Dane Capital Management Fund 2015 Annual Letter To Partners

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Dane Capital Management Fund annual letter too partners for the year ended December 31, 2015.

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Dear Partner:

Given the late timing of our 4th quarter and year-end 2015 letter, we will address both our 4th quarter, and more recent 1st quarter developments.

In the 4th quarter Dane Capital Management Fund (the “Fund”) returned 4.3%, net of fees and expenses, bringing the Fund’s full-year 2015 performance to 0.5%. While this is marginally better than the (4.4%) return of the Russell 2000 (including reinvested dividends), and superior to the returns of many small cap value strategies, this result is far from satisfying. As we have previously stated, we believe our success should be measured over years, and not months or quarters. And even the measure of years, as Nassim Taleb explains in Fooled By Randomness, may not fully reflect an investor’s talent. We remain confident that our disciplined, long-term, value-oriented approach, will reward our Partners for their patience, and that Dane Capital will outperform markets over time.

Despite our focus on the long-term, the first two months of 2016 have been exceptionally frustrating. Our year-to-date portfolio performance has been poor. While the Fund’s performance has been disappointing, there has been no specific factor that has caused the material price declines we’ve experienced in many of our largest positions. We take this as a double-edged sword – on the one hand we don’t believe our positions are impaired, in fact, in our opinion the distance between market value and intrinsic value has materially widened. Still, it’s frustrating, and we have spent significant time checking and re-checking our assumptions, via calls, channel checks, etc. However, our confidence remains strong, especially since several companies have already reported strong results and outlooks, and in many cases we have added to our highest conviction ideas.

As we will detail below, none of our major positions have had a material (or even immaterial) blow-up in fundamentals year-to-date. That said, we have significantly cut our holdings in ChipMOS, a company and management we know well, not because of a loss of confidence in fundamentals or a narrowing of the significant price disparity between IMOS (the US listed shares) and 8150.tw (ChipMOS Taiwan), but because management’s poor treatment of US shareholders concerns us that the price gap when IMOS converts to an ADR simply may not close. While we’re disappointed by ChipMOS management, this has had little impact on Dane Capital's year-to-date performance. The point is simply that if and when facts change, we will not hesitate to reduce exposure to or fully exit a position. However if a thesis remains intact and the stock price drops, we will likely add.

We note that among our largest positions, we do not have exposure/dependence on rapid growth in China, nor do we have exposure to commodity prices. If anything, most of the stocks we own stand to benefit from lower commodity input costs. Most generate the majority of sales from US consumers or enterprises, are inexpensive both on relative and absolute terms, and have engaged in buybacks (either by management and Board members, or at the corporate level). Few, if any, of our holdings are in cyclical industries and we don’t believe the companies in our portfolio generated peak earnings in 2015 – in fact many should see business accelerate in 2016 and beyond.

Our portfolio companies also have relatively limited industry overlap. The one commonality is that many/most are small cap. While there clearly has been a market de-risking, a trend which appears to have turned around the past few weeks, most of our portfolio companies have low valuations – low enough that we’ve been surprised by their downside moves.

Dane Capital's stated goal is to identify materially mispriced securities where we believe we have a unique and differentiated perspective that will generate strong investment returns over time. After 20 years in the investment industry, we have learned that cheap can often get cheaper – which we have attempted to avoid by identifying relatively near-term value-creating catalysts that should result in a stock’s market value and intrinsic value converging over a relatively short period. Despite our less than sanguine view on the global economy entering 2016, we thought we were entering the year positioned to dodge major land mines. While, from a fundamental perspective, we’ve avoided land mines, we’ve been surprised by the pronounced declines in several of Dane Capital's holdings. That said, we’re neither market timers, nor macro-economists, although our view on the macro environment certainly impacts our analysis.

