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Comments on RumbleOn and Liqtech, also Smith-Micro and Vicor

I wrote a couple of lengthy responses in the comment section that I have reproduced here.  One was on RumbleOn (here).  The other was about Liqtech (here).  I also comment on Smith-Micro and Vicor briefly.


1. Isn’t the installation of scrubbers self-defeating if too many ships continue to use HSFO?

A couple points. First, assuming that there is a point where its self defeating to install scrubbers (which I am going to raise a question about in a second) I believe that its far enough away that if it happens Liqtech will have benefited well beyond what is justified by the current share price. Consider that right now we are talking a couple thousand ships getting scrubbers out of a 70k fleet. And my numbers are assuming Liqtech only gets a fraction of those ships (ie. I don’t have the latest framework agreement modeled in there, I don’t have direct to shipowner sales, no sales from the other 4 scrubber manufacturers they are working with). Second, are we sure it would be self-defeating? Consider this – What are current HSFO to LSFO equivalent spreads (you have to use a gasoil equivalent for LSFO because there isn’t a true LSFO right now) and what would be the payback on scrubbers at those spreads? I was looking at this a month ago and thinking that at current spreads (so right now, with all ships still using HSFO) scrubber payback would still be pretty good. Isn’t this the worst case scenario for spreads after 2020? To put it another way, the reason ships aren’t installing scrubbers right isn’t because spreads aren’t favorable, its because they don’t have to.

2. What is a fair multiple for Liqtech given that their growth is concentrated on the next seven years and will massively flatten or even be negative thereafter?

While it’s hard to predict that far out in the future, there are opportunities that could result in significant earnings even after the retrofit opportunity has passed.  First there is the new build opportunity – 60% of new builds are being installed with scrubbers. 1,000-1,500 ships a year get built I believe (I’ve never been able to pin that number down exactly, its always given on a DMT basis, not ship basis) and Liqtech is dealing with 7 of the 10 largest scrubber manufacturers. So the opportunity is quite large.

Second, I think the upside from the ramp could far exceed the current share price on its own. While its tough to project because we don’t know yet whether Liqtech will hold its market share through the build, how many scrubbers will be closed-loop or hybrid, etc, if an optimistic scenario holds then the cash they taken in should exceed the existing share price by quite a bit.

Further off there are other verticals where the exposure from being used in a large number of ships will help give them credibility to expand into – such as scrubbers for power industry, oil and gas flowback filtering, and maybe further inroads into DPFs.

But the main answer i that I think the new build opp is going to be large. The bigger question is what does the regulatory regime look like in 7 years and have even stricter environmental regs come in and how do scrubbers fit into that.  And the other obvious big question is whether there are more hiccups in the implementation of the regulations between now and 2020.

3. Will we see lower revenue because the latest framework agreement is for lower ASP systems?

No, I don’t think that’s right. Consider that the new framework agreement is entirely incremental to my model. You can basically add 80-100 units at $230K and 70% margin (they said higher margin and we know existing units at scale are 65% with the Mark 6 design so 70% is my guess). So I think my numbers actually change pretty dramatically for the better with the new agreement. Also consider that the number in my model (80) is actually less than the other two framework agreements. I conservatively said 80 but if you read the transcripts Liqtech said they expect 120 from these two framework agreements.

4. How likely is another capital raise?

Liqtech came out last week and said they don’t need to raise capital this week. They said they had more cash then they had at the end of the second quarter. And soon they are going to be getting a tonne of cash from orders. I agree $4 million doesn’t seem like a lot but given their comments it would definitely be a surprise to me if they raised at this point.

What I think of the IMO 2020 meetings

This wasn’t a question but I had commented last weekend about IMO 2020 here.   This is obviously the big weight on the share price.  I think the upside based on what can happen is a pretty clear picture.  It’s what will happen that was thrown a curveball when the US threw its hat in the ring leading up to the MEPC meetings.  But since that time the IMO approved the fuel carriage ban and basically told the flag states that if you want us to consider a proposal for a more gradual approach we want to see more details.  So the result was constructive for Liqtech.

The risk remains, but in my opinion the risk specific to Liqtech falls as time passes.   The implementation of the fuel carriage ban was the last step for enforcement and that was passed.  The rebuke of the flag state proposal says to me that the IMO wants any proposal to clearly state that they are asking only for waivers when compliant fuel is not available and not looking to delay enforcement generally.  While the clarification comment that the flag states made leading up to the meetings (which I mentioned in my previous comment) said as much, the actual proposal being voted on last week (which was what the flag states wrote at the end of August and had been interpreted by some as “an attempted coup”) sounded like it was more vague.  I don’t think the IMO wants to implement a vague proposal that might open other doors.  So they closed the door on that.

