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Drum Beats Grow Louder for EcoSynthetix Bio-Adhesive Commercialization

EcoSynthetix PlantWe continue to believe Ecosynthetix (ECO.TO or US OTC: ECSNF) is VERY close to an inflection point for the commercial adoption of its DuraBind bio-adhesive for the wood panel market which consumes $Bs in adhesive per year. Their eco-friendly adhesive is intended to replace the industry standard  which contains formaldehyde and has come under increasing critique for its health dangers, starting with regulations in California.

Yet investors are currently paying only a modest premium to ECO’s US $57M in net cash to participate in this long term growth opportunity. ECO is not a client of our investor relations consultancy, but we would love to represent them, and given the compelling nature of the story – this author established a position starting about a year ago (too early it now seems, but happy to be Long Term!)

These recent developments support our view:

1) July 27th the EPA finalized a rule to reduce exposure to formaldehyde vapors from certain wood products EPA Formaldehyde Rule Summary

2) Cannacord Genuity recently launched a Sustainability & Special Situations Watch List that highlighted Ecosynthetix – the report should help to expand awareness of this very compelling special situation. (To its credit, ECO has neglected its IR outreach – other than good quarterly update – in favor of focusing all resources on the one thing that really matters: commercialization, and therein lies the valuation discrepancy relative to its rapid potential revenue ramp).

3) Ecosynthetix reported excellent progress in its commercialization efforts, which involve industrial testing, in its Q2 reporting:
ECO is currently live with 10 customers, representing over 50 manufacturing lines. ECO estimates each line could account for US $500k – $3M in annual revenue. Further, to put this in perspective, there are more than 1,100 wood composite lines in the world. Canaccord estimates ECO’s current production capacity of 235M pounds per year as equating to approximately  C$190M in revenue, or less than 2% of the total global adhesives market.

ECO’s longest trial has been proceeding over a year or more and accounts for 5 million square feet of produced and sold. One of the company’s customers started its process to be formaldehyde free two years ago and looked at 217 chemistries, eventually short-listing three solutions and performed industrial testing on their products and is currently evaluating only EcoSynthetix. ECO stated on its Q2 call that 10M square feet of board have now been produced using its adhesive.

ECO is very active in raising awareness and driving adoption of its bio-based polymer. Its products are being evaluated by 7 of the top-15 global wood-based panel manufacturers, resin technology providers that provide the PMDI resin used in chip boards, furniture manufacturers as well as big box retailers. EcoSynthetix has indicated that it hopes these tests could lead to commercial orders in the near term.

ECO defines commercial success as running continuously on one line for 30 days. It has run continuously for one or two weeks (and produced 10M sq feet of panels for sale), but for various reasons (largely due to the logistics and processes learning curve involved in bringing a new adhesive into the production process) it has not yet hit its stated benchmark for commercial success but importantly there have been no issues that are not reasonably rectified – and the testing has enhanced ECO’s ability to bring new lines on line expediently.

4) Major retailers are also helping to lead the adoption trend, as both Ikea and Walmart have publicly announced plans to embrace No Added Formaldehyde (NAF) production for the wood products they offer.

5) Putting their money where their mouth is, CEO Jeff MacDonald recently bought 34,200 shares at C$1.65 on 8/24/16 and ECO’s chairman Paul Lucas bought 10k shares on Friday, 8/19/16 for C$1.72 View ECO Insider Activity Here

While it’s taken a year longer than I first expected for the adoption to transpire – in retrospect is was naive to think large companies would move so quickly, particularly during a period of very robust demand for their existing products – and no real impediment to selling those containing Formaldehyde other than in California.  Trialling new adhesives takes time and disrupts production, which impacts the top and bottom line, so it’s understandable in a period of strong demand that the conversion process would get pushed out a bit.  

From our dialogues with those focused on the ECO story – November/December are typically the slowest periods of production in the wood panel industry – where inventories are being worked down and the ability to convert lines to a new methodology is much less disruptive. 

To be continued.

 

Compelling Microcap Growth / Value Idea – Taking the Formaldehyde Out of Wood Panels

EcoSynthetix Logo

A smart hedge fund analyst we know has identified a compelling microcap value idea EcoSynthetix Inc. (TSE: ECO or OTC: ECSNF– ~US$ 78M market cap) that is poised for a substantial ramp in sales of its revolutionary new DuraBind™ bioresin adhesive for wood panels – while sitting pretty with 77% of its market cap in cash (US $59.1M).  

This company is well worth spending some time on – as the upside is significant while the downside is protected by cost consciousness and a very strong balance sheet safety net.

We’re Always Smartest When Listening…
This very savvy investor has built a large position in ECO while also playing a role in adding new industry expertise and management talent to the company’s board and leadership. Like most of our best stock ideas – we just listen to smart people who have clearly done the work, kicked the tires and invest along with them. The value we provide is in filtering out those who do the work and those who pretend they know all the moving parts. While there are no guarantees – after tacking this company for nearly a year – we are impressed on all fronts regarding the Company, its technology, its persistence and discipline and its progress.  The nature of microcaps is that it takes FOREVER for things to get done; it comes with the territory. So patience and understanding of big company/small company hierarchies is critical to staying the course when things drag on.  The good news for readers is that we’ve spent the last year waiting and watching – so you don’t have to! ; ) 

The launch of DuraBind bioresin adhesive for wood panels represents an enormous potential catalyst for this renewable chemicals company and its portfolio of commercially proven bio-based products. DuraBind is an eco-friendly adhesive positioned to replace formaldehyde-based resins that dominate the field but are facing increasing regulatory and consumer obstacles.

Most notably, cancer-linked urea formaldehyde (UF) based resins tripped up Lumber Liquidators (NYSE: LL) when it was found – despite their labeling – that some of their flooring was emitting formaldehyde at levels far exceeding California EPA and its California Air Resources Board (CARB) standards.