Following the sell-off in many small-caps in 4Q 2015, including several of our holdings, which we attributed to tax-loss selling and fund redemptions, we’ve been amazed by the further (often significant) declines in many of our stocks, despite no identifiable bad news (in fact several of our holdings are experiencing accelerating positive fundamentals). We are largely exposed to companies that are extremely inexpensive (i.e. free cash flow yields in the double-digits, based on current/trend, not peak earnings) in secular growth industries, with managements that have exhibited their confidence in their businesses either by corporate or personal share repurchases.

We attribute the majority of stock price declines in our portfolio to a general decline in micro/small-cap stocks. In many cases, there simply has been no bid. We have continued to perform due diligence on our core holdings, have been in contact with every management team of our major portfolio companies, and have assessed (and reassessed) what we could be missing. We are confident that the fundamentals of our core holdings have not deteriorated – and, as we previously stated, in several cases have improved. While it provides us with little short-term satisfaction, we believe for many of our holdings, the distance between market value and intrinsic value has widened, even considering a negative multiple re-rating as the world goes “risk-off”. However, when our analysis proves accurate, as we expect it will, and investors once again step into small-caps, we are optimistic Dane Capital's positive performance could be dramatic. We’re pleased and gratified that despite our year-to-date performance, several of our investors agree with our perspective and have added to their partnership interests in Dane Capital with increased AUM in both March and committed for April.

Many larger-cap companies have seen similar year-to-date stock price declines (Amazon down 14.9%, Netflix down 11.1%, Tesla down 16.2%, and the list goes on), but many of these companies trade at 20x or 30x (or far more) earnings and 10x revenues – unfortunately we’ve been inadequately short this group of stocks (again, we’re not market timers, and had we been short this group in 2015 it would have been a disaster). Our portfolio has experienced similar declines, but with our holdings it’s largely been with companies that now have double-digit free cash flow yields and are enjoying accelerating fundamentals in secular growth industries.

We worked on Wall Street during the downturns of ’98, ’00, and ’08 and are cognizant of current global uncertainty. With those years in mind, we are reminded that owning well-run businesses, in secular growth segments, at compelling multiples, with well-aligned managements is a formula for producing outsized returns over time (we recognize that we say “over time” frequently, but in our view patience is the most consistent path to long-term wealth/value creation).

To be clear, in cases where we believe fundamentals or theses have changed/deteriorated, we have cut/exited positions (i.e. ChipMOS noted above). We are cognizant of the potential for thesis drift – the tendency to stick with a stock, even though the rationale for owning it has changed. Behavioral economics teaches about the endowment effect; the higher value we attribute to things we already own – we certainly shouldn’t own a stock if we didn’t think it was undervalued. Still, the ability to rationalize when a situation has changed is sometimes startling. In our view, a portfolio manager should constantly assess if, ex-transaction costs and tax implications, at current prices they’d buy the stocks in their portfolio. If the answer is no, it’s probably time for reassessment of that part of the portfolio.

Given the challenging investment environment, in this letter we will review positions in more detail than normal to provide greater visibility into our thinking and give clarity as to why we’re so optimistic about Dane’s potential performance over coming quarters (and beyond). As always, we’re also happy to speak with any of our partners at greater length. Before addressing our investment positions we want to provide a brief update on marketing.

Dane Capital Management Fund - Marketing/Investor relations

As we’ve stated previously, we continue to spend the majority of our time focused on our research process. In November we were pleased to be interviewed by the website hedgefundconversations.com - for anyone interested in an extended view of our investment approach we invite you to watch the interview.

Despite a challenging start to 2016, we received additional investments on March 1st and expect additional AUM on April 1. While we remain below the asset threshold originally outlined in our offering documents, we will be closing our Series A (“Founders Class”), which offers preferential terms, on April 1. We do this largely out of our commitment to our earliest investors, those who invested in Dane Capital  during our first 18 months. Series B and C partnerships will be available on a monthly basis thereafter.

As always, we are available to discuss specific questions about our firm’s strategy and portfolio.