At this point the IMO meets next May.  That meeting might have a clearer proposal for waivers on the table but I think it’s less likely that some sweeping change comes out of the blue and derails the whole thing.   Barring an unforeseen event in the interim, shipowners are going to have to move forward with what they know.  I think this means scrubber purchases move ahead.


I was also asked what I thought of the Wholesale acquisition by RumbleOn.

I was initially skeptical about the deal.  RumbleOn’s third quarter numbers, on the surface, weren’t very good. The reulsts matched what I had suspected when I was watching inventory on a daily basis – in September the numbers flattened out/turned down.   As a consequence they missed the unit number. I was surprised that ASP was down too. So when I saw the acquisition my first reaction was: hmmm, are they just trying to paper over a bad quarter and slipping growth?

But since then I’ve listened to the conference call a few times, read through all the documentation and I’m coming around to the deal.  The quarter was still not very good though.

Let’s talk about the quarter first.

While the third quarter results and guide are disappointing I’m not sure that they are as bad as they appear at first glance.  If you take management at their word, they changed their acceptance criteria for making cash offers, basically limiting offers to cases where they thought they could make at least $1,000/bike. Their “terminated” offers (meaning offers that they didn’t decide to make after the seller went through the trouble) went up from 2% to 15%, which is a big increase.  They said this resulted in a 700 bike slip in inventory.  That slowed unit sales, which is what I saw on the site myself.

Now you can believe them or not here.  Maybe this is an excuse and the business just slowed.  But what I have seen on the site is consistent with higher margin bikes being available.  They said that their ASP has been much higher in Q4 (anecdotally I saw that too at the end of quarter – that ASP of inventory has definitely gone up).

Maybe the bigger negative about the quarter is that the SG&A as a percentage of revenue did not come down.  It was up a little from the second quarter.  I had been hoping it would come down soon as the company moved towards profitability.  But this didn’t happen, which is a negative.

When I look at the Wholesale acquisition, I understand why the market was lukewarm to it. Wholesale gross margins are tiny, like 4.3%, so even with the volumes (they are expected to sell 2,000 cars a month next year) and even growing 15-20% that’s tough. Carvana has double the margins and the story there is margin expansion as they layer on services. But Wholesale can’t really layer on services because they are selling wholesale, not to consumers.

Therefore on the surface the acquisition kind of looks not that great.  What you can say is that it wasn’t expensive (as one analyst on the call pointed out they are getting the business at 12x income and asked why the owners would sell so low).

So that was my first take.  But I’m more constructive as I’ve thought about it some more. Here’s how I’m thinking about it now:

How much would it take RumbleOn to create a platform and distribution network to populate their new car and truck online portal with 2,000 vehicles available to consumers from the go, ramp their sales to dealer/auction up to 20,000 per quarter (which is the current Wholesale run rate), building out that network in the process, and build a distribution network to manage the supply chain? I don’t know that number but I think its higher than $23 million.

For $23 million they get immediate inventory that can go to the soon-to-be launched consumer facing site, they get a built and operating distribution network for deliveries and dealer network, and they get to layer on their consumer cash offer business.  And yes they also get the dealer purchasing vertical that Wholesale excels at as well as a couple of retail locations.

Yes margins at Wholesale are really low, but it’s because they buy from dealers, refurbish and sell to auction/dealer. Wholesale seems to me to be essentially an arbiter.  But I don’t think RumbleOn bought Wholesale because they were enamored with this dealer to dealer business.

To put it another way, Wholesale also has an existing network and inventory that can be leveraged to more quickly build the higher margin consumer purchases and higher margin consumer sales that RumbleOn has always planned.  RumbleOn has the automated cash offer system to drive consumer purchases which will be better margins. They have their site/app/brand to drive consumer sales.

I think that looking at Wholesale’s business as-is or trying to think about how RumbleOn will improve Wholesale’s existing business is probably not paramount to how Chesrown and Berrard are thinking about it – yes, RumbleOn should be able to make incremental improvements on what Wholesale does through data analysis that improve decisions but that’s not the primary motive for the acqusition – the point is layering on the consumer online buy side with the cash offer model and consumer sales through the website, and leveraging Wholesale’s existing dealer network to maximize turns right from the start. Improvements to Wholesale’s existing business are peripheral to what they are really going for here in my opinion.

They said it multiple times on the call – RumbleOn is creating a supply side solution – they are demand side agnostic – consumer/dealer/auction – whatever. They need to be able to access each vertical and the more they can sell to consumer the better but unlike Carvana, Vroom, et al the focus is not sales to consumers. Its closer to the other way around – the focus is buying from consumers. They will sell whereever they can sell fastest to maximize turns. It’s the buy side that matter, procuring as much inventory from as possible from consumers while insuring it’s the right vehicle at the right price. If they get the buy side right the sell side sorts itself out. Wholesale fits nicely into this IMO.

