1.3mm in revenue from Deluxe in the roughly two months that they owned it in Q4, but I'll need to see the 10-K to confirm).
On a valuation basis, ALPP is trading at ~7x run-rate (using last two quarters) cash flow, which is very cheap IMO.
https://finance.yahoo.com/quote/ALPP/cash-flow?p=ALPP
Nutribrands
Is Nutribrands on track to produce audited financials? Those were due 75 days after closing, which is coming up in the next few days. Given VRUS will be the majority owner, Nutribrands will have to be consolidated too, perhaps starting with the 10-K given the acquisition seemingly closed on 10/30.
Not true
Leases would still be captured on the income statement through D&A and interest expense. Cash flow operations, which is essentially cash flow to equity), captures both the cash and non-cash effects of these charges.
High yield covenants
Typically based off of EBITDA (or some other cash flow metric) not book capital, which seemed to be your point. Even for oil and gas companies, banks will look at PV-10 or some MARKET based estimate of reserves.
Rebutting some of your points
1. I agree, the net income was largely due to non-cash reversals. That said, ALPP was cash flow from operations positive to the tune of $574k in the most recent quarter. That is AFTER debt service costs. In fact, the company has been cash flow from operations (again, after debt service costs) for the past two quarters. In Q2, the company had CFFO of $351k, so that was a nice sequential uptick.
2. Looking at the balance sheet to judge creditworthiness is highly misleading as it's based on historical costs. No credit analyst would do that (I was a former high yield investment banker and worked for a private equity firm, so I'm keenly aware of credit analysis). One should look at cash flow for a business like this, particularly given a large portion of the debt (~44%) are lease obligations that have to be capitalized now due to changes in GAAP.
3. Looking at number of years to repay debt is misleading as ALPP will almost certainly REFINANCE debt rather than repay. There will always be some debt in the captial structure given their approach.
4. Net worth is negative, but again, that's based on historical costs and not relevant on a forward looking basis. In fact, ALPP's negative net worth is more than entirely due to accumulated losses. That's backward looking and irrelevant when evaluating the stock.
The stock is admittedly struggling due to an absence of buyers rather than inordinate selling pressure IMO. Unfortunately, there aren't any meaningful institutional holders of the stock that I'm aware of, but hopefully that will change as the year progresses and visibility on an uplist improves.
Not sad at all
Part of the M&A game. Deals fall through all the time and companies move on. Market has had plenty of time to digest this news.
As best that I can tell, there wasn't anything unique about Crow. ALPP can focus on new business wins for its existing units, which is better for shareholders as there is no associated capital expended.
8-K
The 8-K contained a fairly standard set of terms and placement fees. I don't understand all of the fuss unless one doesn't understand how investment banks operate and their role in the listing/offering process. Keep in mind, ALPP intends to engage other investment banks as part of this process and to presumably get market making services, so omitting AGF from this disclosure isn't a big deal. Moreover, it's not in either sides best interest to put a dollar figure in an engagement letter as these types of transactions are generally done on a best efforts basis.
Thanks for the post Asymm
I think you're in the minority with your positive sentiment, but I'm fine with that:)
Should be an interesting day given the macro concerns. I don't anticipate those dissipating anytime soon.
Influence on share price
Yes, there could be additional news announcements that could positively impact the share price. That is always the case and no one has differential insight in that regard. That said, with the current share structure, it will take a lot of share accumulation and consequently trading volume to move the stock price up sustainably above $0.05. In my opinion, as I've indicated to you previously, that almost certainly has to come from institutions or high net worth individuals and the first couple of weeks of January were going to be telling. Perhaps this update was Anshu's "catalyst" to spur those with significant buying power to accumulate now.
Other than a share buyback, it's very difficult for a company to directly influence its share price. I don't a see a buyback in the cards here as the company is capital constrained and trying to grow at very high rates. That takes capital and reinvestment.
Anyways, I'll close the loop here on this part of the discussion. Let's see how the "market" views the update and the aggressive plan and targets laid out by Anshu.
1-400 was the max Wood
So you could be right in terms of his target RS ratio being 1-100. That said, how does he get it done so quickly?
Realistically, he needs the stock to be at least $0.05 to effect the uplist IMO. Attainable? Certainly, but not a given with the current share structure.
Been involved since Feb 2017
I've seen the good and the bad here
I'll call it like I see it and we'll see how the plan unfolds and the level of execution. I don't take Management's guidance as a given, particularly in this case after what I've seen.
Best of luck to you.
A few thoughts
There are a lot of perplexing statements in that update. First, how is it possible to uplist to a major exchange (presumably NYSE or NASDAQ) in Q1? Doesn't leave a lot of time. Second, he tries to make a relative valuation argument based purely on growth rates without discussing mix or margins. I was very optimistic when they discussed a 12% net margin target in Q4 back in July, but they've backtracked off of that and now I don't know what to expect. Third, Anshu said the RS authorization will lapse and now he's essentially intimating that one will take place given the desire to uplist in such short order. At least be honest with shareholders.
He's laid out a very ambitious set of goals. We'll see what gets done.
Get the RS over with
It's a certainty now. Why Anshu denied it I have no idea.
Probably some tax deferred selling
Quite possibly some tax deferred selling this morning given many shareholders bought in the low single digits last year. Should get through that soon.
That said, stock is down on very low volume so not a cause for concern. I'm sure Kent has more new business wins to release as we progress through January.
