T11 Capital Management commentary for the month ended September 30, 2015.
- Winning positions in September: LEHct +45.75%, WMIH +13.04%, SCMR +10.79%
- Losing positions in September: IWSY -13.79%, KFS -10.47%,
- New additions to portfolio: None
- New liquidations in portfolio: None
- Portfolio exposure as of September 30th: 100% long/0% cash
- Long Positions as of September 30th: WMIH, KFS, LEHct, IWSY, SCMR
T11 Capital Management – Portfolio Highlights
- WMIH announced that it is uplisting to the Nasdaq, a move which took place on September 28th. The uplisting is a condition detailed by the $600 million preferred B memorandum. As described in the accompanying 8k for the uplisting:
“The Listing fulfills the Company’s obligation pursuant to Section 23(a) of the Company’s Designation of Rights and Preferences of 3.00% Series B Convertible Preferred Stock, which requires the Company to use its reasonable efforts to list its Common Stock on a national securities exchange after becoming eligible to do so and upon approval of the Board of Directors. “
It is uncommon that an OTC shell company will act to uplist its stock before an acquisition that provides a tangible corporate structure and more importantly, revenues. As an example, SGGH (now RELY) uplisted following the announcement of a revenue producing acquisition. Other OTC shells, such as TPHS, SWKH, BKFG and SDOI remain on the OTC, most likely due to the fact that they do not meet the requirements to uplist. ALJJ, a former NOL shell company, remains on the OTC after multiple revenue producing acquisitions over the years. Point being that WMIH has always been a unique special situation stock because it is being driven by what I can best describe as atypical scalability. Every detail that has been disseminated to investors over the past three and a half years is suggesting a rapidly scalable corporate structure.
This move to the Nasdaq is not just a move to provide legitimacy to the company, it is a move that provides scale in share price due to what will become mostly institutional driven purchases. With the early move to the Nasdaq, before an acquisition is even announced, WMIH has provided a venue for institutions to participate immediately. It also provides a venue for institutions to participate upon the unveiling of the acquisition candidate, suggesting that the acquisition will be large enough to warrant institutional attention.
Scalability has been the modus operandi taking place here from day one. We have seen it in the degree of financing offered. We have seen it in the amount of shares that have been authorized. We have seen it in the top tier level institutions involved. And now we have seen it in this unusual move to uplist prior to an acquisition being announced.
It is all being done so that the company can scale appropriately, ultimately suggesting that this will be a large cap company that remains in its infancy today. A unique opportunity, for sure. And more than likely one of the best risk/reward situations in the entire U.S. stock market presently.
- SCMR shares had a respectable gain during the month as further clarity into the intentions of the activists involved in halting the liquidation of the company in favor of a restructuring to capitalize on the tax benefits came to light.
In a 13D filing on September 18th by General Holdings LLC, what I suspected was occurring when we took the position in August was actually detailed for the first time:
The Reporting Persons have engaged, and intend to continue to engage, in discussions with the Issuer’s management and members of the Issuer’s Board of Directors (the “ Board ”) on multiple topics, including the Reporting Persons’ suggestion that the Issuer should revoke its Certificate of Dissolution filed with the Secretary of State of Delaware on March 7, 2013. Such discussions have also touched on corporate governance and corporate finance matters, including but not limited to the potential adoption of a shareholder rights plan, additional equity issuances, the use of net operating losses and other suggestions for maximizing shareholder value. The Issuer has not taken any action with respect to the Reporting Persons’ suggestions described above.
As detailed in the August client letter, the beauty of this investment is that our downside is clearly defined as a result of the liquidation that is seemingly ongoing at this point. Our upside, however, is substantial as the current market cap reflects very little in terms of value for the attached net operating losses.
After witnessing the long road that WMIH has traveled down to detail a plan for exploiting their NOLs, it is only fair to wonder if we have such an inordinately long wait ahead of us for SCMR, as well.
Although all hinges on the decision of management to revoke its Certificate of Dissolution, the process here should move along relatively quickly assuming this takes place. What is important to note, in the case of SCMR, is that any news of the revocation of Certificate of Dissolution instantly turns this from a liquidation play that is based on solely on existing assets in liquidation to a platform/forward revenue play that must be valued according to an entirely new set of metrics. In any case, that shift in focus for the valuation of the name should be dramatic in nature, if and when it occurs, sending the shares markedly higher.
T11 Capital Management – Portfolio Lowlights
- IWSY had a difficult month as shares slipped after initially moving higher towards mid-month. There is a significant amount of short interest in IWSY, which increased during the month due to a negative article that was released regarding the prospects for the company to achieve profitability in the coming months.
I consider IWSY to be a technology platform investment. In this type of investment, we are essentially investing in the future, unrecognized potential for a company to implement an emerging technology successfully. What creates the upside in these types of investments is that the markets have absolutely no idea how to value emerging technologies. There are no earnings models from which to determine what the potential is here since there are so few relevant comparisons. It is brand new territory and markets can’t value brand new territory correctly. Automatically due to the nature of the investment, we have an inefficiency taking place in the share price. The question I have to ask myself is are we are on the right side of the inefficiency? While CEO Jim Miller certainly has a track record of over-promising and under-delivering, I expect that some of the promises of this technology producing substantial results are close at hand. Further, upon validation of the technology by paying customers, this immediately becomes a buyout candidate by a large technology/defense based company.
The Lockheed partnership, which was a substantial driver behind my decision to reinitiate our position in IWSY, is a game changing event for the company. It is essentially validation of the company’s technology, setting them up for revenues from any number of the partnerships in the near future.
Lockheed tested out IWSY’s biometric engine for years before committing to integration of IWSY’s biometric engine into Lockheed’s own biometric offering. The IWSY product is not an option within Lockheed’s IDHaystack platform, it