So I like the acquisition. But I also think the logic behind it is complicated and I’m not totally sure the market will agree with me right away. I also think the quarter was not so good and you have to buy into management’s explanation to be okay with the results.  So we may get more pain. Nevertheless, I did buy back a position on Friday.

A couple other things

I bought back Smith-Micro after the earnings report.  I had said in my update that I was worried they would miss estimates.   They did, kind of. I could have sworn the Roth estimate (the only analyst) was $6.7 million of revenue for the quarter.  The company came in at $6.5 million. But when I looked after earnings it appears the estimate was actually $6.1 million.  So I don’t know if I imagined that $6.7 million number or whether Roth changed it at the last minute.

For what its worth it means they beat, but the stock fell anyway.  I didn’t think it was a bad quarter at all though.  Safe & Found adoption at Sprint continues at a steady pace, there are overtures of a second carrier in the next 6-9 months, and it appears that the sunset of the legacy product used by Sprint customers is coming.  These are all positives and really the only negative had to do with the peripheral Graphics business, which saw a steep revenue decline but is now at the point where it can’t hurt the company going forward.  So I bought.

Vicor stock action remains a gong-show.  I’m holding on (pretty much HODL at this point) and I did think their quarter was fine.  There is weakness in the legacy business but the new products bookings were up 20% sequentially, which is a great number.  Apparently there is a negative report or article on Vicor that has been out for a while that could be the basis for some short selling of the stock.  John Dillon mentioned it on SeekingAlpha.  If anyone has the report I’d really appreciate seeing it.

23 Comments Post a comment
  1. German reader #

    To the Stockholders of Precision Therapeutics Inc.:
    …If all of Helomics’ $8.8 million in outstanding promissory notes and all of Helomics’ outstanding warrants are exchanged in connection with the Exchange Offer, Precision will issue: (1) approximately 8.8 million additional shares of Common Stock at $1.00 per share based on principal and assumed accrued interest, (2) 14,245,130 warrants to purchase Precision Common Stock at an exercise price of $1.00 per share and (3) 597,000 warrants to purchase Precision Common Stock at an exercise price of $0.01 per share.

    October 29, 2018
    • German reader #

      That makes about 2/3 dilution immediately and 5/3 if the $1.00 warrants are exercised with additional inflow of $14.2M

      October 29, 2018
    • Thanks, so that looks consistent with the later disclosure in the 10-Q, not surprisingly. What do you think of the merger? I see that Helomics revenue this year has not been stellar and they are burning through lots of money.

      October 30, 2018
      • German reader #

        Yes, unfortunately.
        So overall I think the transaction is at least “fair”.
        It is clear, that the old thesis based on Streamway is totally in the trash now.
        I think long term precision medicine is one of the coming megatrends and the scientific leadership and management makes me think they can be successful. If the sale of the Streamway systems, which seems on a good track along the original thesis, can fund Helomics in the meantime, you could argue that this is a very lucrative reinvestment opportunity.
        It will be interesting to see what their actual plans in the near future are. I expect some clarity on that with the next reporting date, probably mid November.

        So the upside is there and it is big, very big. The downside is hard to judge and the problem really is, the game has changed. Are we just counting on management? We almost have to, because it is very hard to figure this out now.

        I think you sold out completely?

        October 30, 2018
      • Thanks, its interesting. I’ll have to dig into the presentation some more. i tried to go through it once and I just don’t understand enough about it to know whether they are at the forefront or not. It worries me how much cash is going to be burned and that helomics revenue this year is quite a bit less than last year.

        October 31, 2018
  2. German reader #

    A few more bits:
    “Revenue from the clinical diagnostic tests has steadily declined since early 2016 as the company received a negative coverage determination, from Medicare, for reimbursement on its proprietary ovarian cancer test, ChemoFx. The revenue has continued to decline from 2017 to 2018 due to a decrease in oncologist utilizing the test following the negative coverage determination. Helomics expects the new Precision Oncology Insights model to increase testing volume going forward.”
    “Precision will require additional funding to finance its CRO business and other new business areas, as well as ongoing operating expenses of its STREAMWAY business and investment in its sales organization and new product development and pursuit of sales in the international marketplace. Precision has committed significant capital and management resources to developing its CRO business and other new business areas”
    “Precision will require additional financing to finance operating expenses and fulfill its business plan. Such financing will be dilutive”

    So they expect to need additional funding. On the plus side they say in the presentation that there are 100+ Streamway systems installed, which should give them 2.4M revenue per year at 80% gross margin.