Happy New year Wood
I think the first couple of weeks of January will be a good test as to whether the company did in fact drum up institutional interest at LD Micro. I don't think earnings will be much of a catalyst, in isolation, given revenues have been telegraphed and the upside will have to come from margins.
Thoughts on Crow
From what I could tell, this was a small deal (even by ALPP standards) and would have just given additional scale beyond MSM and Deluxe. Not saying that wouldn't have helped, but one has to understand the ALPP acquisition model. First, and foremost, Kent has to be disciplined on the acquisition price (specifically, the multiple of revenue or EBITDA). He approaches deals with a similar mindset as a private equity buyer- assume minimal synergies and look at deals from a financial perspective. If Kent starts to lose discipline on the purchase price, shareholder value is destroyed.
After having been an M&A banker in a former life, my experience has been that sellers walk away primarily because of price. Given this, Crow likely didn't feel the purchase price was adequate and thought they could get a better deal either elsewhere or in the future. A second reason, as Kent seems to intimate, is that the controlling shareholders had second thoughts about selling. This can oftentimes happen when dealing with private and closely held businesses.
The stock wasn't discounting Crow in my opinion and moving on from this deal without letting it drag on further shows good judgment.
It's in the 10-Q
You have to do some calculations as cash flow isn't presented on a quarterly basis, but instead on a year-to-date basis. They've been cash flow positive for the past two quarters.
Might want to double check the filings before commenting next time.
Flawed logic
Looking at your share count is silly. You should be concerned with the market value of your shares. A RS won't change the market value of your shares in isolation.
If you look at research on reverse splits, after a possible short-term negative impact, which appears to be mainly a Pavlovian response, the long-term impact on market value is oftentimes negligible and in many cases positive (brings in institutional investors that need a price per share above $5). For example, the reduced float can actually have a dramatically positive effect on the share price- I've seen this many times in my 20+ years of being on the buy side in various capacities.
Reverse splits can be negative if the company uses them as a means to avoid delisting and needs to raise capital. You'll see this many times in biotech. ALPP is a different animal as Kent has demonstrated with his recent actions. He is very much focused on creating shareholder value and his interests are perfectly aligned with other shareholders.
The plan sounded good
But the execution, or lack thereof, has been poor. In addition, the market backdrop isn't as supportive as I once suspected. The FDA is highly skeptical of CBD at this point, so it's going to take years of research and trials to bring drugs to market.
NXEN's best chance to make it as a business is to focus on international markets like Western Europe and Israel, but the latter is small. That said, as one of the other posters suggested, the best outcome for shareholders is a sale to monetize whatever value exists in the patent portfolio and XactDose.
Disagree
Twitter has become an accepted means of communication and many CEOs of multi-billion dollar companies use it to communicate with shareholders. All Kent is doing is sharing pertinent information as it becomes available with the appropriate caveats. If any shareholders require clarification, they can either respond to the tweets or contact Kent or Ian directly (they are very responsive).
Who's "we"?
Are you an institutional investor?
The market cap requirement can be easily satisfied as the market discounts the improving fundamentals of the existing businesses and more information about Spectrum ebos is released.
Kent has acknowledged that a R/S may be required. It can be a modest one and with a proportionate reduction in the A/S, is not a long-term cause for concern.
Would like to know who's voting for SBES
That stock looks like a scam to me, but I suppose it's hard to tell given they haven't filed 10-Qs this year. LOL
I doubt Kent is standing still
He hasn't released any PRs on new business wins recently, but he typically does that a couple of weeks after quarter end. Given the low volumes now and lack of institutional participation given it's year end, it only makes sense to wait and release business updates in January and February.
Look at the financial statements and the shareholders meeting video
Uplisting is planned for 2020. They expect to have all of the existing subs (ie. not including Crow) on Spectrum eBOS by the end of Q2 2020. Could they miss those deadlines? That is a risk, but they've still left ample room to get the uplisting done by the end of 2020 even if they fall behind schedule.
As far as making money, they are already EBIT positive (that's after D&A charges) and were cash flow positive as of Q2. If you annualize the most recent quarter's cash flow, they would be producing over $2mm in cash flow from operations(pre capex). Deluxe should improve that further given it's a stabilizer.
2020 will be a year to optimize operations and drive profitability even further.
Clarification on the accounting system
I think the impression you're giving with your comments (perhaps not your intention) is that there is something wrong with the financial statements. That is simply not true as the auditor, Malone Bailey, issued an unqualified opinion in the most recent 10-K. An acquisitive company like ALPP inevitably will have targets that utilize different accounting systems and software. That doesn't mean the financials aren't being accurately reported. It just means that consolidating the financials takes more time and effort. Given the company's current size and aspirations, it certainly does make sense to standardize systems where possible. That said, this issue should in no way impede the valuation from expanding as the financial statements, to the best of anyone's knowledge, accurately reflect the performance of each subsidiary.
Kent has expressed his desire to have all the subsidiaries utilize Spectrum eBOS for financial reporting and to manage their businesses using a similar set of metrics. This should help facilitate cross-subsidiary interactions and knowledge sharing to improve performance as much as possible. He is actively trying to foster more synergy between the business units and this is an important step.
They already gave a range for FY 2020 revenues
I don't see how the top line can be an upside catalyst at this point. They could possibly surprise with an expanded credit facility, but the balance sheet is becoming increasingly levered.
In my view, the upside catalyst has to primarily come from margins and they've been coy about that.