Investment Conclusion

The online lending industry has been red hot this bull market in terms of origination growth. Companies started coming public in 2015. The big names are Lending Club (LC) and OnDeck (ONDK). However, the post-IPO performance has been train wreck for a number of one-off reasons, pushing the valuations for these two online lending pioneers to mind-boggling lows. Now is the time for savy value investors to come in and swoop up these “next-gen” business models that will be paving the way forward in the industry for decades to come. We expect shares of ONDK to double to $10+ equal to a reasonable 3x current book value. LC’s revenue is set to double to over $1 billion by 2020, which we expect to also cause the share price to double to $12+ equal to only 2.5x revenue.

Online Lending Industry Overview

Lending Club and OnDeck Capital debuted their IPOs in 2015 presenting growth investors with an attractive opportunity in online lending. One company is a pioneering marketplace lender serving consumers, while the other is a balance sheet lender transforming into a licensing technology serving small businesses. These two companies (and others) got their start during “perfect storm” conditions for entrepreneurs targeting financial services. Now, public and private market investors increasingly have their choice of lending businesses that are rapidly disrupting the vast credit landscape. Combine these ingredients – a favorable backdrop and a large addressable market – and you get a long runway of opportunity ahead as users increasingly turn to alternative channels in both consumer and commercial lending. The lending market is undergoing one of the most significant transformations in its history.

Here are eight key themes to focus on:

• The consumer lending landscape continues to expand, with more product offerings and broader participation from prime and near-prime consumers.

• It is not just about the consumer segment anymore, as online small business lending takes its place on center stage. • Social signals and other unstructured data sets are transforming conventional credit analytics for both balance sheet lenders and marketplace platforms.

• Institutional investors are now the dominant source of lending capital, replacing the “peer” in marketplace models and de-risking on-balance sheet models.

• The fluid and evolving regulatory environment remains an ever-present backdrop for investing in the lending sector.

• Three dominant business models are emerging – marketplace and balance sheet lending; both are viable and compelling, but there is also the opportunity to license technology.

• Public market investors now have a choice to make in terms of allocating their capital to “next-gen” online lenders versus “old guard” incumbents.

• Capital flows in the private markets have been brisk, with pre-IPO lenders garnering the attention of well-heeled, cross-over investors.

We see the ingredients of a “perfect storm”. The financial crisis and the Great Recession prompted contractions in both consumer and business credit, leaving scores of individuals and small businesses with no place to turn for loans. At the same time, the ensuing and prolonged low interest rate environment has fixed income investors clamoring for new opportunities to generate returns. In tandem with these structural changes, the rise of social signals and advances in technology have led to incremental, non-traditional signals that the next generation of financial services companies can use to better evaluate lending decisions.

Is $12 trillion large enough? The credit markets are substantial, and the current crop of next-generation online lenders is just beginning to scratch the surface. We believe there is significant opportunity for multiple lenders across several verticals to deliver continued strong growth for the foreseeable future.

Consumer lending has gone mainstream. Online-based lending has moved well beyond the subprime consumer segment and high APR, short-duration loans. New players, such as Lending Club, are addressing prime and near-prime customers with more reasonably priced, longer-dated installment loans.

Small business lending takes its place on center stage. The SBA is a resource for small companies seeking credit, but not for the owners of “mom and pop”, asset-light businesses. OnDeck estimates there are ~28 million businesses in the U.S. that do not qualify for an SBA loan and have been abandoned by community banks and credit unions (e.g., the local pizza shop or dry cleaner).

Lending Club – 2Q 2017 Earnings Recap

After what can best and only be described as a rough run for the last year or so for the team at Lending Club, things appear to have picked up some as of the marketplace lender’s latest quarterly earnings report. The firm logged the second-highest quarterly revenue in its history, a situation that had the firm’s long-concerned investors sending the stock up 8% in after hours trading. Lending Club reported a net loss of $25.5 million, or -$0.06 per share, compared with a loss of $81.4 million, or -$0.21 per share, a year earlier.

By the numbers, the performance was also in line with what investors wanted to see — revenue was up 35% to $139.6 million during Q2, a solid beat on the analysts’ consensus estimate of $136.4 million. Originations returned to growth in the second quarter, up 10% to $2.15 billion. Meanwhile, operating expenses fell by 12.5% to $165.1 million in the quarter. Revenue for the year — on the strength of that big performance — got an upward revision to the range of $585 million to $600 million, a reasonable pick-up on the previous forecast of $575 million to $595 million.

Chief Executive Scott Sanborn said on the conference call that the company was “back on its front foot.” Lending Club has spent much of the time since May 2016 on its back foot following an internal investigation that revealed a series of concerning issues about how loans were handled and packaged for investors. The firm was forced to acknowledge it had altered documentation when selling $22 million in loans to investment bank Jefferies Group to make the quality of the loans within the package seem higher than they were. The loans were later repurchased by Lending Club. The loan malpractices led to the ouster of then-Chief Executive and founder Renaud Laplanche. It also led to mass desertions of investors from the platform — which, in turn, caused originations to crater. Under Sanborn’s leadership since June of last year, Lending Club has been working double time to win back the trust of investors, bank lenders and other partners who had taken a step back from doing business with the company. We are now seeing great progress in the right direction!

OnDeck Capital – 2Q 2017 Earnings Recap

OnDeck reported 2Q Adjusted EPS of $0.02, which excluded a $3.2 million severance charge and represented the first positive figure since its IPO. Nice! Huge!!