Dane Capital Management Fund - 4th Quarter review

In the 4th quarter the Fund enjoyed positive performance driven by several positions. Digirad (DRAD) returned 56% during the quarter (inclusive of its $0.05 quarterly dividend) driven by the announcement of the acquisition of DMS Health for approximately 3.5x EV/EBITDA, vs. the 7.8x at which DRAD was trading. This acquisition closed at the beginning of January, with very attractive financing from Wells Fargo (average interest rate of 3.24%), and with the company having net debt of approximately $18 or approximately 1x projected 2016 EBITDA of “at least $17 million” announced at the time of closing (since raised to $17-$18 million). We will discuss DRAD at greater length below.

The Fund also benefited from AgroFresh (AGFS), which began the quarter at $7.94 and ended the quarter at $6.33. Following a 3Q earnings blow-up, the Fund significantly increased its position in the AgroFresh in the high $4 and low $5 range, benefitting from a December bounce which included open market purchases from 6 insiders. We will discuss AGFS at greater length below.

Finally, the Fund was long (and exited) Fairchild Semiconductor (FCS) which received an acquisition bid from On Semiconductor. At the time of the announcement, it was a relatively small-size position as FCS had already appreciated based on rumors that it was in play. As you may recall, we discussed Fairchild at length in our 1Q letter based on our view that the Street was excessively focused on Fairchild’s lack of top-line growth and GAAP EPS, rather than its free cash flow yield which exceeded 10%.

On the short side, our two largest shorts contributed strong performance. Code Rebel (CDRB) declined 62% during the quarter and we covered the position. While we believe the company is likely worthless, with 6+ quarters of cash and a borrow rate approaching the triple digits, we thought covering prudent.

Our single largest short, which we have yet to publicly disclose, declined 30% during the 4th quarter, following a near 30% drop in 3Q – and is down an additional 35% in 1Q. We have almost entirely covered this position as the stock is nearing cash levels, although it’s burning approximately 6-8% of its cash per quarter. Should the stock rally for any of a variety of reasons, we will add to the short. This is a stock where we are confident we have unique perspective having spent countless hours on due diligence, and where the borrow cost remains in the low single digits.

While we are pleased with these two shorts, and happy that none of our shorts were bought out or caused us meaningful capital losses in 2015, we are disappointed that we covered many shorts far too early (Ambarella, GoPro, FitBit, FreshPet, Twitter, TrueCar, amongst others). We will continue to look for materially overvalued, overhyped, challenged businesses and are working on a large number of new ideas.

Dane Capital Management Fund - 4th Quarter New Positions

RMG Networks (RMGN) – In the 4th quarter we added one new mid-sized position. While we are largely small-cap, technology, value focused, it’s unusual for us to invest in a sub $30 million company – that’s small, even for us. However, in the 4th quarter we established a position in RMG Networks (RMGN). Superficially, if you take a quick look at RMGN’s marketing materials they appear to be a video display company, but they neither manufacture nor install displays. They are actually a software company that provides enterprises real-time data on displays for a variety of use cases – call centers, logistics facilities, retail outlets, hospitality, etc. We think it’s unusual for a company of this size to have 70 of the Fortune 100 as customers, and equally importantly, to lack significant customer concentration. We established our position at approximately $0.75 – the stock closed last Friday at $1.08. The company’s historic troubles stem from its former management team that spent excessively and was distracted because it was running its display business and an unrelated airplane advertising business – the former CEO’s expertise (which was divested in July). Under the new CEO, Bob Michaelson, the company has reduced op-ex (which we expect to be down again sequentially in 4Q vs 3Q, to be reported on March 10th), grown sales and backlog, and for the first time in 5 years developed a new operating platform and added 6 new products. There’s now a very good reason to reengage with the company’s numerous Fortune 100 customers. This is essentially a high margin software business (~53-59% gross margins) with 30-40% recurring revenue. We believe the company will approach breakeven in 4Q, versus the single sell-side estimate of a ($0.07) loss (equal to 3Q loss, despite likely lower op-ex and seasonally strong revenue). While 1H tends to trend lower from 4Q, we have modeled, and are confident, that by 3Q or 4Q 2016 the company will earn $0.04-0.05 per quarter, or a $0.16-$0.20 run-rate. At a 20x multiple, that would imply a $3.20-$4.00 stock, or a 4x-5x return from our cost, and 3x-4x current prices (shares are now at $1.08). It’s worth pointing out that both the CEO and CFO made open-market share purchases post 3Q results (albeit relatively small open-market buys). In addition, the company has $6 million of net cash and in November secured a $7.5 million credit facility (at an attractive prime plus 1.25-2.25%, depending on conditions) from Silicon Valley Bank. We believe that SVB providing a low-cost credit facility to a historically money-losing nano-cap is strong evidence that far better times are ahead. In our experience, SVB does thorough due diligence, and would not provide such financing without extensively evaluating a company’s business plan and prospects. In our conversations with management it’s clear that the company has no need for any financing, and believes its new operating platform, several key sales hires, and additional products position the company for growth. Again, at Dane Capital we don’t typically spend lot of time on $30 million market cap companies, but ones that can return 4x-5x, with clean balance sheets, motivated managements, and that have been vetted by high quality banks (i.e. SVB) present what we believe are highly asymmetric risk/reward opportunities – and if 2H plays out as we expect, 2017 could be extremely interesting for RMGN as the digital signage market is expected to enjoy double-digit annual growth into the next decade.