Anecdotally, we have heard that much of the flooring and furniture industry faces the same emissions issues, and is rapidly looking to eliminate formaldehyde from their products.  One prominent example is that IKEA is attempting to reduce or eliminate formaldehyde levels in its wood composites over the balance of this decade.  The industry refers to these products as NAF – No Added Formaldyhyde formulations.

DuraBind Commercialization Progress
As companies seek to produce products that meet regulatory and consumer preferences, DuraBind represents the only economic alternative for wood-panel manufacturers. EcoSynthetix has spent the past 24 months advancing dialogs, pilots, and industrial-scale mill trials with most of leading global wood panel manufacturers. Traction in this area is clearly the key to value creation – so we will provide more detail on this progress below. Suffice it to say, it is our understanding the ECO is already in trial stages with manufacturers who own enough mills to support a substantial ramp in its business. enough mills to support hundreds of millions in annual revenues.  The total potential market is measured in the billions and is dominated by UF products from large specialty chemical companies like BASF and Koch Industries.  We believe early commercialization success by ECO will be met by swift M&A or partnership activity by a large incumbent.

Our optimism is only tempered by past experience: it should be noted that EcoSynthetix had previously attempted to commercialize a formaldehyde-free product targeted in the building insulation market but was unsuccessful in these efforts.  However, we believe that the engineered wood substitution opportunity is much more complex – wood mills in the industry have been looking for economic alternatives since the first anti-formaldehyde legislation in the early 1990s, and still no alternative has been mass-adopted.  Thus, we believe that the company has a truly unique value proposition that will not be easily copied.

Recent progress outlined in the Q1 conference call and slides includes ten large manufacturers in various phases of active trials along with the addition of a few new customer prospects during Q1, demonstrating growing awareness and interest in NAF  Q1.  The Composite Panel Association held its annual panel in Arizona this past April and attendance was extremely strong.  Further, interest was very high in the no added formaldehyde segment.

To date, DuraBind has been utilized in the production of over 5 million square feet of manufactured boards that have been approved for customer sale.

In total, EcoSynthetix estimates there are approximately 1,100 wood board production lines around the world, driving adhesives demand in the billions of dollars each year.  Currently approximately 90% of total demand is being supplied with formaldehyde-added adhesives.  EcoSynthetix DuraBin represents the first bio-adhesive that delivers both on performance and cost – to make it a suitable NAF replacement.

Microcap Risk Mitigated by US $59M Cash Position
Backstopping an investment in EcoSynthetix has an impressive balance sheet with no debt and US $59.1M in cash and term deposits (held in US dollars) and a recent market cap of just US $69.8 M. The strength of the cash position can be diminished by investors who fail to assess the $US cash position in the apples to apples context of a US$ denominated market cap, given that the TSE is the only viable market for ECO shares. Trading on the OTC under the symbol ECSNF is sporadic at best, and our belief is that this only represents grey market trades that are executed in Canada but “printed” on the OTC denominated in US$.

Potential Steep Growth Ramp is Masked by Legacy Business
EcoSynthetix also screens poorly on recent financial performance as its legacy business is in bio-coatings for paper and paperboard. That business has been under pressure due to pricing pressure from petroleum-based alternatives that have benefited from the oil price slide, as well as the secular decline of the paper industry, exacerbated by the bankruptcy of key customers in the US in 2015. FY 2015 revenues totaled US $14.6M, down from US $18.8M the prior year,

New Management Team is Talented, Focused and Executing
However, with the appointment of CEO Jeff MacDonald in 2015, management has been successful in its efforts to reduce costs and cash burn by steering focus exclusively to the wood composites market. Q1 2016 operating expenses were 38% below those in the year ago period, and cash burn now stands at ~$1.5MM/quarter.

Further, the steady ramp in focus on eco-friendly bio-friendly alternatives continues to provide optimism to EcoSynthetix’s prospects in this area.  The recent addition of Paul Lucas, former CEO of Glaxosmithkline Canada, and Jeff Nodland, former president of the coatings division of Hexion (a major industry incumbent now owned by Apollo), to the board of directors gives us confidence that the company is experiencing a resurgence.

Overview
EcoSynthetix offers a variety of bio-chemicals proven to help manufacturers reduce their reliance on petroleum-based chemicals and VOCs, while decreasing overall material costs, improving manufacturing performance and reducing their carbon footprint. Its products include

  • EcoSphere®  legacy bio-chemical which is an alternative to petroleum-based latex coatings
    for paper and paperboard
  • EcoMer®       EcoMer can be combined with conventional vinyl monomers, including
    styrene, acrylics, and vinyl acetate to produce polymers suitable for use in
    pressure sensitive adhesives, ink and toner resins and paints.
  • EcoStix®       bio-based pressure-sensitive adhesives for stickers
  • DuraBind™  bioresins for wood panel market 

 

Biostage at a Glance:
                                                            Canada                                      US
Symbol                                               ECO.TO                                   ECSNF

Recent Price                                       $C 1.70                                  US$ 1.30*

52 Week Range                            $C 1.00 – $C 1.85                     $US 0.77 – $US 1.41

Exchange Rate                             $C 1.30 = US $1.00               $US 0.77 = $C1.00

Market Cap                                        $C 101M                               $US 77M*

Cash & Term Deposits                      $C 76.8M**                         $US 59.1M

   Cash per share                                 $C 1.30**                              $US 1.00

Shares Out                                         59.3M                                    59.3M

*Based on 1.3:1.0 conversion rate
**Based on 0.77:1:00 conversion rate

Disclosure: The principal of Catalyst Global, which publishes CG Focus List, has been an investor in EcoSynthetix since July 2015 – with subsequent purchases over the next 6-9 months.  The principal has no intention to sell any of his position over the balance of 2016 and will weigh any further purchases or sales based on the progress of EcoSynthetix in its commercialization.

