Remark shares should move significantly higher this week, starting what we believe will be a significant long term uptrend. The reversal began this past week with a move higher that we expect to gain steam this week in part due to a short squeeze caused by the company’s name change / cusip change that became effective as of Thursday. As we discussed earlier last week, the cusip change will require all of the old Remark Media shares to be exchanged for the new Remark Holdings shares. We believe this will cause some near term displacement for the holders of what we believe could be a fairly substantial naked short position, as we believe they will have to purchase shares on the open market this week. Adding to what could be much more aggressive buying than this stock has seen in awhile is a reported short interest that is the highest in Remark company history. For those who have profited from the Remark trade on the short side, this week’s reversal makes it more likely that the money to be made on the Remark trade will be on the long side at least in the near term. We believe a significant portion of the open short interest will be either covered or boxed this week and in either scenario, it will significantly boost the volume on the buy side.
In addition to the buying we should see from those who previously sold the stock short, we think other significant buyers will be in the market this week –
1) Remark Itself – Remark’s board authorized a buyback of up to 15% of the shares outstanding. Bears say the company will not actually do it. We believe that they have not used it yet because they couldn’t and remain within the safe harbor restrictions of Rule 10b-18, because executing a buyback in the days leading up to a corporate action like a name change or a cusip change might be perceived as manipulative. Now that the cusip/name change is complete (as of Thursday) the company is well within a safe harbor to make share purchases. We believe they absolutely should and we believe that will start this week and likely continue through the end of the month or whatever turns out to be the 10th day prior to the company reporting Q1.
One other thought on this – Remark is 50% owned by its CEO and two large institutional investors, so 15% of the shares outstanding amounts to over 30% of the public float. Remark is a stock that has traded an average of only 60,000 shares per day and much less than that on many recent days so it is a very thinly traded stock in addition to having a very small public float. ANY uptick in buying interest would likely push the shares higher and the stock moving higher will increase the urgency of shorts and the other buyers mentioned below.
2) Long Fence Sitters – many investors in our own community have watched Remark with fascination without pulling the trigger to actually buy shares because it was perceived as a “broken stock”. No matter the gravity of the good news released, the short sellers would quickly jump on it and pound the price back lower. However, the company’s newly aggressive stance has changed that outlook significantly and many of those watching from the sidelines started buying again late last week. With just that small uptick in buying interest, the shares rallied over 20%. We think there will be much more of that this week.
3) Traders – We will be surprised if there is not significant interest and involvement from short term traders this week. Traders beat the bushes to find a “situation” like we have with Remark this week and many others may be drawn in by the price action and momentum.
In addition to the uber bullish near term picture, we think this move could have some legs due to several factors we see materializing –
1) Marketplace Recognition of KanKan – On the most recent conference call, the company indicated that its KanKan Big Data AI/Machine Learning division’s first product – a credit scoring service to serve the nascent but rapidly expanding market for Chinese consumer lending – is gaining traction and that they expect it to contribute $5m in revenue in the current calendar year. When pressed on that figure in the Q & A, CFO Doug Osrow indicated that they actually expect the figure to come in higher than that, they just wanted to provide an official estimate that they were certain they would achieve. Additionally, management indicated the company is in the final testing stages of rolling out a second product based on this internally developed technology and that a third was already in the works. The bottom line here is that KanKan is a business that is quickly transitioning from a development cost center to a rapidly growing producer of revenue with very high margins that is targeting an addressable market that could generate hundreds of millions and potentially many billions of dollars long term.
2) There have been rumors over the last few weeks of a transaction in progress that would create significant liquidity for Remark through the sale of its very valuable but non core domain portfolio. The chatter has the company taking down something in the range of 8 figures and that a deal could be announced over the next few weeks. While we have no information beyond what is in the public realm on that, we note that the IRS.com domain alone once fetched $12.5m at aucttion and its Banks.com, Bikini.com and several income tax related domains might also draw considerable interest from multiple bidders.