Dane Capital Management Fund - 1Q Update and Key Positions

AgroFresh (AGFS) – As we mentioned above, in 4Q we benefited from increasing our position in AgroFresh following a 3Q earnings call that resulted in a 35% intra-day drop in shares. The company blamed a poor North American apple harvest (AgroFresh sells a product to farmers which keep apples ripe longer post-harvest). However, management didn’t handle the call well and failed to provide full-year EBITDA guidance despite just 45 days left in the quarter. Clearly management realized its miscalculation and 2 days later announced that they expected 2015 EBITDA of $87-$93 million, as well as a $10 million share repurchase program, followed by 6 different insider buys. AgroFresh was a $13 stock in August and $7 prior to reporting 3Q results. Multiple insiders bought stock in the $9-$10+ range when the stock declined in late August/early September. To be clear, the company, in its prospectus had guided to $100 million in EBITDA in 2015, up from $95 million in 2014. While we recognize a y/y decline is a reason for multiple compression, the decline struck us significantly overdone, especially since management attributed the revenue/EBITDA shortfall to an unusually weak apple harvest – the lowest globally since 2008 (corroborated by government data – see below).

Global apple production for 2015 was down more than 10% and AgroFresh’s EBITDA, at the mid-point, was down approximately 5%.

At times like this we look to one of our investing heroes, Warren Buffet. In this particular case, his words from his 2013 Berkshire letter seem particularly appropriate:

“I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.”

Warren Buffett, Berkshire Hathaway letter 2013, p.17

Following AgroFresh’s healthy bounce in December, shares have declined 21% year-to-date. In late November and early December insiders were purchasing shares in the $5.50-$6.50 range, and today shares are at $5.00. There has been no news or earnings (the company reports March 10th). There have been 2 positive sell-side initiation reports. There is potential competition, but that was true as of last summer, and our work suggests the competition will have little, if any, impact on the company’s business. AgroFresh are also 3 new business lines that they expect to contribute $90 million of incremental revenue (likely $50M of incremental EBITDA) in the next 5 years. So, even assuming the company’s core SmartFresh product stays flat (it’s assumed to grow by $50M with new geographies and new fruits), AgroFresh would have ~$150M in EBITDA and $75-$80M in free cash flow by 2020, versus a current market cap of $225 million, and enterprise value of $650 million (if SmartFresh grows as expected those figures are closer to $180M and $105M). We’re optimistic that global apple production will revert to the norm, that management and insiders will scoop up shares personally, and via corporate buybacks, and that we could see a very substantial snap-back in shares over coming quarters. It seems that another awful harvest, competitive price degradation, and market share loss, has been more than priced in.