Flux Sees 300% Growth in FY ’16 Following Nearly 100% Rise in FY ’15

Our client Flux Power just issued the following news announcement to provide some greater visibility on the ramping demand it is generating with large national & regional customers.  While we were too early in brining the stock to investors attention (at around $0.17 per share) the company’s current market cap of around $4 million seems modest given the traction they see within what is estimated to be a $600-$800M market for Class III walkie forklift batteries that is virtually all based on legacy lead acid technology.

Flux Logo with (r)

Flux Power Industrial Lithium Battery Sales Expected to Rise 300% to
$3 Million in FY 2016, Driven by Growing National Customer Demand

FY 2015 Revenue Rose Approximately 100% to $700,000;
Q4 Unit Shipments Rose to Record 81 Units vs. Q3 ’15

VISTA, Calif., Aug. 4, 2015 — Flux Power Holdings, Inc. (FLUX), a developer of advanced lithium battery technologies for industrial applications including electric forklifts, today provided an initial LiFT revenue forecast of $3 million for FY 2016 (ending June 30, 2016) in conjunction with a preliminary projection of its Q4 and full year FY 2015 results. Flux launched its LiFT Pack lithium battery line for Class III pallet jack forklifts or “walkies” in January 2014.

2016 Sales Outlook
Flux has built a nationwide network of battery distributors, forklift dealers, OEMs and national and regional customers who now recognize the performance and cost benefits of Flux’s lithium-ion storage solutions over legacy lead-acid batteries. Based on customer and distributor dialogues, LiFT Pack piloting, and initial purchases, Flux management feels confident it can achieve fiscal 2016 LiFT Pack sales of at least $3 million, representing 300% growth over fiscal 2015. The FY 2016 sales estimate excludes other product sales opportunities in development and is subject to Flux’s ability to secure sufficient working capital to fund inventories, demo units, industry certifications, receivables and expanded sales, customer support and administration expense. Flux is currently considering various options to address its working capital needs.EF3C4402

Ron Dutt, Flux CEO, said, “It’s very exciting to see the realization of our team’s strategy and efforts resonating so strongly within the material handling industry. We have developed very meaningful large account interest that supports the strong sales ramp we anticipate beginning in Q2 fiscal 2016. Based on current dialogues we expect our sales to improve significantly over the next year, reaching a $1.5 million per quarter run rate by the end of fiscal 2016. We are also planning several product design, sourcing and cost management initiatives to improve our product margins.”

Growing National/Regional Customer Base
Demand for Flux LiFT Pack solutions is centered on logistics-intensive industries including beverages, food, groceries, consumer goods and shipping and transportation. To date, 26 large national or regional companies have piloted Flux LiFT Packs for walkies and so far 15 of them have proceeded to make initial LiFT Pack purchases. This demonstrates solid progress from the 16 piloting companies, 10 of which had made initial purchases, as reported in March 2015. Flux’s revenue expectations are based primarily on advanced discussions with several companies that are planning to include Flux LiFT Packs in their monthly/quarterly battery replenishment schedules beginning in Flux’s FY 2016 second quarter.

Latest LiFT Pack Image 01-15Q4 and Full Year 2015 Preview
Flux expects to report record LiFT Pack shipments – a total of 81 LiFT Packs – for Q4 2015. The shipment record was achieved despite several customers that await the completion of additional product certifications, pushing the purchase of 65 additional packs into FY 2016.

Though its Q4 and full year 2015 financial statements are not finalized, Flux anticipates Q4 2015 revenue grew to approximately $205,000 and full year FY 2015 revenue rose to approximately $700,000, nearly doubling over FY 2014 revenue of $358,000. Flux expects its Q4 2015 net loss to range between $700,000 – $900,000 and its FY 2015 net loss to range between $2.5M – $2.7M, a significant improvement over the FY 2014 net loss of $4.3M.

About Flux Power Holdings, Inc. (www.fluxpwr.com)
Flux Power develops and markets advanced lithium-ion energy storage systems (‘batteries’) based on its proprietary battery management system (BMS) and in-house engineering and product design. Flux storage solutions deliver improved performance, extended cycle life and greater return on investment than legacy solutions. Flux sells direct and through a growing base of distribution relationships. Products include advanced battery packs for motive power in the lift equipment, tug and tow and robotics market, portable power for military applications and stationary power for grid storage.

Flux Blog:     Flux Power Currents
Facebook:    FLUXPower
Twitter         Company: @FLUXpwr Investor Relations: @FluxPowerIR
LinkedIn      Flux Power

This release contains projections and other “forward-looking statements” relating to Flux’s business, that are often identified by the use of “believes,” “expects” or similar expressions. Forward-looking statements involve a number of estimates, assumptions, risks and other uncertainties that may cause actual results to be materially different from those anticipated, believed, estimated, expected, etc. Such forward-looking statements include the development and success of new products, projected sales, Company’s ability to fund its operations, distribution partnerships and business opportunities and the uncertainties of customer acceptance of current and new products. Actual results could differ from those projected due to numerous factors and uncertainties. Although Company believes that the expectations, opinions, projections, and comments reflected in these forward-looking statements are reasonable, Company can give no assurance that such statements will prove to be correct, and that the Company’s actual results of ‎operations, financial condition and performance will not differ materially from the ‎results of operations, financial condition and performance reflected or implied by these forward-‎looking statements. Undue reliance should not be placed on the forward-looking statements and Investors should refer to the risk factors outlined in our Form 10-K, 10-Q and other reports filed with the SEC and available at www.sec.gov/edgar. These forward-looking statements are made as of the date of this news release, and Company assumes no obligation to update these statements or the reasons why actual results could differ from those projected.