The company made significant strides toward achieving the aggressive cost reduction plan first outlined on the 4Q16 call and raised further on the 1Q17 call. Credit displayed signs of stabilization as late-stage delinquencies rolled into charge-offs, and reserves on newer originations reflected tighter underwriting. The company anticipates accelerating volumes off the 2Q trough and is still guiding to a reduction in quarterly operating expenses to ~$40 million in 2H’17, leading to modest year-end GAAP profitability. Great!

The implementation of cost rationalization appears on track. Consistent with management’s stated objective to reduce operating expenses to a $40 million per quarter run rate by the end of the year, total operating expense of $44.6 million in the quarter marked a 6.3% Y/Y decrease, lowering the total efficiency ratio to 51.4% vs. 55% in 2Q16. Excluding the related $3.2 million severance charge incurred during the quarter, the Y/Y reduction of 13% brings the company within striking distance of the targeted $40 million quarter run rate. We note, however, that while sales & marketing expenses have remained muted in recent quarters given the pullback in growth initiatives, incremental expenses could conceivably trend upward again if the origination growth trajectory picks up in early 2018 as expected.

Credit appears to be stabilizing, which is fantastic. While the 18.5% headline NCO% translates to the sixth sequential quarterly increase, we note that the downward pressure exerted by a shrinking portfolio has been pronounced, particularly when considering the ~40-45% (excl. rollovers) historical quarterly paydown rate. Further, the strategic pullback in longer-maturity (15 months), higher balance (up to $500K) term loans by management since 3Q16 has more than likely compounded the reverse denominator effect, which, in our view, will run its course in the next 2-3 quarters, consistent with the downward trending weighted average term of new originations since the pullback.

Growth in originations is expected to return to double-digit Y/Y growth in 2018. Commentary regarding origination and UPB growth amounted to the most meaningful incremental outlook, in our view. Specifically, instead of an expected lower UPB balance at the end of this year, management has now guided to a sequential increase in the UPB balance for Q4, which we believe is yet another sign (assuming the absence of a material increase in origination volumes) that the implementation of more stringent underwriting since 2H16 and recent vintage performance is providing support to portfolio attrition in the form of lower charge-offs.

Lending Club Consensus Estimates

OnDeck Consensus Estimates

  Own The Top 2 Players Leading The Future Of Online Lending!

 

 

 

Vuzix Corporation (VUZI), our February pick at $6.15, closed at $7.55 yesterday for a gain of 23% in just over a month.

News of a development agreement with electronics giant Toshiba for customized smart glasses by Vuzix has resulted in some initial short covering and with a solid rise in volume and share prices. The agreement validates the patented waveguide technology Vuzix has that opens the way for augmented reality glasses that look like something you wouldn’t be embarrassed to wear. I test drove a working pair of the new Blade 3000 series of AR glasses (which will be rolled out the second half of this year) and they looked great, worked great, were surprisingly comfortable, lightweight, and sturdy.

Additionally, Vuzix was featured on the front page of the Wall Street Journal print edition on Sunday in an article titled “Smart Glasses Get a Fresh Look.”

And while the latest numbers show over 25% of the VUZI float short and still to cover, longs and shorts alike shouldn’t be surprised to see more positive news from VUZI on the Toshiba front.

CEO Paul Travers noted that:

“The (Toshiba) agreement demonstrates how we are leveraging and partnering our industry leading technology with top tier global partners.  We trust that this will be the first of many ongoing collaborations between the firms.”

 

Vuzix conference call Friday, March 17th at 9:00 am Eastern Time.

The call will cover Q4 and full-year 2016 financial results and provide a business update.

Dial-in Number for U.S. & Canadian Callers: 877-709-8150
Dial-in Number for International Callers (Outside of the U.S. & Canada): 201-689-8354

Participating on the call will be Vuzix Chief Executive Officer and President Paul Travers and Chief Financial Officer Grant Russell, who will discuss operational and financial highlights for the quarter and year ended December 31, 2016, and will share a business update.

A replay will be available for 30 days, starting on March 17, 2017, at approximately 10:30 a.m. (ET) by dialing 877-660-6853 within the U.S. or Canada, or 201-612-7415 for international callers. The conference ID# is 13656767.

Stay tuned VUZI longs, as all indications are that 2017 is going to be the breakout year for VUZI in sales, strategic partnerships, and investor awareness.


tapimmune-logoTapImmune (TPIV) to Host Inaugural Quarterly Business Update Conference Call and Webcast

TPIV is a more recent pick from two weeks ago at $4.30, see: TapImmune (TPIV): Developing Cutting-Edge Vaccines that Attack Ovarian and Breast Cancer with a Vengeance).

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TapImmune’s current market cap of just $39 million is a bargain given the company’s cash balance + $13.3 million grant from the U.S. government, + four Phase II studies in progress with top tier partners like AstraZeneca (AZN) and Mayo Clinic.

TapImmune will have its inaugural quarterly business update conference call and live webcast today, Tuesday March 14th, at 4:30 pm Eastern Time.

You can register for the live webcast here: http://tapimmune.com/register/

  • To access the call, dial: (877) 870-4263 (U.S.), or (412) 317-0790 (International).
  • To access the live audio webcast, visit the Events section of the TapImmune website http://tapimmune.com/events/.

The webcast will be archived for 90 days beginning at approximately 6:30 p.m. ET, on March 14, 2017.


This should be an exciting call by TapImmune and I’ll be listening intently.

TPIV has 4 different phase 2 studies underway for breast and ovarian cancer with world-class sponsors and collaborative partners, and it’s very reasonable to expect continued share price appreciation as more retail and institutional investors become aware of the company in the coming weeks and months.

