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.
We have encouraged investors to be cautious with Remark over the last 12 months, as the acquisitions (of Vegas.com and China Branding Group) transformed the company’s financial statements and outlook, while the company continued to pour significant resources into the development of its Kan Kan Data Intelligence Platform. While the acquisitions had very clear and compelling top and bottom line implications and potential for growth, we were concerned about the runway for the Kan Kan project and found it’s potential difficult to quantify. For this reason, we encouraged investors to take a “wait and see” approach until there is tangible evidence of value creation and the potential for Kan Kan to produce revenue.
The announcement today of Kan Kan’s selection by the AliBaba Cloud Group to provide its advanced facial recognition and image classification services to Alibaba cloud’s Robotic Vision Ecosystem Union represents a huge step forward in the company’s growing relationship with Alibaba and (according to Remark CFO Doug Osrow) a very significant revenue opportunity that will impact the financials in the first half of 2017. This is the traction we have been waiting to see and we believe it is now time for investors to aggressively accumulate Remark Media shares again. With the stock up only 1.3% since the news was released this morning, we believe the lack of investor recognition of the implications of this deal plus what is likely end of year tax loss selling presents a tremendous opportunity for adding shares.
After the close yesterday RAVE Restaurant Group announced a $3 million shareholder rights offering that will allow each shareholder to purchase convertible notes redeemable for Rave stock at an exercise price of $2 per share. These non-transferable rights are being granted to all shareholders as of December 21, 2016, so it appears that the offering and conversion price were set based on a 10% premium to the closing price of Rave ($1.82) on Dec. 20. Shareholders can purchase one $100 note paying 4% interest for every 355 shares that they own. Newcastle, the company’s largest shareholder whose principals include Rave CEO Clinton Coleman and Rave BOD chairman Mark Schwarz announced that they will participate and have essentially already paid in the full amount ($1 million) that they can invest under the deals terms based on their holding of approximately 1/3 of the company’s outstanding shares.
It is important to note that there is also an over-subscription right that will allow holders who exercise their rights to the full extent of their holdings (which Newcastle already did) buy any remaining rights not exercised by existing shareholders. Thus, if existing shareholders do not exercise their right to purchase these notes, Newcastle can exercise its over-subscription rights and essentially buy approximately 15% of the company for $3 million.
This presents an interesting situation, as shorts have sold hundreds of thousands of shares in a bet against Rave. These shares have been borrowed from shareholders who have made their shares available for hypothecation and sold, but the shareholders have just been awarded the right to purchase these convertible notes, be paid the 4% coupon and ultimately convert the notes into 50 additional shares when they choose to do so. Those who were short Rave stock as of December 21 will have to provide those rights or buy shares to replace the ones that they borrow and sold.
It also bears consideration that many short sellers made the bet in anticipation of a capital shortfall for Rave. With the company receiving a capital infusion of $3m as part of this offering, any pressure due to capital concerns will no longer be a factor at least for the next year or so.
The bottom line here is that this offering is giving shareholders an opportunity participate in Rave’s capital raise in proportion to their existing stake in the company. To the extent that some choose not to do so, the largest shareholder of Rave (Newcastle) will be able to increase their percentage stake. And the entirety of the situation will provide some very interesting and not too appealing options for the short sellers who have bet against Rave.