Flux, Flux Power and associated logos are trademarks of Flux Power Holdings, Inc. All other third party brands, products, trademarks, or registered marks are the property of and used to identify the products or services of their respective owners.

cropped-LOGO-Cropped.pngPuradyn Filter Technologies Incorporated
OTCQB: PFTI


Proven Bypass Oil Filtration Technology – t
hat Reduces Costly Oil
Changes, Downtime and Engine Wear – is Poised for Sales Breakout

pic b

Puradyn produces innovative engine oil filtration systems that drastically reduce costs, maintenance and downtime. Puradyn filters remove oil contaminants and replace additives – keeping oil in “like new” condition, reducing oil changes and increasing engine life.

Having proven the technology with several industry leaders, PFTI is now engaged in sales efforts with several substantial oil field and industrial companies that offer (but by no means guarantee) breakout sales potential. (see “New Business Activity & Outlook”)

PFTI’s CEO is sufficiently confident in Puradyn’s outlook, he has funded working capital deficits totaling $10M over several years. His background and integrity (we met with him) provide us the confidence to introduce you to this nano-cap name.

chart

 

 

 

 

 

 

 

Puradyn Investment Strengths:

  • Patented filter technology delivers >75% decrease in oil use, oil maintenance and related costs.
  • Thousands of installations in operation globally.
  • Razor-razor blade model – delivers solid ongoing revenue streams from replacement filters required to maintain filtration performance.
  • Rapid customer ROI: 100% cash-on-cash return in as little as a few weeks to several months.
  • Compatible with several large engine markets:
                                  • Oil drilling; pipeline compressors
                      • Marine vessels
                      • Mining haul trucks
                      • Hydraulic systems
                      • Heavy duty equipment
  • Solution works on all size engines including CAT, John Deere, MTU, etc.
  • Scalable production facilities support growth.
  • Impressive management team owns 28%.
                                  • CEO Joseph Vittoria was previously CEO of AVIS.
  • Very attractive valuation relative to annual customer savings and global sales potential across all markets.

chart update


“Our
patented bypass oil filtration system saves
one oil industry customer over
$5M per year.”
Joe Vittoria, Puradyn CEO

Yet PFTI’s market cap is roughly 2X this customer’s annual savings – making PFTI worth far more to the customer – than to all of Wall Street.

The CG Focus List thesis is that PFTI’s valuation hugely understates the global cost savings its patented technology could deliver – and that will ultimately be reflected through share price appreciation or M&A when sales ramp.

 

picture text box 4

Product Strengths:

  • Demonstrated nearly 70% efficiency at removing solid contaminants below 1 micron.
  • Easy-to-change filters; rugged filter canisters built for extreme conditions.
  • Filter replacement ever 250-1,000 hours
                                    • Up to 24 filter replacements per year.
                                    • Saves up to $3K per avoided oil change in large oil field applications.
  • Increases machine efficiency, oil circulation and purity and engine life.
  • Applicable to all diesel, gasoline and gas engines.
  • Approved by John Deere.

Customers/Validation:

U.S. Military

  • Supplying military contractor with 750 small units over 3 years, estimated revenue of $300K.
  • Military Tractors (Freightliner).
  • Armored fighting vehicles (MRAP).

Nabors Industries – Oil Field Services

  • Customer since 2009, ~ 2,000 units.
  • International division saves over $5M per year on 400 systems for large oil drilling rig engines.

South Ferry (Shelter Island, NY)

  • Customer since 2002.
  • Puradyn extends oil drain intervals from 250 hours to 3,000 hours on each vessel.
  • Extended time to engine overhaul by ~300%.

pic 2

 


pura
DYN’s rugged, high efficiency, multi-stage bypass filtering system consists of an external canister that houses a disposable filter element (with time release additives) and a heated chamber to evaporate water, fuel vapors and other gaseous contaminants.

 

 

 

Why Bypass Filtration is Needed

60% of engine wear is caused by particles between 5-20 microns, yet most OEM full flow filters only perform efficiently down to particles between 15-40 microns.

puraDYN bypass oil filtration systems filter particles as small as 1 micron or less, reducing engine wear from particles not trapped by normal full flow filtration. A micron is really small – 1/1,000th of a millimeter or 1/25,400th of an inch.

Emission Regulations are Driving Demand

New engines are designed to meet strict emission regulations, with the unintended consequence of generating greater amounts of soot in the oil.  Increased soot and other solid contaminants, plus fuel and water that cannot be effectively removed by full flow filters, create greater need for bypass filtration.

picture 3

 

 

puraDYN’s simple bag-and-trash filter element disposal.

 

 

 

 

New Business Activity & Outlook

Currently, a number of evaluations are in progress in the U.S., Mexico, Central  and South America, Africa, Indonesia, China, Russia and the Middle-East, and a few are about to begin.

Each customer prospect insists on a product evaluation, given the high value of the engines involved and their requirement for 24/7 service.

Of note, one evaluation is for one of the world’s largest oil & gas companies. Puradyn has already achieved the customer’s initial objective, but one final test is underway in Europe. This final evaluation is within 80% of the customer’s targeted duration and is progressing as planned.

 

Disclosure: The parent of CG Focus List, Catalyst Global LLC, is is an investor relations consultancy.  Puradyn Filter Technologies is not a client of Catalyst Global. Coverage of Puradyn reflects the belief of Catalyst and a fund manager we respect that the company represents a very attractive special situation. Neither CG Focus List nor Catalyst Global have received compensation of any kind for the preparation and distribution of this Alert.

CG Focus List and/or its affiliates do have long positions in Puradyn shares but per our trading policy, we will not effect any transactions in Puradyn shares for five days following the distribution of today’s article.