    If you look at the competitors of Helomics in the proxy, the “dream” would be something like Foundation Medicine. I don’t see, why that wouldn’t be achievable considering Helomic’s large (unique?) database of oncology related cancers on their D-CHIP platform.
    But this is very much the long game, it can take years to gain traction and take off. We can’t hope for a buy out by a big pharma player, I suppose, so we need to rely on them making money from this. I don’t see that all too soon.

    November 1, 2018
  3. German reader #

    Altura Energy Inc. Announces Third Quarter 2018 Results, Material Operating Cost Reduction and Record Corporate Production

    Click to access d63ee4_8f4e11fa1c7e419492738e689c70a385.pdf

    2,050 Boe per day already achieved, I like that

    November 11, 2018
    • Its a good company. Wells are above the type curve so far as well. The next 2 months are going to be rough though, no getting around it. Apportionment will happen which is why there is the huge range in the exit guide (they don’t know how much the apportionment will be, no one does). The good news is they have almost no debt so they can wait till things get better beginning next year. I read that Peters is seeing a lot of positives, both curtailments and crude-by-rail that will begin to hit in Q1. I don’t expect much out of the stock for the next couple months, though if there is a bump in WCS when Whiting comes back online ATU might get a tailwind from that. I built a little model on their type curve and I think they can keep production flat on 4-5 wells per year, which is good and means that even at $40 WCS (which is higher than now but historically low) they can hold their own while staying within cash flow.

      November 11, 2018
  4. German reader #

    Recently came across Par Pacific Holdings, Inc
    They operate the only refinery on Hawaii after recently buying the assets of the last competitor. That will boost their LSFO production quite a bit and let them profit from IMO 2020.
    Hawaiian business also seems to grow steadily (air traffic, gasoline). The also have a Wyoming Refinery, a Logistics and a Retail segment and own 46% of Laramie Energy with its unconventional O&G operations concentrated in the Piceance Basin, Western Colorado.

    November 11, 2018
    • Thanks I’ll check it out.

      November 11, 2018
      • German reader #

        I am not yet finished myself. It is certainly capex intensive, but I like the setup:
        -profit from IMO 2020
        -buy out the sole competitor on an island that experiences secular tailwinds
        -realize synergies

        November 11, 2018
      • German reader #

        I like it. They don’t seem to overpay while getting more diversified and project ca 10M synergies.

        December 6, 2018
      • German reader #

        They also get exposure to the Bakken and Canadian WCS.

        Leon Cooperman was also on the call and liked the deal. Some Hedge Funds hold positions currently, including Renaissance, AQR and O’Shaughnessy albeit small positions.

        December 6, 2018
  5. German reader #

    Gran Colombia Gold with good numbers again. This is so stupid cheap, I don’t know what to say.
    Pick your metric, P/E, EV/EBITDA all around 2.
    Are we going to see negative EV in two years?

    November 15, 2018
  6. James Andrew #

    Any comment on the latest results fro Gran Colombia – looked good.

    November 19, 2018
  7. arf #

    Isn’t a better way to play IMO 2020 with shipping stocks with new ships? It seems a lot of older ships will probably leave the market, and a lot of shipping markets have tightened up already.


    “For example, one expert who had strongly touted Exhaust Gas Cleaning Systems (colloquially known as scrubbers) just a few months ago as the leading solution to dealing with the 2020 restrictions now admitted that they just weren’t catching on. More expensive fuels (0.5% sulfur content fuel oil and marine gasoil) have since become the more preferable solution, he said.”

    Star Bulk looks like a good candidate.

    December 1, 2018
    • I think that could be a good way. I don’t know about better way. Its hard to have the leverage LIQT has. I agree the market tightens. This would be a more obvious idea to me if the economy was better. With OPEC likely cutting that takes some demand away on the tanker side. With trade problems that could take demand away on the container and dry bulk side. So how does that all play out? The product tankers have said they expect to benefit quite a bit from the changes due to longer routes, more LSFO being shipped and such. So that makes sense. I bought a little ASC in the $5s but already sold it because I’m nervous about the market. And ASC, like all the shippers, seems like they will raise capital as soon as their shares pop.

      December 6, 2018
  8. Anonymous #

    Bueller?…. Bueller?….

    December 12, 2018
    • Yeah I know. I’ll do an update shortly, just keep putting it off because my portfolio is boring right now. Short answer: I own LIQT, gold, a couple oil positions I just added and my illiquid cdn microcaps that I continue to wait for news on. I sold everything else.

      December 13, 2018
      • Anonymous #

        Are those illiquid canadian microcaps listed on your blog?

        December 14, 2018

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