 

TapImmune Pipeline


See also: TapImmune January 2017 Investor Presentation.


Disclosure/Disclaimer/Terms of Use


Green Organic Dutchman - gary

American Brewing/Bucha Inc. (ABRW), a stock we recommended at .40/share last month announced a monster merger agreement with $50 million privately owned New Age Beverage, gaining market leading brands such as XingTea®, which is distributed in major national retailers across 46 states and in 10 countries around the world.


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ABRW


Shares are beginning to move (currently up 20%) on the news, and given the size of the merger, I expect a multi-day move in shares this week. 

Read the merger announcement here: 

Búcha, Inc. Signs Merger Agreement with $50 Million New Age Beverages/Xingtea Group to Create a Leading Healthy Functional Beverage Company


And congratulations to our subscribers who bought ABRW shares at .35-.40 range last month. The ride is just beginning!

25 million O/S post-merger/acquisition and at just 1X sales and assuming no growth, that’s $2.00 a share. 


Subscribe for FREE to MicrocapResearch.com and get great picks like ABRW before the crowd rushes in!


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Update: American Brewing (ABRW) changed it’s name to New Age Beverage Corporation and symbol to (NBEV) to better reflect the business effective August 5th.


Some of the best stock picks I’ve known feature small companies that had what it takes to successfully refocus their businesses to take advantage of a high growth market opportunity.

So what does it take to successfully refocus a business to increase shareholder value and share prices?

  • a laser-like focus dedicated to an unconsolidated, yet booming market
  • the right product that has strong competitive advantages in the market
  • a balance sheet that allows the company to focus on the new, or previously underutilized direction
  • the right management with the right connections and experience in the space to make the decisions that will drive success

American Brewing Company (ABRW) has all of these requirements in place right now, and investors can reasonably expect strong gains in market share in coming quarters. 


American Brewing CompanyAmerican Brewing Company (ABRW)
Shares issued/outstanding:
15.4 million
Closing Price 4/5/2016:  0.40
Market capitalization:
$6 million
Float:
5.9 million
2014 sales: $1,069,898
2015 sales: 10-K pending

American Brewing Company, Inc., produces and sells healthy, functional beverages. The Company recently sold off all underperforming beer/microbrewery assets, and is now focused completely on the high growth, functional beverage market. The Company’s key product, the Búcha™ Kombucha brand (web site) of kombucha is currently distributed to 1,800 stores, including Whole Foods, Kroger, Safeway, Jewel Osco, Shaws, and others, with major expansion plans on tap. American Brewing Company was founded in 2010.


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The Booming Kombucha Market 

Americans are simultaneously ageing and becoming more health conscious, creating strong growth in the “functional beverage” market.  Functional beverages are drinks that keeps one’s body hydrated and provide overall nutritional well-being. Functional beverages may also help address health issues and can include ingredients such as herbs, vitamins, minerals and amino acids to additional raw fruits and vegetables.  Consumers are also trending toward non-sugary beverages with fresh and organic ingredients. Meanwhile the market for carbonated soft drinks/sodas has been on a steady decline for over a decade… see: Soda Consumption Falls to 30-Year Low In The U.S. (Fortune Magazine).

Kombucha is one of the leading growth products in the functional beverage space today. Made from sweetened tea that’s been fermented by a symbiotic colony of probiotic bacteria and yeast, kombucha is called the “Immortal Health Elixir” by the Chinese, and has a rich anecdotal history of health benefits like preventing and fighting cancer, arthritis, and other degenerative diseases.

The global kombucha market is forecast to grow from just $ 0.6 Billion last year to $1.8 Billion by 2020, and at a CAGR (Compound Annual Growth Rate) of 25.0% in the United States according to Markets and Markets research.

American Brewing Company - kombucha market analysis

Clearly, the kombucha market is entering a very strong growth phase. As you’ll see below, American Brewing Company is well positioned to capitalize on this growth with a kombucha product that is far superior to the competition.


A Better Kombucha Product

American Brewing Company kombucha selection

American Brewing Company entered the kombucha market last year with the acquisition of the Búcha™ Kombucha brand (see web site at mybucha.com). The acquisition was 26% dilutive, but resulted in an immediate revenue increase of over 300%. Prior to the acquisition, Búcha™ Kombucha grew sales by 79% from 2013 to 2014. (Audited 2015 sales are pending).

I spoke with Brent Willis, the new CEO of American Brewing Company, (and previously the President for Coca-Cola in Latin America, the Global Chief Commercial Officer and Zone President at AB InBev, and the Chief Executive Officer for Cott Corporation, the world’s largest retailer brand beverage company), to find out what differentiates Búcha™ Kombucha from the competition.

I found that other kombucha beverages usually have a sour, even “vinegary” taste. However, Búcha™ Kombucha has a proprietary extraction process that eliminates sour taste and appeals to more customers. In fact, Brent Willis explained that Búcha™ Kombucha contains the preferred flavor taste profile by 43% vs competition. As a result of the great taste available in 7 flavors, Búcha™ Kombucha is now outselling competitors 1.7 to 1 in sales per point of distribution.

Additionally, Búcha™ Kombucha has a proprietary production process which makes it the only kombucha tea with a stable and consistent shelf life of up to 9 months. Most competitors have a shelf life of 3 months or less.  The added 6 months of consistently stable product can lead to broad distribution systems that would allow the company to distribute on a global scale one day. And from a consumer point of view, people naturally reach for products with expiration dates as far out as possible, particularly ones that involve a live colony of desirable probiotic bacteria.

 

To summarize: Preferred Taste + Longer Shelf Life = Superior Kombucha Product that Outsells Competitors.