Authors: Kate Keller & David Collins – CG Focus List

www.cgfocuslist.com   ✪ 212.924.9800   ✪   info@cgfocuslist.com

1st Copperfield, Now Gotham City – Anonymous EBIX Attacks Veiled As Research

Here’s the other article I posted to provide some counterpoint to the Seeking Alpha Post by Gotham City.  The revised post (which included SA’s editorial comment) is below, followed by the initial post that was rejected.   While I am a shareholder, and have suffered from the Gotham City attack, the bigger issue is one of fairness in reporting, blogging and access.  That Gotham could do what it did and then have my reasoned rebuttals be deferred or declined for such nebulous reasons, even though I have a 7-year history with SA dating back to my first article on EBIX in September 2006: http://seekingalpha.com/article/17662-the-long-case-for-ebix is hard to understand?

Screen Shot 2013-02-22 at 10.19.15 AM

First Copperfield and Now Gotham City – Anonymous EBIX Attacks Veiled As Research – Will We all Be Fooled Again? (submitted 2/21/13) 

The downside to a free country is that a fool and his money can still be parted when they give heed to an anonymous attack of the credibility of a company and its management by a well crafted propaganda campaign that recycles previously disproved myths.

Alas, EBIX needlessly takes it on the chin yet again but for those who are patient, it creates a more attractive entry point to invest in a company with an impressive track record and a three year growth goal of $500M with comparable operating margins of ~39%. I am told that in achieving this mark EBIX shares would rise ~200% over the next three years while also paying a 1.6% yield.

But let’s get to today’s rehash report:

It’s easy to sling mud when you don’t identify yourself – the Gotham City Research name and website seem constructed solely to host this EBIX attack as they did not exist prior to last week – after the stock had broken out of a long-term trading range. The Gotham site was created only last week (Feb. 16th) as this confirms.

But this is not the first time EBIX has been so savaged. On March 22, 2011, another start-up, anonymous site “Copperfield Research” launched a savage short campaign that was amazing in its manipulation of facts and its success – the stock has never regained the ground it lost. They teased out the report on the 22nd with a link to the full report and the stock flagged a bit that day, closing at $28.70, down from the $29.07 close on the 21st but then rallied on March 23rd to a $29.33 close. Then the anvil fell on March 24th with the launch of the report in three parts – and EBIX cratered $7.10 to $22.23 on nearly 15M shares traded in one day – clearly a more artful job than Gotham has managed! But the greater damage was the impact the report had on the company’s credibility, with investors shunning the stock all the way to a closing low of $13.38 on October 3, 2011. It was very hard to hold your position under such tremendous pressure… and many didn’t.

So Gotham’s effort mirror’s previous campaigns that were very successful in creating fear and causing EBIX shares to fall despite solid ongoing growth and substantial cash generation used productively for debt repayment, share repurchases and dividends – all of which are pretty hard to fake. Cash flow is not typically what you see in good short ideas so the naysayers have had to be creative in building new reasons to fear EBIX.

Gotham hangs a lot of their view on errors in the 2010 and 2011 10-Ks and yet those filings have been reviewed by the SEC and just last month… with the benefit of all of 2012 for them to review the data. On Jan. 16, 2013 the SEC issued a “We have completed our review of your filings” letter for EBIX’s 2010 and 2011 10-Ks – link to letter:

For me, that puts a fair amount of cold water on the allegations of an SEC investigation of the Company and other claims.

As in the case of the Copperfield reports in 2011 (true masterpieces in propaganda, persuasion – I really am impressed in their manipulation of facts to make their case) the authors are not disclosed and therefore they don’t have to answer for their comments.

Copperfield’s initial report – part 1

Gotham took the same “Part 1” approach to their report, both suggesting more to come and creating a perception of in-depth review. It’s a genius positioning that Copperfield used in breaking up what would normally be one report into three installments all posted at the same time.

Similarly, Copperfield had no prior “research” and has written nothing since, and like Gotham seems to have been created with the sole aim of serving as a vehicle to drive down EBIX’s share price. So far it’s been very effective and even Bloomberg has jumped on the innuendo bandwagon filing an article today citing the report and allegations of an anonymous firm created last week!

I haven’t even read the report closely yet – but I’m pretty certain I will find a rehash of artfully staged allegations that are very light in detail or specificity and long in opinion and in many cases present facts in a completely misleading light so that those who don’t conduct their own due diligence will likely be persuaded.

Here’s a rebuttal I wrote regarding Copperfield providing broad access to Craig-Hallum’s commentary:

The timing of today’s report seems obviously aimed at quelling the momentum of a stock that has finally started to cast off the affects of the most recent rumor recycling that occurred in a Bloomberg article citing four sources (four is always better than one – and when have every seen four sources for a rumor?) confirming that EBIX was the subject of an SEC investigation. That article also sent the stock into a tailspin. And surprise, surprise, Copperfield was there to lend a hand again.

But the Bloomberg article had to be corrected because the author grossly misstated facts around the CEO’s shareholdings and created the impression that the CEO’s holdings had dropped from over 3M shares to under 500k. I would guess that erroneous view came from one of the four sources because I know the Bloomberg reporter a little and find him open to hearing both sides of a story and far to experienced to have botched the shareholding data in his own research. The Form 4 filings are just too clear for him to have come up with that perception on his own – it seems it was fed to him by his sources and clearly not fact checked. As for the other allegations – only time will tell if any hold water.

As I have written before, I have known the CEO for around 10 years and worked for EBIX for 2 years as its IR counsel. While I find various aspects of EBIX’s IR profile to be wanting, and have expressed same to the CEO, I have found his execution in the business to be nothing short of amazing and so I have put up with a volatile stock and a depressed valuation for nearly 10 years of being a very satisfied shareholder with an adjusted cost basis well below $1.00.

