Hi Bear,
Agreed on many of your points, disagree on a couple
I am also quite disappointed in their financing strategies. I know that physical inventories and cash for acquisitions have always scared traditional financing, which is why they may have opted to go for an alternative route. But I don’t understand why they attached warrants to the 8% loan. Perhaps the strike price is much higher than their previous warrants (which was priced at $16) which could justify the decision. But it seems like they could have just accomplished the same with an ATM offering. $9m a year in interest isn’t chump change for a company of this size.
The gross margins are also definitely a negative. I have no illusions about this company ever reaching the valuations held by the software companies discussed here. Would think 10 P/S is the absolute ceiling, even at 100% growth rate. If it ever reached even the mid 20s, I would probably be long out by then (unless something about the business drastically changed)
Something else that is a big red flag to me that I’ve been open with since the start is their basic business and also just the nature of their growth strategy. They are an acquisition focused company, that sell physical goods, even though they do launch new products as well. When I first introduced the company back in December, most of the posts on the thread were asking how this fits on the board because they are not software. Additionally, management hasn’t broken out organic versus acquired growth, which indicates to me that they are reliant on making good acquisitions to continue their growth. Fine at a small size but doesn’t seem like it can scale very well.
The change in fair value of contingent earn-out liabilities doesn’t bother me. That just means that their acquisitions are working out well. The earn out could be in cash or in stock (diluting the shareholders), but it’s common amongst roll up companies
Regarding your comment on beating expectations - that doesn’t seem like a flag to me in the least. Even if they miss their $380m guide by a few million, that’s still 100% growth, on a 3 forward looking P/S? Sign me up for more of that. I’ve never understood or agreed with the fascination on “they beat guidance!” - AT&T regularly beats its guidance because they work with their analysts to set low expectations, who cares?
And finally, on your point of not convincing the board to invest in the company - I don’t feel any need to do that. I share what I’ve done and my reasons for investing because others on the board are generous enough to do the same. I see the board as a collection of ideas and discussion, not a list of which companies we should be invested in. If it helps one other person on the board, that’s productive enough. I’m not offended at all if the majority passes on the company, it’s their money and they are acting in a rational fashion since as you correctly point out there are many flags.
I can offer a speculation on why this company is collectively ignored though. Over the past few years the board (and the knowledge base) has really leaned into the “software or bust” mentality, which is something I also mostly buy into, given the results, and the fact that the majority of my investments are also software related. So a CPG company that sells widgets, and seems to derive most of its growth via acquisitions? Not really the flavor of the board - so understandable. I reiterate that my investment thesis is not that the company is a dominate winner take all like the software companies we’re invested in, but that it’s tiny, cheap, hyper growth, and in a large TAM market.
Neither I nor anyone here are saying we’re better than you or our companies are more noble, or anything of the kind. But as long as I’ve been at this, I still feel much better after vetting my ideas against the braintrust of this board. I encourage you to do the same. Why wouldn’t you? You’ve got a great resource at your disposal!