Digirad (DRAD) – As we mentioned above, the Fund benefited substantially from its position in Digirad in 4Q. Quarter-to-date Digirad has declined 12%. At $5.09 it’s now far cheaper (just over 6x EV/EBITDA vs 7.5x EV/EBITDA) than it was when we originally purchased it below $4. The company recently reported upside to 4Q, and raised guidance for 2016. The company’s market cap is just $99 million, versus free cash flow that should be in the $11-12M range – a low double-digit free-cash flow yield – and pays a 4% dividend. Digirad provides outsourced diagnostic imaging and ultrasound across 42 states. We think their future has little dependence on whether China grows 3% or 7% or oil is $30 or $90 a barrel (or US interest rates go up another 50bps). This is a management that we know well and trust. The good news is that they will be extremely disciplined and do acquisitions at 3-5x EV/EBITDA. Conversely the bad news is that we might go through an 18 month stretch with no new deals – however, we far prefer a management that doesn’t chase deals. DMS Health is a far larger acquisition than the company has made previously, and importantly, management has been clear that’s its objective of “$17-18 million in EBITDA in 2016” does not rely on cross-selling or operational synergies…so the story could get better in future years as synergies are realized. With shares trading at just over 6x EV/EBITDA, low cost debt, and strong demographic growth trends we think DRAD offers a compelling risk/reward profile. We don’t know when the company will find the next DMS, but with a disciplined acquisition approach, interesting expansion/cross-selling opportunities, and almost $100 million in NOLs, we see DRAD as a multi-year compounder, before it (by our best guess) is ultimately acquired.

Lindblad Expeditions (LIND) – Lindblad is an adventure cruise expedition company that the Fund has owned for several quarters. We think it’s an excellent business at a good price (currently 8x EV/EBITDA). We believe there is a strong moat around Lindblad’s business due to its 50 year operating history, and its exclusive relationship with National Geographic (20% of sales are through Nat Geo and they have an option to purchase 5% of Lindblad) – as we like to say, “no one doesn’t like puppies, no one doesn’t like National Geographic.” That Lindblad, with relatively few amenities, charges 5x (or more) the price of mass-market cruise brands speaks to its reputation and the uniqueness of its experience. The company also has a strong balance sheet, with net cash, and can self-fund its fleet builds. We believe that the balance sheet affords the company the opportunity to make acquisitions, which we expect will prove extremely attractive given the company’s brand reputation, marketing prowess, and operational infrastructure. If acquisitions don’t occur, we’d expect further share repurchases ($20 million was announced, and we believe largely completed, last quarter).

The company’s shares are down 14% year-to-date, although there’s been no bad news – they have yet to report 4Q, but we expect results/outlook to be solid. We suspect that when Lindblad reports, they will announce that they used much of their $20 million repurchase plan to buy back warrants during 4Q. The significant number of warrants (strike price of $11.50) becomes increasingly dilutive as the share price rises, so the repurchase of warrants would be materially accretive if Lindblad executes, as we believe they will.

Lindblad is on schedule to have two new ships, one in 2017 and one in 2018, each with ROICs in excess of 20%, far higher than the mass market cruise lines, and which can be funded from internally generated cash flow.

While we recognize the boom-bust cycle of the cruise industry we simply believe that Lindblad is a very different story. For example, Carnival hosts 11 million passengers per year, Lindblad less than 20 thousand. With an aging population, that is increasingly healthy, wealthy, active, and looking for unique experiences, we believe the underlying demographic trends for Lindblad are strong. We note the recent Pew Research study about the shrinking of the US middle class. While there’s been an explosion of impoverished, there’s also been an explosion of wealth.

Dane Capital Management Fund

Source: http://www.pewsocialtrends.org/2015/12/09/the-american-middle-class-is-losing-ground/

We think Lindblad, with its unique positioning, will continue to enjoy strong demand at high price points.