3) The Sharecare holding remains a tremendous alpha opportunity. The discovery last week of a long term health care industry work in progress at Apple in addition to significant health care industry initiatives at Google require that we consider the possibility that Sharecare may not go public after all. Should that turn out to be the case, we have to think that its acquisition by one of these (or similar) companies would result in Remark Media instantly have an additional $50-$100m in cash. If Apple were willing to pay $3 billion to Dr Dre to get a product whose product is appealing to maybe 1% of the world’s population, what might they pay Dr. Oz for the company most likely to be the nexxus to offer products/services that will be appealing to the vast majority of the worlds population? A $2 – $3 billion buyout of Sharecare would barely warrant a footnote on the financials of Apple or Google but such a deal would add $100 – $150m to the balance sheet for Remark and we do not think a $2 billion + valuation for Sharecare would be that surprising given the potential of Sharecare’s business.
There have been several interesting developments that bear watching with Remark Media over the last couple of weeks and in particular over the last 24 hours. Several recent corporate actions lead us to believe that Remark’s executives and directors have been doing some bear watching of their own and several actions they are taking make it appear that they may be taking the fight to those betting against Remark through short sales. We believe the spike in trading volume and price going into Tuesday’s close may presage a more significant short squeeze that could be exacerbated by several actions announced by Remark.
After the market closed on Tuesday, Remark filed an 8k with more information on the name change, including an announcement of a change to the stock’s cusip number. Changing the stock cusip number results in each share with the old cusip number having to be exchanged for a share with the new cusip number, which causes each short position to have to prove the borrow. Naked short positions would be unable to comply and those positions could have to be covered by purchasing shares with the new cusip on the open market. With a low float micro cap stock like Remark that with trade volumes as low as 10,000 – 15,000 shares on recent trading days, any significant increase in buying would likely push the shares materially higher in a very short time frame.
There has been a growing suspicion among some Remark investors (including the author) that the trading in Remark stock reflected very aggressive short selling beyond that which we are seeing reported in the near record highs calculated in the Nasdaq short interest report. Today’s announcements lead us to wonder if this might be the beginning of a longer term campaign by management and the board to eradicate short selling in Remark stock. Is it a coincidence that this name and cusip change announcement was made on the day that the Nasdaq released the most recent short interest data showing REPORTED short interest to be within a few thousand shares of the highest in Remark’s corporate history? Is it a coincidence that it was also done just days after the company announced board approval to buy back up to 15% of the company’s shares outstanding, which essentially amounts to 30% of the tradeable shares? Perhaps, but at some point your wonder when the shorts will see there is very real potential for this stock to move dramatically higher in a time frame that would not allow those short positions to be covered without incurring substantial losses and choose to get on the other side of the trade.
Short sellers should also consider that there has been talk over the last few weeks of a transaction that could create near eight figure liquidity for Remark through the sale of its very valuable but non-core domain portfolio. The chatter has the company taking down something in the range of $10m and that a deal could be imminent. While we have no information beyond what is in the public realm on that, we note that the IRS.com domain alone once fetched $12.5m at auction and its Banks.com, several income tax related domains and Bikini.com might also draw considerable interest from multiple bidders.
Another potential scenario that could result in an even larger liquidity event for Remark is the monetization of some part of its 5% Sharecare stake. Management has previously indicated an intention of doing that in a time frame that would make a Q2 sale of some part of that stake well within the realm of possible outcomes. Many (including the author) believe the 5% stake in Sharecare could be worth over $50m and we believe there are multiple parties that would have a keen interest in acquiring some or all of Remark’s stake in Sharecare.
In summary, we believe we may be seeing the early stages of a long term effort by Remark Holdings management and its Board of Directors to deal with the increasingly aggressive short sellers targeting its stock. It will be interesting to see how the purchases necessitated by the cusip change over the next few days and the potential for the company to take down a substantial portion of its free trading shares may impact trading over the next few weeks.