Now Focused as Pure Play Healthy Beverage Company with Clean Balance Sheet

Having a great product with the potential to dominate a high-growth market, American Brewing Company decided to focus squarely on the rapidly expanding kombucha business, and sold its underperforming beer microbrewery assets.
The company reported on September 8th that they had just turned cash-flow positive thanks to the Kombucha acquisition and their last quarterly report was their first that included the acquired Kombucha assets, posting $611K in sales and a slight loss of -.02 that included one-time integration costs.
By selling the microbrewery and beer assets, the company:
  • Improved income statement by removing an increasingly competitive, non-profitable business unit and all the associated taxes, liabilities and obligations
  • Improved balance sheet, eliminating long term debt and interest and removing other long term liabilities, thus creating an immediate increase to earnings
  • May devote all resources and managements’ time and effort toward a focused goal related to the healthy beverage/ healthy food segments
  • Reduced expenses related to public filings by eliminating an entire audit and the costs with maintaining those books
  • Decreased payroll and related expenses by one third
  • Can create a company vision statement that focuses on the functional beverage category and thereby create a message that can be clearly identified by consumers and stakeholders alike

The removal of all long term debt from a non-profitable business unit creating an immediate increase to earnings is undoubtedly positive here. At the same time, the beer asset sale allows the Company to maintain a laser-like focus on the high growth, fragmented kombucha market.


The Right Management

Brent Willis may be the new CEO of American Brewing Company Inc., but he comes from senior management of the largest beverage companies in the world.

Here are some highlights from his LinkedIn profile:

• Developed and implemented the strategy and business plans that created AB InBev (NYSE: BUD)
• Led the largest turnaround in Coca-Cola Company history as Division President in Latin America
• Lead multiple PE-backcompanies to leaders in their respective verticals
• Launched Kraft in China, Stella Artois worldwide, and multiple other brands in markets globally
• Completed and/or integrated and captured synergies in more than 40 acquisitions worldwide
• Lead multiple PE-backed companies to leadership in their respective verticals
• Developed the Category Management System for Kraft Foods throughout the United States
• Former US Military Officer; West Point graduate; University of Chicago MBA

When I spoke with Brent last week to prepare for this article, I asked him what attracted him to American Brewing Company. His response was simple: The Company has an existing product that’s great and can compete very successfully in a high-growth market with the right marketing and channel development.

Brent Willis sees “huge legs” for the Búcha™ brand, and added that:

“I’m here for a simple reason, to capture the potential of this hidden opportunity.  It is a very fun thing to do to make something huge (like we did at AB InBev), and shareholders will get plenty of wealth creation along the way.”

 Shareholder Call Tomorrow at 11:00 AM EDT

There will be a shareholder call tomorrow (Thursday) where the Company’s new marketing and forward strategies will be discussed. Driving the Búcha® brand’s expansion has been rapidly growing distribution with major new mainstream retailer accounts across the United States.
As a result, the Company is now committed to a multi-million dollar investment behind the Búcha® brand with its new campaign inviting consumers to … “Kom Bucha® with Us.
The call will be Thursday, April 7th, at 11:00 AM EDT, at 1-800-895-0198 (domestic) or 1-785-424-1053 (international), using the conference ID: CEO.
This call is a great opportunity for prospective investors to learn more about the Company directly from management.

 The Bottom Line

American Brewing Company has taken the steps necessary to successfully capture a high growth market opportunity:

American Brewing Company - summary

With a current market capitalization of just $6 million, there is plenty of room for share price appreciation during 2016.

Keep in mind that during the last quarterly report, American Brewing Company had turned cash flow positive due to the Búcha® Kombucha acquisition.  

With a freshly cleaned balance sheet, a great product with proprietary, competitive advantages in a market with a 25% CAGR, and world-class leadership, don’t be surprised to see ABRW shares trading above $1/share in the not-too-distant future.


Best wishes for profitable investing!

Gary Anderson sig.

 

 

Please read disclaimer
Disclosure: Receipt of $7,500 from American Brewing Company for 3 month investor awareness program.


 

 

Chanticleer Holdings logoIn news this morning, Chanticleer Holdings Nasdaq: HOTR) announced the successful acquisition of Little Big Burger restaurants with 8 locations in Oregon and a 9th location opening in Portland by the end of this year.

The acquisition adds over $1 million of annual EBITDA immediately, and will make HOTR EBITDA positive in Q4 2015 and onward according to the CEO, Mike Pruitt (press release).

 
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HOTR has by far the lowest Price/Sales and Price/Book ratios in the restaurant group combined with 65% revenue growth.

Company  Symbol Market Cap Price/Sales (ttm) Price/Book (mrq) Qtrly Revenue Growth (yoy):
Darden Restaurants DRI $8.7 billion 1.3 3.6 13.8%
Shake Shack SHAK $1.7 billion 3.74 5.1 74.7%
Kona Grill KONA $175 million 1.4 3.2 21.2%
Chipotle CMG $22.3 billion 5.1 9.9 14%
Jack In The Box JACK $2.8 billion 1.8 26.5 3.2%
El Pollo Loco LOCO $410 million 1.2 1.8 2.9%
Chanticleer Holdings HOTR* $16 million 0.4 0.9 64.9

Note: *The numbers for HOTR do not include accretive contributions from today’s announced acquisition.

 

Bottom line, there is not a restaurant stock out there with faster sales growth and more attractive P/S and P/B multiples than HOTR.

 

With the positive effect low gas prices typically have on casual restaurants, strong sales growth far exceeding the industry average, and the company turning EBITDA positive this year, I remain very bullish on HOTR shares and added to my position today.

