My view of the EXPH Spin-off to Create a Separate Company
The proposed spin-off announced this week is creating a lot of misconceptions and confusion, as evidenced by the posts on the board over the past few days. I am giving my view of it below. It is my own opinion only, but I am posting it in hopes it may help others in evaluating the proposed change.
1. Currently we have EXPH with its shareholders. Let’s use a simplified structure to make it easier to follow:
Insiders 325,000,000
Friends and Longs 500,000,000 (estimate)
Other shareholders 167,131,500
Total 992,131,500 shares
Let’s say that EXPH has real assets of about $2,500,000, which would be quite likely based on the June 30th statement with adjustments for higher receivables, and taking into account that the equipment is likely worth more than the depreciated book value. [Although this would give an asset value per share of about .0025, the company should have a higher market value due to its ability to make money and prospects for growth, so the share price should reflect that, and it does – it is around .008 these days – probably not too far out of line, IMO, until we get the better production numbers and are able to show profitability. Nevertheless, for this illustration, I want to deal with asset values.]
2. Now a new company is created, which we will call Etc. Company. At the beginning it starts with no assets, and shares are issued to the EXPH shareholders without cost (which means that no money comes into Etc. Company for the shares either). So Etc. now has:
Insiders 32,500,000
Friends and Longs 50,000,000 (estimate)
Other shareholders 16,713,500
Total 99,213,150 shares
Etc. Company starts with no cash, no assets; it is starting from scratch.
3. Next, some assets are moved from EXPH to Etc. Company to get things started in the new company. When the assets move out of EXPH, there should be a Note Receivable created on the EXPH books for the asset values as they transfer, so the net assets of EXPH should stay the same – some cash, office equipment, warehouse equipment, perhaps vehicles are exchanged for a Note Receivable. (I would expect the manufacturing equipment to stay in EXPH as it will retain the manufacturing side of things). Let’s say that $1,000,000 of hard assets move from EXPH to Etc. Company. EXPH now should have a note receivable for $1,000,000 from Etc. Company. The value of the assets at EXPH hasn’t changed – just the form of them has changed. We would also own shares of Etc. Company which would then have assets of $1,000,000, but it also has a Note Payable to EXPH of $1,000,000 so there is no real value for shareholders there until it actually starts to produce income and profit.
4. Next, Etc. starts operations. It develops sales and contracts the manufacture of product out to EXPH’s D&D Displays division. As funds come in from customers, Etc. Company pays EXPH for the manufacturing it did, and retains a bit of profit margin for itself. As the Etc. product lines grow, the revenues and gross margin should also grow, and in time (probably a couple of years at least), a profitable bottom line may develop. Out of its earnings, Etc. Company will make payments to EXPH to pay down the Note Receivable created from the assets transfer discussed above in point 3.
5. Meanwhile, the existing display manufacturing business that was already in place at EXPH with the major companies (Lowe’s, Stanley, Food Lion, etc). is likely to continue on and to grow – I am expecting that it would stay under EXPH.. Thus, EXPH would continue to grow the previously existing business, PLUS have the manufacturing it will do for Etc. Company, and Etc. Company will get established and grow as well.
6. As shareholders, whatever percentage we may have of EXPH, is the same percentage we would have of Etc. Company. So whether the revenues and profit were left all together in one company or whether split into two, as long as one holds their shares, they will have the same percentage of the whole picture – it’s like two pockets on the same pair of pants – its doesn’t matter whether the money is in one pocket or the other, as long as we own the same percentage of both pockets. [This statement will be true as long as the share structures of the two companies are maintained. For example, if Etc. Company issued additional shares to raise capital, our percentage of that company would be reduced. However, I am not concerned about it – the shares were free so whatever comes from them is gravy, IMO.]
7. Note, though that there are now two separate companies. EXPH is public, trading OTC on Pink Sheets. However, Etc. Company starts off private until it gets established. After a couple of years goes by and it develops its financial base and hopefully some profit, it then can look into becoming a public company. I do not think that JD would choose to go public on Pink Sheets with Etc. Company. He has stated that he will run with fully audited financials for the new company. This higher level of reporting costs more than what is required for an OTC company. To me, it says that the plan would be to go public on a higher exchange when ready – perhaps AMEX. Going to a higher-level exchange with Etc. Company could not happen immediately, so that is why I think he is starting as a private company first – that gives time and space to develop to a point where it would qualify.
Therefore, I am not seeing negatives in this week’s move to create a separate company. I am seeing it is a very well thought-out move which will help pave the way for strategic growth and to move to a higher exchange.
JMHO.