After a recent conversation with Remark Media CFO Doug Osrow, we are again bullish on the near and long term prospects of Remark Media. While there had understandably been concerns among shareholders (and plenty of Groove contributors) about CFO Doug Osrow’s sale transactions last month, we are now convinced that these sales should not be viewed as indicative of a bearish outlook by Mr. Osrow. The sales were part of a 10b5-1 plan established by Mr. Osrow to allow for the sale of enough stock to cover the substantial tax liability he incurred as a result of stock grants he received during calendar year 2016. In addition to his cash salary, the stock grants to Mr. Osrow last year created a substantial personal tax liability that is due by April 15 of this year. Mr. Osrow set up this plan at a time when the average daily trading volume of Remark Media shares was significantly lower than it is currently. Given the volume constraints and the large number of shares that needed to be sold by April it is likely that it would have taken weeks of smallish sales each day if he had chosen to do regular open market sales at year end instead and this would have been likely to drive the stock much lower. Mr. Osrow instead took the 10b5-1 approach to take the timing of the sales out of his hands except to establish the volume parameters that would allow the shares to be sold. While this typically proves to be a prudent measure that protects shareholder value, in this case the parameters set were such that the execution of the sales led to much lower prices than what one would expect and this meant that even more shares had to be sold to achieve the plan’s targeted dollar amount. We note that such plans require that the person setting them up may not exert any subsequent influence over the plan, so the unfortunate timing of many of the sales (and the sales prices) were not within the control of Mr. Osrow, who expressed great frustration with the plan’s results.
We are now convinced that Mr. Osrow’s sales were not indicative of any bearish sentiment on his part. Quite the contrary, Mr. Osrow seemed extremely upbeat about the company’s operational performance and while he was unable to discuss specific numbers due to SEC restrictions, he was clearly very pleased with where the company is right now and he seemed very optimistic about the mid and long term outlook for the company’s operations as well. He also indicated that the company would likely take a much harder look at the best approach for dealing with the personal income tax considerations for future stock issuances given what the company viewed as a very unfortunate outcome with the execution of Mr. Osrow’s 10b5-1 plan. Given these comments, we are confident that the company is not selling shares to Aspire Capital at these prices which had been a major concern prior to this conversation.
Given the bullish near term outlook we took from the call with Mr. Osrow and our already existing belief in the longer term picture for Remark, we believe that Remark Media shares in the current $3.15 – $3.25 range will prove to be very cheap and that it represents a very good entry point for for both long term investors and short term traders.
A quick update for Groove community members on Rave Restaurant Group. We are very bullish on recent developments with Rave, including the company’s recently announced convertible note offering and the hiring of former Smashburger CEO Scott Crane.
We believe that the note offering is ingenious in that Rave’s largest shareholder Newcastle has found a way to acquire a larger percentage of the company using an approach that allows them to acquire a larger stake in Rave at a very low price, but unassailable because on its face it allows existing shareholders to participate ratably in the offering to maintain their ownership percentage stake in the company. There are two key aspects of this offering that shareholders should understand:
1) We see this as a “Land Grab” by Rave’s largest shareholder, Newcastle. While the terms of the offering make it legally unassailable because it allows all existing shareholders to participate and maintain their existing percentage stake, we note that the reality of the situation is that many likely will not and this will allow Newcastle to buy additional shares (see #2 below). With RAVE trading at a price that appears to be very low vs. comparables and very low vs. the value of its assets in any kind of acquisition scenario, an open market purchase of any significant number of shares by the company’s largest shareholder would drive RAVE’s stock price substantially higher. With the offering, Newcastle is able to take down a very large number of Rave shares at a much, much lower price than they would have in any other scenario. Shareholders should see this for what it is – a very clever way for the biggest Rave insiders to buy more stock without causing the stock price to rocket higher.
Many short sellers had seized on the theme that RAVE stock was not cheap because if it was, then insiders would be buying the stock. In fact, the biggest insiders were working on a plan that would allow them to buy many more shares at the lowest price possible. Using the convertible note approach, they will be able to buy those shares (along side existing shareholders who are wise to what is happening here) at $2 per share, a price that will likely look astonishly cheap 6-12 months from now.
2) “Oversubscription Privilege” The terms of the deal include an Oversubscription Privilege that reads as follows: “If less than all of the subscription rights are exercised, then those shareholders who have fully exercised their basic subscription right will be entitled to purchase an allocable portion of the convertible notes unpurchased by other rights holders at the same purchase price of $100 per convertible note.”