And I’m not the only one adding shares.

Institutions have been buying more HOTR shares also, with 9 institutions adding 1.2 million shares in the most recent figures available.

With today’s news I expect institutional participation in HOTR to continue to increase.

Chanticleer - acquisition

Source: Nasdaq.com

 

There are times to sell a stock, times to average up, and times to average down.

Despite the recent volatility and underperformance in share price, HOTR is a stock I want to own in Q4 and into next year and I added to my position today.


 

Pulmatrix sig.

Disclosure: I own shares of Chanticleer Holdings (HOTR).

I did not receive any payment from any party for this article.

Disclaimer


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IMGT Capital Logon news out this afternoon, MGT Capital Investments (MGT) has signed a deal to sell DraftDay.com for $7M in total consideration which includes $4M cash. MGT will also retain an equity interest in the new venture (including common stock and warrants), with an initial valuation of up to $3.0 million.  MGT expects the deal to close in the current quarter.

At time of publication MGT is trading at .44/share with a market cap of $6M. With the $7M planned sale plus retention of up to $3M in the new venture being launched by buyer, Sportech Digital, a subsidiary of SportechPLC, we believe shares are of MGT are currently undervalued.


Disclosure: The publishers of MicrocapResearch.com are long shares of MGT Capital Investments purchased in the open market.

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Solar3D Inc. logoThe CEO of Solar3D (SLTD), James Nelson, will be ringing the bell for the Nasdaq market tomorrow, 5/28/2015, at 4:00 pm.

Sola3D reported a strong Q1 , guided for total revenue in the $40-45 million range this year, and expects to reach profitability. Solar3D exited Q1 with cash and cash equivalents of approximately $11.2 million versus $0.4 million at the end of the prior quarter and had a working capital surplus of $10.5 million versus working capital deficit of $0.74 million in the last quarter.

Since the Q1 report, Solar3D has anounced a $3M contract win and will be presenting at the Marcum MicroCap Conference in New York tomorrow, and at the LD Micro Invitational in on June 2.

With the recent pullback below $5/share, we believe this is an excellent time to add to or initiate a position in the stock as increasing investor awareness will result from today’s Nasdaq close and upcoming conferences.

Read why we believe SLTD is heading (much) higher in our article: Solar3D (SLTD): A High Growth Solar Stock Trading at a Significant Discount to Peers.


Disclosure: The publishers of MicrocapResearch.com are long shares of SLTD purchased in the open market. We have not been paid by any company or any third party for this update.

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Last week Disney (DIS) invested $250 million in fantasy sports wagering site DraftKings.com, valuing the second largest fantasy sports site at $900 million according to The Wall Street Journal

MGT Capital LogoMGT Capital (web site) owns and operates the third and next largest fantasy sports wagering site at DraftDay.com and yet the company has a current market capitalization of just $5.5 million vs. the $900 million valuation of DraftKings.com with Disney’s investment. This investment by Disney not only legitimizes the online fantasy sports wagering market, we believe it makes NYSE/MKT listed MGT Capital Investments Inc. (MGT) a strong buy. MGT  Capital currently trades at just .46/share.

MGT Capital - DraftDay logo II


January 2015 Investor Presentation

Fully diluted shares: ~ 12 million

Market cap: ~ $5.56 million

Insider ownership: ~ 20%


 

Industry

Fantasy Sports wagering is currently legal in 45 states and Canada, operating under a carve-out of the Unlawful Internet Gambling Enforcement Act of 2006. Legislators deemed Fantasy Sports games of skill and therefore not considered gambling.

According to The Fantasy Sports Trade Association, Fantasy Sports represents a huge opportunity with over 45 million fantasy sports players in North America, up from 15.2 million in 2003, a 10% compound annual growth rate. In the US alone, the total expenditure on fantasy sports is $3.64 billion. Fantasy sports is such a large draw that during football season, 17% of ESPN’s 90 million unique website visitors are fantasy sports players.

Daily fantasy sports wagering is growing at an even faster pace. The largest daily fantasy sports wagering platform FanDuel paid out $10 million in winnings to its users in 2011. In 2014, the payout grew to $400 million. The industry is projected to grow to $31 billion in player entry fees by 2020. Fantasy wagering platforms take roughly 10% of entry fees as revenues and payout the remaining 90% in prizes meaning the industry is projected to grow by 0ver 85% per year over the next six years.

In addition, the fantasy market’s potential to acquire customers from the US Sports Betting Market presents a huge opportunity. Eilers Research estimates Americans spent $160 billion on non-regulated sports gambling in 2013, 44 times the amount $3.6 billion spent in Nevada.

MGT Capital Betting breakdown

If online fantasy platforms could tap a small portion of the non-regulated sports betting in the United States there is a huge opportunity for fantasy platforms.

The growth and legality of daily fantasy sports wagering is attracting heavy investment from some of the largest private equity, media, and entertainment companies in the world. In September 2014, FanDuel raised $70 million from NBC Sports Venture, KKR and Shamrock Capital Advisors. There was no valuation announced at the time of the deal but sources put the valuation for FanDuel at just south of $400 million. According to Fortune, FanDuel is considering another round of financing that would value the company at $1 billion. With FanDuel’s estimated payout of $400 million in 2014, its revenues are roughly $45 million, placing its September 2014 fundraising valuation at 9 times revenues and it current expected valuation of $1 billion at 22.5 times revenues.

