NHLD History and Due Diligence
NHLD is down 8% Year-to-Date in 2015 and closed at $4.15 per share today. Last year when NHLD was selling in the $5.00 range, Iroquois Master Fund Ltd. said, “we continue to believe that NHLD’s current market price does not fully reflect the Company’s intrinsic value.”
Here is NHLD’s history and prospects (using post-split numbers):
After hitting a post-split adjusted high stock price of over $100 in 2000, NHLD suffered in the aftermath of the contraction that resulted from the dot-com bubble. Again, in 2008, NHLD stock price fell from $26 to $3 in the aftermath of the housing bubble. It has almost gone bankrupt many times. “Old” management had issued a ridiculous amount of convertible debt and convertible preferred stock in order to prevent bankruptcy, however, the onerous capital structure ensured NHLD’s common stockholders would not benefit.
In March 2012, Klein, Fagenson and Riley, together as National Securities Growth Partners, LLC (“NSGP”), had become material owners of convertible debt. In July 2012/September 2012, NSGP provided additional convertible debt funding.
As a result, Klein and Fagenson became Co-Chairmen of NHLD’s Board. Riley was also elected to the Board of NHLD, but resigned in October 2012. As of September 30, 2012, NSGP owned 30% of the NHLD, and Officers and Directors owned 39% (50% fully-diluted).
In essence, Fagenson and Klein came in as substantial owners of convertible debt and could control NHLD’s future because NHLD was essentially a bankrupt company. Both Klein and Fagenson were elected co-chairmen of NHLD, and then they eliminated all of NHLD's outstanding debt and preferred stock by issuing millions of common shares. While it sounds heroic, the dilution experienced by the existing shareholders was tantamount to bankruptcy because each shareholder's ownership percentage was reduced dramatically. While NHLD had already increased its outstanding common stock in 2012 to almost 2.7 million from 0.5 million in 2006, Fagenson and Klein continued to increase NHLD common stock to 12.5 million shares, while in the process becoming substantial owners of NHLD.
Here are the details:
In January 2013, NHLD issued almost 3.0 million common shares for $3.00 per share in a private placement to a “new” investor group and almost 2.0 million common shares for $5.00 per share to retire convertible debt and convertible preferred stock. Additionally, 1.4 million shares were issued to retire preferred stock warrants. As a result, NHLD had eliminated almost all of its debt. While NSGP’s (Klein, Fagenson and Riley) ownership had been diluted to 20%, NHLD was no longer threatened with bankruptcy. Also, Klein became CEO in January 2013.
In August 2013, NHLD issued 1.0 million common shares for $3.00 per share in another private placement. In October 2013, NHLD issued another 2.3 million common shares to buy Gilman Ciocia, Inc. and effectively used the August 2013 issuance proceeds to pay Gilman’s liabilities.
As of September 30, 2013 NHLD ownership by NSGP was spilt as follows: Klein 8% (1.0 million shares), Fagenson 7% (0.9 million shares), and Riley 6% (0.6 million shares), and as a whole, Officers and Directors owned 28%. As of September 30, 2014, current Officers and Directors continue to own about 28% of the outstanding common stock of NHLD.
While prior shareholder’s ownership of the company had been diluted substantially, new stockholder were able to buy stock in NHLD’s new capital structure at a low price. Some "new" investors, however, feared the “new” management group might be self-serving, and perhaps, start to dilute new shareholders’ ownership in NHLD as time passed.
In October 2013, the former director, Riley, began to sell his NHLD stock and by the end of November, he had reduced his holdings 4% (0.5 million).
Iroquois Master Fund Ltd.'s story:
One “new” investor group who was concerned about what was going on at NHLD was Iroquois Master Fund Ltd.
In January 2013 and August 2013, Iroquois Master Fund Ltd. bought 0.4 million and 0.3 million common shares, respectively, of the private placements for about $3.00 per share. In November 2013, Iroquois filed a Schedule D because they no longer intended to be passive investors. Iroquois’ average purchase price had been $3.19 per share. Now, Iroquois owns 7% (0.8 million shares) of NHLD with its most recent 0.1 million shares having been purchase in the $5.00 range in June 2014.
Back in December 2012, Klein had told Iroquois that both he and Fagenson would not receive any stock options; however, in June 2013, Klein was awarded 0.6 million in stock options (5% of NHLD) and Fagenson was awarded 0.2 million in stock options. Iroquois was concerned that the awarded stock options are clearly dilutive to the “new” stockholders.
Additionally, Iroquois was concerned about the non-independence of the Co-Chairmen (Klein and Fagenson), and that firms owned by them were authorized to earn money from NHLD.
In July 2014, Iroquois’ Abbe and Silverman became independent Directors of NHLD.
In September 2014, Klein announce his resignation as Co-Chairman and CEO (effective December 2014) and said he would resign as director as well (effective March 2015).
Fagenson continues as Chairman and is now CEO of NHLD. As recently as February 2015, Fagenson said, NHLD has “not planned to make any significant options grants to senior management,” but it is subject to change, perhaps, if NHLD want to induce someone to join the Company. Fagenson is close to retirement. He is 66 years-old and he does “not intend to spend my 70th birthday here.”
Iroquois has said NHLD “represents compelling value” and its stock price ($5.00 at the time) does not reflect NHLD’s intrinsic value. Additionally, Iroquois said a superior value for NHLD stock could be realized through the sale of the company.
Iroquois probably considered these 14 factors that make NHLD an attractive acquisition target:
Small company size…NHLD's market capitalization is slightly over $50 million
Ignored by Wall Street…NHLD has no analysts who follow it
Low Valuation…NHLD's Price-to-Book is close to 1
Low Price-Earnings…NHLD's Price-Earnings Ratio is less than 3 (adjusted is around 10)
Inside Ownership…NHLD's insiders own 28% of common stock
Clean Capital Structure…NHLD has no Debt
Cash on Balance Sheet…NHLD has $22 million ($1.75 per
share)
Low Enterprise Value…NHLD's EV = $28 million ($2.50 per share)
Deferred Tax Asset…NHLD's net Deferred Tax Asset = $11.8 million
Expandable Margins…NHLD margins could be expanded and overhead
eliminated
Solid Distribution Network…Fagenson said “the strength of distribution network is something that we feel that many in the investment community don’t adequately understand.”
CEO retirement is imminent…Fagenson is 66 and he does “not intend to spend my 70th birthday here.”
Known Litigation Risk/Threats…NHLD has reserved probable and estimable risks of $0.7 million
Note: NHLD reported threatened claims before insurance are higher:
1Q 2015 -$21.8million;
2014-$15.0 million;
2013-$10.1 million;
2012-$16.8 million.