So for every 355 shares where the owner does not choose to invest more money into these (as described) highly illiquid debt securities with a laundry list of “risk factors”, those shares will go into a pool available to be purchased by other shareholders who exercise their rights to participate in full. This means that all who have accounts that own 354 shares or less do not get to participate. And the economic reality is that even accounts holding up to 1000 shares will be unlikely to participate given the fees that accompany such corporate actions at most brokerage firms. When investors must pay between $39 – $100 in fees/costs to exercise these rights, they are unlikely to exercise their right to invest $200. While we do not know how many RAVE holders there are with 1000 shares or fewer, we are confident that Newcastle knows exactly how many accounts have share amounts that will render those holders unable or unwilling (due to the cost economics) to exercise those rights. We wonder if this offering’s terms were not designed in the way that would result in the largest number of accounts choosing not to exercise, thus allowing those rights to go into the pool that will be available to be purchased under the oversubscription privilege.
We find it interesting that the company planned for the original offering deadline date to be right after the release of the most recent quarterly earnings. We believe this quarterly report (which was very poor by any measure) will mark a low in every key metric – average unit volumes (AUVs), same store sales, earnings, cash flow etc. and investors will be able to look back and very clearly see an inflection point for Rave’s operational performance. And while we are very confident that will prove to be the case, there is nothing today that Rave holders can point to that would allow them to be certain that the sub-par performance will not continue. And it would be an understatement to say that we do not expect that there will be announcements of improving operational metrics prior to the deadline for shareholders to commit additional capital to participate in this offering. There is nothing quite like news of a 17% same store sales decline to make shareholders want to tie up additional investment capital in a longer term commitment, right?
If this offering is all that it appears to be, we think last week’s extension of the deadline was a wise move by Newcastle for two reasons – 1) it allows for an even stronger argument that they gave shareholders every opportunity to participate in the deal and 2) it gives the impression that there have not been enough shareholders choosing to participate, which may cause even more to be skittish and choose not to exercise their rights, which allows those to go into the Oversubscription Privilege pool so that Newcastle can buy a greater number of notes/shares.
The bottom line here is we believe that the opportunity to exercise rights to buy RAVE notes convertible into stock at $2/share represents a tremendous opportunity for shareholders to add to their position at a price they may never see again. Groove community participants and all Rave shareholders should recognize that the people who know this company better than anyone (insiders at Newcastle) are pulling out all the stops to buy as much RAVE stock as they can right now, as we believe that Newcastle will attempt to use the oversubscription privilege to buy as many notes as the offering terms and demand from shareholders will allow. The author of this piece (along with several who contributed their thoughts on the offering) have exercised for the full allocation of convertible notes in all of our accounts and in several we have submitted a request to participate in the oversubscription privilege to the tune of an extra $25k. We think all shareholders would be wise to recognize that the quarter just reported likely will prove to be a trough in RAVE’s operational performance. We also believe that new RAVE CEO Scott Crane is going to be a major game-changer here – if he is able to help Pie Five restaurants achieve the store level operational excellence exhibited during his reign at Smashburger, Pie Five is going to be reporting improvements in every key measurable (sales, AUVs, same store sales, etc.) in the near future. We believe that investor recognition of this and what will soon be a clearer picture of significant improvements in operational and financial results should drive RAVE’s stock price significantly higher over the next 6-12 months and the opportunity to buy RAVE shares in the current trading range will be very short lived.
Remark’s Chief Financial Officer has now dumped 60,000 shares over the last two weeks and the Form 4’s just keep coming with Tuesday night’s filing (21,400) showing that the number of shares being sold each day is accelerating. He has now liquidated over half of his holdings at prices as low as $2.93. There have been several new 52 week low transactions now, where the actual price achieved by the CFO’s sale notched a new 52 week low. While our long term outlook on MARK remains positive as an asset play, we have to temper our enthusiasm when we see the company’s CFO accelerating what first appeared to be a measured sale of just part of his equity stake in the company. The selling into today’s early rally looked very familiar to the other recent days where we got another Form 4 filed shortly thereafter to confirm the selling was by Remark’s CFO. The good news is that it appears as of Tuesday night’s filing that he only had about 44,000 shares left to sell. The bad news is that the person who knows more than anyone else about Remark’s near term prospects appears to be selling all of his stock.