The second largest player in the industry, DraftKings, paid out roughly $200 million in 2014. The company raised $41 million in August 2014, placing its value at just under $250 million. On April 3, 2015, ESPN’s parent company, Walt Disney invested $250 million in DraftKings, valuing the company at roughly $900 million. The entrance of Disney into the industry adds a tremendous amount of credibility to the industry, painting it in a more favorable light. With estimated revenues of $22 million in 2014, DraftKings’ August 2014 valuation places the company on 11.25 time revenues. The recent investment by Disney values DraftKings on 40.5 times revenue.

The fantasy sports online platform industry is growing at a very rapid pace with a significant runway for growth. The industry is also receiving investment from some of the biggest private equity, media, and entertainment companies in the world validating these growth estimates and the business model. The valuations of the investments are placing MGT’s two closest competitors at close to a billion dollars each, while MGT the owner of the 3rd largest daily fantasy wagering platform enterprise value is only 3.26 million.

We believe recent investments in FanDuel and DraftKing drastically increase the probability of investment in, or outright acquisition of MGT Capital.


Positioning

In addition to having the 3rd largest daily fantasy wagering platform, MGT Capital is innovative in driving traffic through its site and generating additional revenues by partnering with leading entertainment brand. These partnerships illustrate the company’s emphasis on the Business-to-Business market. In this market, MGT offers a broader style and variety of game contests.

The company recently announced a partnership with Seneca Gaming Corporation (press release) where players at Seneca Resorts & Casino properties will be able to play their favorite fantasy sports on an easy to use website featuring multiple game formats in seven sports. The site will be available for play online, and will feature the addition of exclusive games for the property.

MGT also announced a partnership with the leading adult entertainment company, Vivid Entertainment, LLC. The new partnership will develop and market a fantasy sports gaming site available online at VividBetSports.com. The partnership will drive additional traffic to DraftDay.com and be an additional source of revenue. It takes advantage of a shared demographic between Vivid and fantasy sports, male with an average age of 34. Adult websites also get more visitors each month than Netflix, Amazon and Twitter combined, with over 30% of the internet’s bandwidth used for adult content. Partnering the preeminent adult company and a leader in the daily fantasy sports segment, the companies created a marriage between one of the fastest growing internet business segments and one of the largest sources of unique online traffic.

The company also recently announced its mobile app Rapid Fire. DraftDay Rapid Fire presents a new way to play daily fantasy sports while on the go. Players will enjoy all their favorite fantasy sports with Rapid Fire. Two variations are offered: Rapid Fire and Rapid Fire Max. Winning prizes range from roughly double the entry fee to nearly 20 times.

The company was the first sports wagering platform to launch a social media platform, Daily Fantasy Legend, enabling users to play on Facebook with virtual currency, thereby expanding daily fantasy sports to a wider audience, including those aged thirteen and up and those unwilling to play with cash. Daily Fantasy Legend also creates a community environment enriching the social aspect of the game.

Growth in the market and MGT’s initiatives has lead to a significant growth in revenues. In Q3 2014, the company reported year on year revenue growth of 643%, a extremely healthy gross margin of 43%, and a 44% decline in operating expenses.

 MGT Capital Fantasy Sports


Valuation

Given the investment in or potential acquisition of MGT, the best way to value the company is to look at recent transaction valuations.

MGT Capital Valuation - 1

A very conservative estimate of 2014 revenues is $1.2 million.  MGT Capital did not acquire DraftDay until after the first quarter of 2014 and the company’s combined revenues in Q2 and Q3 of 2014 was $617,000.  Annualizing this figure does not account for growth and is therefore very conservative but provides the $1.2 million used in MGT’s valuation. The low-end valuation uses 9 time revenues multiple similar to FanDuel’s mid-2014 valuation. MGT’s conservative low-end valuation is $10.80 million or 94% upside. The high end used a 40.5 times revenue multiple from Disney’s most recent investment in DraftKings. MGT’s high-end valuation is $48.60 million or 774% upside.

 MGT Capital valuation 2

The Bottom Line

MGT Capital is a leading player in the fast growing fantasy sports wagering industry. It is creating innovative partnerships with leading entertainment business and is extremely undervalued relative to peers. We believe recent investments by industry giants like Disney validate the space and make MGT a strong candidate for a comparable investment or a potential buyout based on its extremely low valuation at current share prices.


APPENDIX

Corporate Structure

  • MGT Capital Investments, Inc.
    MGT Capital Investments, Inc. is publicly traded under the symbol MGT on the NYSE MKT exchange and is a holding company for its wholly and majority owned businesses.
  • MGT Sports, Inc.
    MGT Sports, Inc., a wholly owned subsidiary, owns 100% of DraftDay.com and a majority interest in FanTD LLC, online daily fantasy sports wagering businesses. MGT Sports also owns FantasySportsLive.com, an online portal for fantasy sports news and commentary.
  • MGT Studios, Inc.
    MGT Studios, Inc., a wholly owned subsidiary, is an online and mobile game developer. It operates www.mgtplay.com, a skill-based game platform in partnership with M2P Entertainment GmbH.
  • MGT Gaming, Inc.
    MGT Gaming, Inc. holds certain intellectual property patents focused on casino slot machines. MGT Capital holds 55% of the issued share capital of MGT Gaming

Microcapresearch.com Gary Anderson

 

 

Disclosure: The publishers of MicrocapResearch.com are long shares of MGT purchased in the open market.
Receipt of $20,000 from MGT Capital Investments Inc. for our coverage above.

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As alerted earlier this week, we believe shares in Solar3D (STLD) are significantly undervalued and that a minimum 100% gain in 6-12 month period is realistic and perhaps conservative based on an expected doubling of revenue for 2015, strength of management, peer group price-to-sales comparisons, and other factors discussed below.