Finally, for us, the elephant in the room is the company’s cash position, and anticipated cash generation. According to their investor presentation, over the next 5 years they intend to build 3 ships (2 are on order for $10 million total more than originally expected, factored into our estimates), increasing passenger capacity 50%, and doubling EBITDA – while generating net cash of $50-$60 million, by our estimates over that period. Cash is going to go to accretive acquisitions or additional buybacks, both positive outcomes in our view. We consider the current multiple undemanding especially since we think there’s a lot that go right. This is a company that bought a $30 million ship in 2013, the Orion, renamed it the National Geographic Orion, and in 2016 will likely generate over $10 million in EBITDA and almost $10 million in free cash flow. There’s a lot of hidden value to the brand and we’re patient to wait for it to come out.

Pointer Telocation (PNTR) – Pointer was one of the Fund’s big losers in 2015, with a decline of almost 30%. We attribute the decline to a spin-off of its unrelated roadside assistance (“RSA”) business that was scheduled for 1H 2015, but postponed (it is now scheduled for May), and lack of top-line growth due to exchange rate deterioration of several currencies in countries in which they have operations. With a 1% increase year-to-date in 2016, we count Pointer as a major winner, but well below fair value.

The company recently reported 4Q and gave a very upbeat view on 2016, with strong growth expected in its high margin services businesses, a stabilization in currencies, major new opportunities in Brazil, and multiple new products for asset tracking, the connected car segment and the Internet of Things.

We believe that the company’s upcoming spin of its low-margin RSA (12.5% gm) business will be a catalyst to take shares to higher levels. As a standalone Mobile Resource Management (“MRM”) business Pointer will look far more attractive with 48.2% gm, versus the current 33.9% for the combined company. Pointer is trading at under 5x EBITDA, versus CalAmp (CAMP) at almost 3x that multiple, and has a double digit free cash flow yield. If the company grows its MRM business 10% in 2016 (management was very comfortable with that figure on its recent call – and we suspect upside), they should be able to grow EBITDA by 20-25% based on incremental gross margins in excess of 50%. We suspect that as investors see the far superior growth and margin profile of stand-alone Pointer, shares should re-rate (for example, at an 8x EV/EBITDA multiple, the stock would be a double from current levels). We believe the company is well positioned for several years of double-digit top-line (and faster bottom-line) growth, and trades at an unsustainably low multiple in a consolidating industry (CalAmp recently agreed to acquire perennially money-losing LoJack). Even a modest rerating would be material to the stock’s current share price, which we view as significantly disconnected from company fundamentals.

Radisys (RSYS) – Shares of Radisys are up 1% year-to-date, which relative to the Russell 2000 makes it look like a big winner. That being said, we believe the stock is extremely cheap (more than mere optics would suggest), and, like many other micro/small-caps, seems to have ongoing selling pressure. In addition, the company had upside to 4Q and raised guidance for 2016.

The company has two disparate businesses, a low-margin, highly profitable, embedded computing division, and a fast growth, high margin, but currently unprofitable software and systems division. In our view, the stock is a story of 1+1= ½ - with the sum of the parts worth less than each unit individually.

In 2015, Radisys earned $0.21 (non-GAAP), exceeding the guidance it laid out at the start of the year for the first time in quite a long time. When the company reported 4Q, they guided 2016 EPS of $0.22-$0.28, which at the mid-point implies almost 20% EPS growth. But, in our view, that’s far from the whole story. In 2016 the company guided that the embedded division will grow – in part due to a one-time $19 million win – however they also stated they expect y/y growth for embedded in 2017. Embedded, rather than being a melting ice cube (it has been declining for several years) is a now a highly profitable, growing, segment of the company. Rather than being worth perhaps 3-5x EBITDA, embedded is likely worth 7-8x or more. Several years ago the company considered strategic options for this business. We don’t think anything is imminent, but we believe the company would be a willing seller at the right price. We suspect that Embedded, ex-software/systems losses, probably is a business earning $0.30-$0.35. That is inexpensive, in our view, for a growing business at a company trading for $2.81 with over $0.20 per share of net cash. It would suggest the software/systems business is free (or even being attributed a negative value).

