Monday, November 28, 2016

SOFT Has Big Plans

SofTech (SOFT) is an extremely low float nano cap in the middle of big change.  Five years ago they completed a recapitalization and have been selling off divisions while moving into a new business line.  In October shareholders approved the sale of their PLM business for $3.25M and with a market cap of $800k the public is not impressed with what's left.   Shockingly this is a blog post about an actual SEC reporting company... :)

SOFT is following the big change formula for a turnaround.  All eggs have been placed in one basket and they are pretty much a self funded startup at this point.  The question is will the potential be realized and what's the upside vs downside.

The Short Story
Let's start with the short story for those out there who like to make quick decisions.  The PLM transaction was expected to close on Oct 14 and we haven't seen a quarterly since.  The proxy gave balance sheet estimates following the PLM transaction:
  • 790k shares common
    • 39% owned by board
    • 720k after all redeemable common bought back (more on this below)
  • cash + accounts receivable: $3.26 per share
  • cash after accounts payable, accrued expenses, redeemable common: $1.91 per share
  • tangible assets: $2.15 per share
  • no debt
Following the PLM sale SOFT will consist of two things: the new HomeView technology and their legacy SofTech Srl division.  When Srl was removed from the PLM transaction the purchase price dropped from $3.6M to $3.25M so let's say Srl is worth $0.3M = $0.38 per share.

On the debt topic, the company said in the proxy they will be "debt free for the first time in two decades". This is true and untrue.  The debt remaining is redeemable common: 70k shares at $7 each for a total of $490k over the next couple years.  "Such put rights will be exercisable in the second quarter of fiscal years 2017 (with respect to 60,000 of such shares) and 2018 (with respect to 10,000 of such shares). If such put rights are exercised, we may use a portion of the net proceeds to satisfy our repurchase obligations."

Following this PLM transaction SOFT shareholders will have the following:
  • HomeView
    • More on this below.  This is their new high growth, high potential, disruptive technology.  This will definitely eat into the cash as it's developed and marketed.  
  • SofTech Srl
    • SOFT is actively trying to sell this.  Maybe worth around $0.38 per share
  • $1.91 cash
Over the past few weeks the share price has fluctuated between $0.36 and $1.00.  I'll take that bet

The Longer Story
I own a number of *potential* turnarounds and generally they can be split up into several groups.  Some are less of a turn than just waiting for business to come back like MRCR.  Some are staying in the same business line while selling off unprofitable divisions like WPCS.  Some are reinventing themselves like SOFT: selling off the old while investing in the new.  The common theme amongst them all is to let the balance sheet guide your way.  A company in the middle of a turnaround or at the bottom of a cycle is going to experience losses and the balance sheet must be able to weather the storm.

HEMA has gone (and is still going) through a turnaround similar to SOFT.  Years ago HEMA was a blood bank priced as high as $3 per share.  Losses set in and the stock took a nose dive.  The company scrambled to stay alive by selling off divisions.  Eventually they went dark to save money and change their business with the stock price dropping into the teens.  They invested in a new bio research division while selling everything else.  They were essentially a startup priced below NCAV because the market was unaware of the changes.  Division sales left them with enough cash to transition.  The new business is adjacent to their prior experience so it all carried over to give them a head start.  They already had related expertise, a donor base, and facilities.  Those who bought at $0.15 two years ago when the waters were cloudy have seen a 400% return as bio research has taken off.  And I think HEMA is just getting started.

GIGA is attempting to do the same thing now.  Over the past few years they have been selling off legacy business lines and issuing equity while investing heavily in their new product, the Advanced Signal Generator. The ASG has not taken off yet so here I wait.

And that brings us to SOFT. In May 2011 the company completed their “Recapitalization Transaction” (see pg 15) in which a group of 8 investors purchased 39% of the company, arranged for debt facilities of $3.2M, and negotiated a $7.6M debt reduction. Since then the company has:
  • Sold the AMT product line in 2011
  • Sold some patents in 2012
  • Sold the CADRA line in 2013
  • Sold the Connector and Product Center lines (the PLM business) in 2016
In the middle of selling all those lines the company has developed a new product called HomeView. The only remaining legacy division is SofTech Srl which is up for sale.  Srl is a remnant of the old company, an Italian branch that supports CADRA products while diversifying within the PLM space. The recent proxy has a very good explanation of the past 5 years on pg 15-18.