Solar3D Inc. logo

 

 

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Overview

Solar3D focuses on the design, installation, and management of solar power systems for commercial, agricultural, and residential customers. Through its wholly owned subsidiaries, Solar3D is one of the fastest growing solar systems providers in California, delivering 2.5 kilowatt to multi-megawatt commercial systems. Solar3D’s technology division is developing a patent-pending 3-dimensional solar cell technology to maximize the conversion of sunlight into electricity. The Solar3D Cell collects sunlight from a wide angle and lets light bounce around in 3-dimensional microstructures on the solar cell surface. Solar3D is based in Santa Barbara, California.

Fully diluted shares: 17.7 million (includes recently completed capital raise of $12.5 million at $4.15/share).

Market cap: ~ $63 million

Insider ownership: ~ 24% with insider buying at $4.15/share in last 3 month period with no insider selling (source: Nasdaq.com)

We believe institutional ownership will dramatically increase in the weeks/months ahead due to March NASDAQ uplisting.

March 2015 Investor Presentation

Video- Solar3D CEO, James Nelson, speaks with Maria Bartiromo on Fox Business


Industry Growth

The solar industry has a tremendous growth opportunity in front of it.  Solar3D’s management believes the solar industry will be the fastest growing industry over the next 20 years as distributed solar has penetrated less than 1% of its addressable market in the residential and commercial sectors. Solar3D management, the Department of Energy and many Wall Street analysts agree the key to increasing solar’s penetration rate and growth within the sector is the cost of installations. The key metric to watch is $ per watt. Consensus believes when the cost of installation per watt reaches $1 solar penetration rates will increase to 17%.

Current installation costs at the two largest solar installation companies, SolarCity and Vivint Solar were $2.85 and $2.96, respectively. In 2014, Vivint’s installation costs declined at a rate of 8.6% per quarter.

Solar3D installation cost

If the rate of decline at Vivint continues, the company will reach installation costs of $1 per watt by the end of 2017.

Solar3D’s installation costs compare very favorably with SolarCity and Vivint, with the average cost of installation at $1.90 per watt during the first 9 months of 2014.


Recent Public Offering

Solar3D recently completed a public offering of 3,000,000 shares at $4.15 per unit. Each unit contains one share of common stock and one warrant to purchase an additional share at $4.15 by March 9, 2020. The gross proceeds before the exercise of any warrants are $12.5 million. The money raised will allow Solar3D to continue its strategy of consolidating the highly fragmented California and Nevada markets, which represent 60% of the US installations market.

Solar3D pic 2

 


 

Acquisition History and Industry Consolidation

Solar3D has a history of acquisitions proving the company can consolidate the fragmented California and Nevada Solar markets and made two acquisitions in the past 15 months.

Solar3D logo SunworksSolar3D completed the acquisition of SunWorks, (web site) serving the northern California market, in January of 2014. During 2014, SUNworks installed over 300 systems, totaling 10 MW of capacity, a 100% increase over the approximately 150 systems installations in 2013. Sixty percent of SUNworks 2014 revenue was sales to the commercial market, including the agricultural market, and approximately 40% of its revenue was sales to the residential market.

SUNworks has gained brand popularity throughout California due to its commitment to excellent customer service and the ability to provide flexible cost savings to large commercial organizations. Recently, SUNworks was contracted to perform commercial solar design and installation programs for two large-scale California-based companies, Innovative Produce, Inc. and Heidrick & Heidrick Properties, L.P.

solar3D division MD EnergyOn March 2, 2015, Solar3D completed the acquisition of MD Energy (web site). MD Energy focuses its operations on the commercial market for Southern California. Similar to SUNworks, MD Energy designs, arranges financing, monitors and maintains solar systems, but outsources the physical construction of the systems. In 2014, MD Energy installed 14 systems totaling 3.35MW of capacity.

MD Energy already has a strong brand within Southern California with the company recently landing a $2.4 million contract from Rancho Mirage Public Library.

Smart Acquisitions

Solar3D acquired both companies at very inexpensive prices. Solar3D paid approximately $2.8 million for SunWorks.

In 2013, SunWorks generated revenues of $8.5 million and earnings of $685,968 representing revenue growth of 108% over 2012 and earnings growth of 234%. Solar3D acquired SunWorks for 0.33 time revenues and 4.07 times earnings both of which are ridiculously cheap for a company with SunWorks’ growth and financial position with no debt.

Solar3D paid approximately $3.5 million for MD Energy.

In the 9 months ending September 2014, MD Energy generated revenues of $4.4 million and operating profit of $447,124. On an annualized basis, Solar3D paid 0.6 times sales and 5.83 times Earnings for MD Energy. Again, Solar3D was able to add significant value to shareholders by buying MD Energy at an extremely attractive price. An acquirer paying 0.6 times sales for a profitable business with no debt, which grew its revenues by 1255% in the preceding nine months, is unheard of.

These two acquisition illustrate management’s ability to acquire complimentary assets, integrate those assets and be disciplined enough to pay a very low price for the assets.

Despite the inexpensive prices, these two companies fit Solar3D’s ethos of a strong focus on customer service…a key differentiating factor within the industry which allows companies focused on customer service to demand a premium for their work. The focus on customer service has resulted with both companies having a strong brand which is crucial for the solar installation industry, as the quality of the product is not known until the product is used. This is a particularly important characteristic as the customer is making a 25-30 year commitment. If the company installing the panels does not have a reputation for high quality customer service and a good product, the customer will go to a competitor and pay more for the assurance of a quality job.