We are tempering our near term outlook for Remark Media shares due to the continued selling by company insiders. While we remain bullish on the long term outlook for Remark based on our belief that its current share price does not reflect the long term potential value of the company’s assets, we think there may be more weakness in the near term as investors digest the latest round of insider selling. A second round (following an early round of selling filed last week) of selling was just disclosed and these filings answered two questions that had been a big talking point among Groove community members in recent days –
1) Who would sell Remark shares at $2.93?
2) Who would be in such a hurry to sell their Remark stock on the very day that the company announces a partnership with one of the largest and fastest growing companies on the planet?
The answer is Remark Media’s Chief Financial Officer. While insiders sell for many different reasons that often have nothing to do with the company’s prospects, we find the most recent sales to be very disappointing, as the form 4 reporting our Chief Financial Officer’s second round of sales in two weeks indicates that his sale transaction “painted the tape” at $2.93 last Friday and the Monday transactions were clearly part of the major dump that occurred on the gap up that greeted the Monday morning news of our enterprise data solutions venture with Alibaba. While we do not believe these sales will be viewed as running afoul of SEC regulations, the timing and price are quite discouraging and make the possibility that the company may be selling shares to Aspire Capital as part of the agreement that allows the sale of 50,000 shares per day at these low prices seem more likely. While we have hoped that the company would halt such sales with the share price this low, the continued selling by key insiders and recent higher trading volumes require that we consider that possibility until we can definitively know otherwise.
At yesterday’s close we published our “aggressive buy” upgrade to get our high level thoughts into the hands of our investment community while the stock was still trading at levels that do not reflect the transformative impact of yesterday’s news. There has clearly been a great deal of tax loss selling (note that the stock is still trading just marginally above the 52 week lows set a few weeks ago) and it could continue into today’s final trading day of the year and we see this as an opportunity for many to establish new positions and/or for those still holding from our original buy rec several years ago to start to add shares again.
For those new to the Remark story, we “discovered” Remark Media about four years ago and published research pointing out the ridiculous value it represented at $1.65 per share. The stock subsequently ran to $10+ and we recommended that investors take their gains off the table at $8+. We have published mostly neutral or bearish reports since that time, as we could not wrap our head around the Kan Kan investment. Remark was essentially incubating a social media data start up over the last two years with capital investment of upwards of $15m and it was difficult to quantify what value (if any) the platform would create for shareholders. Like many start ups, Kan Kan was a big capital drain that produced little to no revenue. But that has all changed in the last 60 days, as the company has signed multiple agreements with various entities to provide services related to its Kan Kan Data Intelligence Platform. Deals with Tencent and other companies to use Kan Kan’s social media credit scoring platform and the new deal with Alibaba that we believe will lead to many new deals with other entities will further monetize the Kan Kan platform and may push the revenue generated by Kan Kan in 2017 well ahead of our $6m estimate. We note that there is very little incremental expense associated with each new company that partners with Kan Kan and the boost in revenue that we expect to see as a result of the new deal with Alibaba could have a dramatic impact on the company’s margins going forward.
We believe that the value of Remark’s 5% stake in Sharecare is +/- $80 million if an arms length transaction occurred today, but we would expect any liquidity event with Sharecare itself (IPO, acquisition, etc.) to result in a substantially higher valuation. Some have pointed to an $800,000 equity investment in Sharecare that Remark made in 2015 to argue for a very low valuation of Sharecare, but they are apparently unaware that Remark’s original agreement in the development of Sharecare included anti-dilutive provisions that allow Remark to maintain its ownership stake on a percentage basis when certain dilutive corporate events occur. Remark has an option to invest cash based on the much lower valuation specified at the outset of that agreement and the recent $800k purchase is another example of the benefit the company continues to reap from what it sowed a half decade ago.
The bottom line here is that the stock price essentially gives the operating businesses of Remark Media to investors for free, as the Sharecare stake will prove to be worth $80m or more and that represents the current market cap it its entirety. We believe Remark’s three operating businesses (content/commerce, online travel/ticketing, Kan Kan) will prove to be worth substantially more than the $80m Sharecare stake and the current valuation now represents a disconnect on par with that we discovered when Remark was at $1.65 four years ago and we see any chance to build a position in Remark Media shares below $4.50 as a tremendous opportunity.