EBIX’s CEO literally transformed the company, fixing the original business and acquiring amazing businesses that are very profitable, defensible and recurring. He has been fierce on cost controls and driving margins and efficiencies and has had little or no use for paying fees to Wall Street investment banks for M&A counsel or corporate finance assistance. He’s done the deals and raised the money for them with his own creativity and resources. The downside of that approach has been greater profitability and far less mainstream support

If you wonder about how were let go, our firm was gently fired after two years because the CEO felt he was not fully utilizing our services (which was indeed the case) and that he could perform the IR function in-house with existing resources and save the $$. He acknowledged that it might not be done as well – but back in ~2006 – given the scope of the company, our fees were a relevant savings and that cost discipline has been consistent during my association with the Company.

A few years ago having reached a far greater scale, he staffed up the IR role with a very capable former Wall Street analyst who does a great job.

Last but not least – I’m a fan but I’ve been around long enough to keep asking the tough questions as falling in love with a story is never wise… ever!

I have several sources who track the company closely, but I must confess I also rely on the due diligence and monitoring of EBIX that is done by its leading shareholders:

                                                             % of
Firm                       Shares             Outstanding
Fidelity                          3.9M               10.0%

BMO Asset                   2.3M                 6.0%

Wedge Capital              2.1M                 5.5%

Capital World                 1.7M                4.5%

TimesSquare                 1.4M                3.8%

Riverbridge                    1.3M                3.3%

Thompson
Siegel            1.1M                 2.8%

Pyramis*                         0.9M                 2.3%

Ashford Capital               0.9M                2.3%

Opus                              0.9M                  2.2%

*Pyramis is a Fidelity sub.

The Bottom line is that I’ve seen much sizzle and no steak, and so I encourage investors to look for corroboration of any of the allegations. It’s easy to call someone a crook but impossible to defend against it once it’s been said. Even SEC comment letters don’t’ seem to count.

From all I have seen, I have had no reason to believe there is any fundamental issue with EBIX. I just think they run a good business, do not pander to Wall Street, use tax strategies employed by multinational companies, are very disciplined in cost management but have not bought their way into a broad base of investment banking relationships that would come to their defense in such times. They are orphans in a sense, making them very vulnerable to these attacks. I do believe management needs to take this situation very seriously and take some steps to address the company’s credibility within Wall Street. In the interim, I count on EBIX to keep generating cash and paying me to wait for them to grow out of this vulnerability.

Here’s what Seeking Alpha wrote about my initial post – holding up its publishing past the market’s close. Wouldn’t it be more valuable for them to publish it and have me do an addendum? – but the above now reflects my attempt to address their comments.

Thank you.<br/>We agree – there needs to be more context presented about the history of Copperfield, and the relevance of Gotham to EBIX. It’s a bit unclear how this all came about as written. Some of the history of how prior firms (Copperfield) have attacked EBIX and driven down the stock, and how this is deja vu all over again with Gotham would be helpful. You hint at it, but again, it isn’t quite clear how it all fits together.<br/>Additionally, if possible, can you please embed the links into the text as opposed to leaving the native links as you have? So, for example, you might link to Gotham’s website on the word “site” in that paragraph instead of leaving in the native link. You can do so by highlighting the word in the editor, then clicking on the icon that resembles a globe with chains around it at the top. <br/>

Disclosure: I am long EBIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have been an EBIX shareholder since March 2003.

This article is tagged with: Long Ideas

 

 

Declined

Dear David Collins,

This revision doesn’t pass muster. As noted in your other piece, we welcome constructive counterpoints. If you would like to offer a constructive rebuttal of the investing issues raised, we will reconsider, but this version does not inform investors.

Sincerely Yours,
SA Editors

 

Post as Instablog

Delete Post

 

INITIAL SUBMISSION

First Copperfield And Now Gotham City – Anonymous EBIX Attacks Veiled As Research

 

 

First Copperfield and Now Gotham City – Anonymous EBIX Attacks Veiled As Research – Will We all Be Fooled Again?

 

The downside to a free country is that a fool and his money can still be parted when they give heed to an anonymous attack of the credibility of a company and its management by a well crafted propaganda campaign that recycles previously disproved myths. Alas, EBIX needlessly takes it on the chin yet again but for those who are patient, it creates a more attractive entry point to invest in a company with an impressive track record and a three year growth goal of $500M with comparable operating margins of ~39%. I am told that in achieving this mark EBIX shares would rise ~200% over the next three years while also paying a 1.6% yield.

But let’s get to today’s rehash report:

It’s easy to sling mud when you don’t identify yourself – the Gotham City Research name and website seem constructed solely to host this EBIX attack as they did not exist prior to last week – after the stock had broken out of a long-term trading range. The Gotham site was created only last week (Feb. 16th) http://www.whois.com/whois/gothamcityresearch.com

Today’s article is quite reminiscent of previous campaigns that were very successful in creating fear and causing EBIX shares to fall even though the business continues to grow and generate substantial cash (not typically what you see in good short ideas) used productively for debt repayment, share repurchases and dividends – all of which are pretty hard to fake. It’s rare to find a short idea that generates lots of cash…

Gotham hangs a lot of their view on the 2010 and 2011 10-Ks and yet those filings have been reviewed by the SEC and just last month… with the benefit of all of 2012 for them to review the data, the SEC issued a “We have completed our review of your filings” letter for EBIX’s 2010 and 2011 10-Ks – link to letter: http://www.sec.gov/Archives/edgar/data/814549/000000000013002804/filename1.pdf

For me, that puts a fair amount of cold water on the allegations of an SEC investigation of the Company and other claims.