Going forward the typical target for Solar3D is a solar installation company with revenues between 10-30 million and is profitable. Any target will initially be located in California or Nevada with a focus on Residential and/or Commercial sector and strong customer service orientation.

 


 

Strong, World-Class Management Experienced in M&A

James Nelson, President and CEO began his career 30 years ago at Bain and Company, the premier business strategy consulting firm in the world, where he managed teams of consultants on four continents solving CEO-level programs for global companies. Prior to joining Solar3D, he spent 20 years working in the private equity industry as both a capital partner and operating CEO to portfolio companies. Mr. Nelson was a General Partner at Peterson Partners from 2007 to 2009, and at Millennial Capital Partners from 1991-2010. In addition to his responsibilities in acquisition and divestiture, Mr. Nelson worked as an executive in a number of portfolio companies. He served as CEO of Euro-Tek Store Fixture, LLC, Chairman of the Board of American Retail Interiors, Chairman of the Board and CEO of Panelview Inc. and Chairman of the Board of Critical Power Exchange, as well as serving on numerous boards of companies. The companies led by Mr. Nelson have created exceptional returns for investors – sometimes over 20 times the original investment.

Prior to his years in private equity, Mr. Nelson served as Vice President of Marketing at Banana Republic/The Gap, where he managed company-wide marketing, as well as the initial international expansion of Banana Republic. He was also General Manager for the highly profitable catalog division. He also served as Vice President of Marketing and Corporate Development at Saga Corporation, a multi-billion dollar food service company.

Mr. Nelson received his Masters of Business Administration degree from Brigham Young University, where he graduated Summa Cum Laude and was named the Outstanding MBA Graduate. Mr. Nelson’s expansive experience in global companies, worldview strategic thinking, and hands-on entrepreneurial and operating execution is ideally suited to help exploit Solar3D’s breakthrough solar cell technology in a multi-trillion dollar global market opportunity.

Tracey Welch, Chief Financial Officer was recently hired by Solar3D. Welch joins Solar3D after holding CFO and Treasurer roles at several large private and publicly held companies, including multi-billion dollar energy companies KN Energy and Smith International, and food giant, Schwan’s. Welch’s responsibilities while leading publicly traded companies include, among others, financing acquisitions, developing financial departments, post acquisition integration, safety and risk management, and ultimately driving revenue and profit optimization. During his career, Welch has overseen the successful raise of billions in capital through private and public debt offerings.

Welch is an ideal fit for Solar3D due in large part to his extensive energy industry experience, and his reputation for successfully evaluating, financing, and integrating acquisitions. During his career, Welch has completed 36 transactions ranging in size from $10 million to $500 million, and has been largely responsible for the financial assimilation and integration of those companies into the parent organization.


Valuation

Despite the company’s growth rate, ability to acquire companies cheaply, its profitability and its strong competitive position due to its low customer acquisition costs, low installation costs and commitment to customer service; Solar3D valuation is still significantly below peers.

 Solar3D - comparisons - Final

  • Solar3D is trading on a trailing twelve month (ttm) price to sales of 3.8 times compared to SolarCity on 19.5 times and Vivint Solar on 52.2 times. This is despite Solar3D expectations for profitability in 2015 while SolarCity and Vivint is expected to remain reporting losses for some time. If we are conservative and say Solar3D should trade at a 20% discount to SolarCity, there is 400% upside based on the ttm sales.
  • Solar3D’s potential upside is even more drastic when you take into account the expectation for the company to more than double revenues in 2015 reaching $40-45 million. Using the bottom end of the guidance range ($40 million) and the same price to sales multiple of 16 times, Solar3D’s market cap should be roughly $600 million, representing 750% upside from current prices.

These valuation scenarios do not take into account Solar3D’s revolutionary solar panel technology. Solar3D has a 3D solar panel that is 90% more efficient than current 2D solar panels as it captures significantly more sunlight and allows for more electron reabsorption. The technology is still in development but could add significant upside to the stock.

 


 

The Bottom Line

Solar3D is a rapidly growing solar installation company with a very strong competitive position due to its low installation costs, superior customer service, and ability to consolidate a fragmented market. All these factors and significant undervaluation relative to peers points to tremendous potential for shareholders. Shares have begun to appreciate since our alert four days ago, despite a volatile overall market. We believe patient investors who buy now or add on pullbacks will be well rewarded over the next 6-12 months.


Microcapresearch.com Gary Anderson

 

 

Disclosure: The publishers of MicrocapResearch.com are long shares of SLTD purchased in the open market.
Receipt of $20,000 from a third party for our coverage above.

Disclaimer


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Despite the rocky market overall, our picks have been doing very well.

Our December picks are now up an average of 45% from date of article publication-today’s close (see Picks and Performance)

Additionally, our January pick, VUZI (which closed at $5.47 on article publication) closed at $7.00 today on NASDAQ up-listing news…up 28% in 3 weeks.

Harris Shapiro and I are very selective in our picks. Our goal is to introduce what we both believe are some of the best small and microcap stocks available at a time when there is a strong catalyst for upward move over a 4-6 week period, even in a weak overall market. We won’t typically publish “sell alerts” – our focus is on entry prices…and we trust our subscribers to know what’s best for them and when to lock in profits.

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New Pick Coming Soon

We are having a conference call with management of a promising biotech company tomorrow that we anticipate writing about in the near future. The company is a true nanocap with a current market cap < $20 million. While we don’t typically write about companies as small as this one, we believe it won’t be an undiscovered and thinly traded nanocap for long based on our expectations for strong revenue growth this year.  Stay tuned.

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