With software/systems benefiting from strong secular tailwinds, and top-tier partners like Nokia, Reliance (India) and, we believe, AT&T, we think the segment is extremely well positioned. Comps to Radisys’ software/systems business trade at 2.5x-3x revenue or more, so with Radisys guiding to over $60 million in sales in the segment, it would imply $4-$5 of additional value.

We recognize that prior to 2015 Radisys was a frequent source of investor disappointment (turnarounds can take time), but if the company delivers in 2016 the way it did in 2015, we think there is a significant opportunity for sentiment to change. If it does, we think Dane Capital has the opportunity to capture a 2-3x return. We also note that multiple insiders and Board members made open market purchases in 2H 2015, at prices well above levels where the stock was trading at in 1H 2015 (there were additional insider buys post 4Q results), in our view suggesting increasing confidence in the company’s prospects as the year progressed. We also note that the single factor most tied to management’s options vesting is the achievement of higher share prices – clearly there is significant investor/management alignment.

Volt Information Sciences (VISI) – Volt is a staffing company that was historically mismanaged, including being out of date with its filings for several years. It is in the midst of a turnaround under new leadership and a highly upgraded Board, no longer filled with former management’s cronies.

For the past several quarters the company has been exiting money-losing businesses, reducing headcount and upgrading outdated IT systems. The company has also tripled its liquidity as of 4Q (reported in January) versus 2Q (when the company put its repurchase plan on hold).

When the company reported 4Q, CEO Michael Dean reiterated his optimism that the company could achieve a 2-4% operating margin over time – at the low end this implies EPS of $1.25 (with comps trading at high-teens multiples this implies a stock price approaching $20 versus Friday’s close of $7.91). However, the hoped for sale-leaseback of the company’s Orange County headquarters was not announced on the call, although Dean reiterated it would happen soon, as would the sale of MainTech, an unrelated, profitable computing business (that we think will garner $20-$30 million). Following results, six insiders made open market share purchases, yet in the month that followed the stock dropped 20% (the stock has since recovered and is down 3% year-to-date).
On March 1st the company issued an 8-K (with no press release) of the long awaited sale-leaseback of Orange County, resulting in $28 million of net proceeds to Volt, further improving the company’s liquidity position.

We expect further good news ahead. Specifically, when the company reports 1Q results on Wednesday, March 9th we expect Dean to reiterate his optimism about the company’s ability to achieve operating targets, suggest that revenue levels are stabilizing, and state that the MainTech sale remains on target – likely in late 2Q or early 3Q (only 2-3 months from now). We suspect management will be clear that as soon as MainTech is sold the company will reinstate its buyback, which would be exceptionally accretive at current levels, if operating goals prove realistic. In addition, the company should be months away from receiving an anticipated $17 million tax refund. In aggregate, within a few months the company could have $60-$70 million in excess capital, above the $40-$50 million it requires to run its business – versus a $165 million market cap.

This was a stock that traded at almost $13 in the past 52 weeks. With rapidly improving liquidity, business that appears to be heading in the right direction, the exit of money losing and distracting businesses (i.e. Uruguayan yellow-page directories), a looming sizable buyback, and almost 20 days short interest, we think this stock has the potential to be sharply higher in a matter of months. With an activist on the Board and a turnaround CEO in place, we think the ultimate endgame will be a company sale. If the company executes, we think that happens at a triple-digit percentage premium to the current price.


There will be the occasional bad crop, however our investments remain fertile and importantly, we continue to see many opportunities in the market. We remain confident that there will be good news to come and more abundant harvests in the future. We appreciate your continued partnership and we look forward to keeping you apprised of your Fund’s progress.



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