As in the case of the Copperfield reports in 2011 (true masterpieces in propaganda, persuasion – I really am impressed in their manipulation of facts to make their case) the authors are not disclosed and therefore they don’t have to answer for their comments.

http://seekingalpha.com/article/259998-ebix-not-a-chinese-fraud-but-a-house-of-cards-nonetheless-part-i

Gotham took the same “Part 1” approach to their report, both suggesting more to come and creating a perception of in-depth review. It’s a genius positioning that Copperfield used in breaking up what would normally be one report into Three installments all posted at the same time.

Similarly, Copperfield had no prior “research” and has written nothing since, and like Gotham seems to have been created with the sole aim of serving as a vehicle to drive down EBIX’s share price. So far it’s been very effective and even Bloomberg has jumped on the innuendo bandwagon filing an article today citing the report and allegations of an anonymous firm created last week!

I haven’t even read the report closely yet – but I’m pretty certain I will find a rehash of artfully staged allegations that are very light in detail or specificity and long in opinion and in many cases present facts in a completely misleading light so that those who don’t conduct their own due diligence will likely be persuaded.

Here’s a rebuttal I wrote regarding Copperfield providing broad access to Craig-Hallum’s commentary:

http://seekingalpha.com/article/260820-craig-hallum-research-report-provides-counterpoint-to-copperfield-claims

The timing of today’s report seems obviously aimed at quelling the momentum of a stock that has finally started to cast off the affects of the most recent rumor recycling that occurred in a Bloomberg article citing four sources (four is always better than one – and when have every seen four sources for a rumor?) confirming that EBIX was the subject of an SEC investigation. That article also sent the stock into a tailspin: http://www.bloomberg.com/news/2012-11-05/ebix-accounting-practices-said-to-be-probed-by-sec.html

But the Bloomberg article had to be corrected because the author grossly misstated facts around the CEO’s shareholdings and created the impression that the CEO’s holdings had dropped from over 3M shares to under 500k. I would guess that erroneous view came from one of the four sources because I know the Bloomberg reporter a little and find him open to hearing both sides of a story and far to experienced to have botched the shareholding data in his own research. The Form 4 filings are just too clear for him to have come up with that perception on his own – it seems it was fed to him by his sources and clearly not fact checked. As for the other allegations – only time will tell if any hold water.

As I have written before, I have known the CEO for around 10 years and worked for EBIX for 2 years as its IR counsel. While I find various aspects of EBIX’s IR profile to be wanting, and have expressed same to the CEO, I have found his execution in the business to be nothing short of amazing and so I have put up with a volatile stock and a depressed valuation for nearly 10 years of being a very satisfied shareholder with an adjusted cost basis well below $1.00.

EBIX’s CEO literally transformed the company, fixing the original business and acquiring amazing businesses that are very profitable, defensible and recurring. He has been fierce on cost controls and driving margins and efficiencies and has had little or no use for paying fees to Wall Street investment banks for M&A counsel or corporate finance assistance. He’s done the deals and raised the money for them with his own creativity and resources. The downside of that approach has been greater profitability and far less mainstream support

If you wonder about how were let go, our firm was gently fired after two years because the CEO felt he was not fully utilizing our services (which was indeed the case) and that he could perform the IR function in-house with existing resources and save the $$. He acknowledged that it might not be done as well – but back in ~2006 – given the scope of the company, our fees were a relevant savings and that cost discipline has been consistent during my association with the Company.

A few years ago having reached a far greater scale, he staffed up the IR role with a very capable former Wall Street analyst who does a great job.

Last but not least – I’m a fan but I’ve been around long enough to keep asking the tough questions as falling in love with a story is never wise… ever!

I have several sources who track the company closely, but I must confess I also rely on the due diligence and monitoring of EBIX that is done by its leading shareholders:

                                                            % of
Firm                           Shares            outstanding

Fidelity                       3.9M              10.0%

BMO Asset                  2.3M               6.0%

Wedge Capital           2.1M               5.5%

Capital World             1.7M               4.5%

TimesSquare             1.4M               3.8%

Riverbridge                1.3M               3.3%

Thompson Siegel       1.1M               2.8%

Pyramis*                    0.9M               2.3%

Ashford Capital         0.9M               2.3%

Opus                           0.9M               2.2%

 

The Bottom line is that I’ve seen much sizzle and no steak, and so I encourage investors to look for corroboration of any of the allegations. It’s easy to call someone a crook but impossible to defend against it once it’s been said. Even SEC comment letters don’t’ seem to count.

From all I have seen, I have had no reason to believe there is any fundamental issue with EBIX. I just think they run a good business, do not pander to Wall Street, use tax strategies employed by multinational companies, are very disciplined in cost management but have not bought their way into a broad base of investment banking relationships that would come to their defense in such times. They are orphans in a sense, making them very vulnerable to these attacks. I do believe management needs to take this situation very seriously and take some steps to address the companies credibility within Wall Street. In the interim, I count on EBIX to keep generating cash and paying me to wait for them to grow out of this vulnerability.

Disclosure: I am long EBIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have been an EBIX shareholder since March 2003.

 

 

 

EBIX – Analyst at $11B Fund Counters Gotham Smear

I had submitted the following article to Seeking Alpha but it was rejected so rather than play the game, I decided to publish it here.  Hope you find it helpful.  The analyst I site is at a highly credible growth fund manager known for long term ownership of stocks. He of course is not in a position to comment on behalf of his firm so he asked that I withhold his name.  SA should understand that.

Screen Shot 2013-02-22 at 10.20.23 AM

A Screen Capture of my “Declined” advisory from SA.

Interesting that SA refuses to publish my post when they freely published an anonymous report from a newly created firm…  I’m not comfortable with their editorial censorship – particularly given all the things I have read on the site.  It does seem they are not being impartial?  Let the readers decide.

Wanted to pass on the following unsolicited comments from an analyst at a well respected, $11B growth manager regarding EBIX and the Gotham City “Report.” He has particular expertise in accounting in Singapore and accounting in general – clearly something the Gotham writers are assuming most people don’t have. His fund does not have a position in EBIX at this time.

I called the analyst who sent this to me to thank him and get his permission to redistribute it. Among the things he said was the accounting was perfectly normal in his view and even noted that Google has 8 Singapore registered sub’s but mentions none of them in their 10-K (I take him at his word). He said it made sense to him but he could see how they (Gotham) were presenting this as irregular.

Subject: EBIX

Date: February 21, 2013 3:03:13 PM EST

I saw the move in EBIX shares today, and read the “research” by Gotham City Research on Seeking Alpha. Neither I nor my firm have a position in EBIX, but I have been following them since meeting with the company last summer. I saw your comment on the article and thought you may handle IR for the company. If that is the case, I would like to pass along a few observations that may be of use to you. For background, I have an undergraduate degree in accounting and finance, am a CFA charter holder, and at one time negotiated a pioneer tax status extension with the Singapore Economic Development Board (EBD) for a company that had made a number of acquisitions.

1. The credibility questions in regards to the 990 filings do seem spurious, as the author fails to point out that Robin Raina has contributed “about” $2MM a year to his foundation for the past few years, which is perhaps what he was referring to in the interview.

2. The inter company (aka “related party”) loan that seems to be the primary concern of the author would not be disclosed on a consolidated balance sheet, unless the obligation was subject to exchange rate fluctuations, which is almost never the case. If inter company transactions were reflected on consolidated balance sheets, or in footnotes, companies like Google or GE would require hundreds of pages for footnotes alone in their 10-K.

3. To me, knowing accounting, the transactions seem to be fairly obvious, though confusing to those that have never seen cross border IP transactions at the granular level. It appears that US Parent loaned money to Singapore sub, which purchased the intellectual property in the Australia transaction, with the tangible assets staying with the Australian sub. On a consolidated basis, this all rolls up to one clean balance sheet. Why? The company is taking advantage of Singapore’s favorable tax climate by having that subsidiary purchase the intellectual property in the foreign transaction, and then using “transfer pricing” to determine the portion of the revenue for each contract that is “earned” with the IP in Singapore, with the remainder of the revenue “earned” in Australia, thus lowering the effective tax rate. See comment 5 below.

4. The Australia cash flow statement does appear to be somewhat incorrect, in excluding the two offsetting items, but this does not impact the actual cash flow calculation, nor does it impact the consolidated financials since these were all inter company transactions.

5. The difference in the revenues and income for Australia per SEC and ASIC filings seem to be explained in that on a books basis it reflects the tax treatment where a portion of the revenue from a customer is attributed to the intellectual property held by the Singapore sub, while the revenue is actually generated by customers in Australia. For comparison, look at how Google runs revenue through its low tax subsidiaries (i.e. Ireland) on a tax basis, while reporting those revenues as being from the United States in its SEC filings.

6. On the unbilled receivables question, it seems that the company is properly accounting for these. As a refresher, Unearned Revenue is a Balance Sheet account, appearing on the liability side. Unearned revenue can be created if a payment is received for work yet to be completed, or for billings on long term contracts. For a nice summary, see: http://ndhcpa.com/wp-content/uploads/2012/12/THE-NDH-GROUP-LTD-TIA-ACCOUNTING-FOR-COMPUTER-SOFTWARE-REVENUES-10-08-04.pdf.

7. Why has the company not responded? I imagine it is because they are in a quiet period pre-earnings release, though I have not confirmed this. Impeccable timing on the part of the author.

8. Final note, take a look at the open interest in the Mar 15, 16 and 17 strike puts last week. Unusual? Looks like someone is having a good day.

As for the open interest in options he mentions, he said that on Bloomberg he could see the open interest in March 2013 Puts was limited but ramped substantially a week ago. He said economic studies confirm over and over that options that are 25% or more out of the money, with one month to expiration, are generally like a lottery ticket – they rarely pay off; and that institutional investors would not purchase them. So the aggressive purchase activity is an aberration. From my notes, this is what he saw on Bloomberg – it may be off slightly but the gist is correct and you can look for yourself.

March 2013 EBIX $17 Puts – the open interest went from 700 to 1,900 contracts from 2/13 to 2/14, all trading at the ask price.

March 2013 EBIX $16 Puts – the open interest went from 1,100 to 1800 contracts from 2/13 to 2/14

March 2013 EBIX $15 Puts – the open interest went from 680 to 1,200 contracts from 2/13 to 2/14 – someone paid $0.40 for what is now priced at $2.50

So with the same authority that Gotham questions EBIX, I can state that Gotham – or someone knowledgeable about their plans clearly placed their bets on these options (and perhaps the stock as well) prior to a premeditated plan to attack the stock. They made that investment even before they bought the Gotham website.

Just trying to provide some balance to the story.

Disclosure: I am long EBIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Have been a shareholder for nearly 10 years and am disgusted by how the media covers this hatchet job as if it were credible – when the author is anonymous and the website was launched last week.

This article is tagged with: Long Ideas

HERE’s The response to my submission.  I can publish it here now because it’s not on SA.

 

 

Declined

Dear David Collins,

Thank you for the submission, and we do welcome counterpoints, but in order to publish we’d need several revisions. First, we’d ask you to identify the fund the analyst is with, or explain why you can’t. Second, the information on the options is interesting, but the allegations of impropriety are not sufficiently supported. Lastly, if the analyst could provide sources supporting their statements, that would add to the credibility.

Sincerely Yours,

SA Editors

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