All hopes are now pinned on HomeView and they have a game changer vision for this product.  I am
no business analyst and do not feel comfortable analyzing business potential, margins, etc.  I just buy cheap companies based on the numbers.  So when looking at something like this I just see potential.  It could take off, but then again it may fall flat on its face.  I don't know.  What I want is to buy a huge upside on the cheap.  Let me explain HomeView by copy/pasting out of the recent proxy, pg 22-24.
"Since fiscal 2015, we have invested a significant amount of time and attention in developing and launching HomeView, our secure, intelligent home asset management and maintenance system."
"In December 2012, the Company filed a patent with the United States Patent and Trademark Office describing a system that would allow a homeowner to manage and maintain their homes."
"The HomeView product is a database that allows the homeowner to detail all of the items making up a home, essentially enabling the homeowner to create a bill of materials of the raw materials used in construction and all of the things added thereafter such as appliances, paint colors, renovations, air conditioning and heating systems, invoices, service records, cost records and any other pertinent information deemed relevant by the homeowner. We view the system as a living owner’s manual that could be transferred to future owners. We envision a time when no residential property will change ownership unless and until a full record of its components are delivered to the buyer as happens in a commercial building transactions or when a consumer purchases a Carfax report before acquiring a used vehicle. "
"There are approximately 132 million residential properties in the United States with an estimated market value of approximately $27 trillion. Homeowners spend between 2% and 4% of the value of their homes annually in repairs, maintenance and renovations depending on the age of their homes. HomeView would seek to aid homeowners by notifying them of maintenance needs, anonymously collecting bids from service providers and potentially generating revenue by arranging for the service of those items or replacement."
"The average home in the United States was built in 1965 and has had between five to six different owners. There is no standard means of providing any kind of continuity between and among homeowners. This despite the fact that homes represent between 30% and 40% of a person’s net worth depending on their age. The Carfax technology has been in the marketplace for thirty years and has become the de facto standard in the United States for due diligence prior to purchasing a used vehicle. We want to establish HomeView in a similar role for the 5 to 6 million used (existing) homes that are sold each year in the United States."

"The fact is that a U.S. homeowner’s home represents, on average, about 30% to 40% of the homeowner’s net worth depending on their age. Most homeowners remember the purchase price of their home but have only a general sense of the investments they have made during their ownership. HomeView provides this kind of cumulative tally so that homeowners can know precisely how much they have invested at any time. Today’s technology makes it so much easier."
Shareholder Value
With the newfound cash and loss of debt the company has freedom to work.  Let me just mention a few things they laid out as possibilities in the proxy.  They are trying to sell SofTech Srl and it sounds like they are pretty open to a merger or other transaction.  I don't know if anything will happen but with this language and all the recent division sales it's a possibility.  All below emphasis is mine.
"Selling the PLM Business will address the Company’s need for near term additional capital, allow for us to focus primarily on one market, allow for us to be debt free for the first time in two decades and provide us with flexibility to potentially engage in activities aimed at enhancing shareholder value, such as share buybacks, dividends, merger, acquisitions and/or other targeted investments."
"We will continue to operate SofTech Srl, our Italian subsidiary, as a value added distributor of PLM solutions but will seek opportunities to monetize that asset if at all possible in the coming year."
"The above described businesses and prospects, together with estimated tangible assets of about $1.7 million subsequent to the transaction, provide additional opportunities for the Company to continue to positively impact shareholder value subsequent to the sale of the PLM Business."
"A core tenant of the management team’s strategy following the Recapitalization Transaction has been to actively consider ways to monetize some or all of the Company’s assets, develop new revenue streams and to pursue new strategic initiatives such as potential business combinations, sale transactions or strategic partnerships."

"We will continue to evaluate business combination and other sale opportunities."

"One possibility would be to acquire or merge with a profitable entity that is well established in the residential property marketplace"
Risk
Of course there is risk.  There always is and probably more so with a new product like HomeView.

The very first thing that stuck out to me in the proxy is this line.  I suppose it could be good if they buy all of us minority shareholders out to go private.  But it could be bad as well if they use the horrible SEC 300 shareholder rule to fade away into the darkness (SOFT has 102 "shareholders of record")...
"We intend to evaluate the merits of remaining a public company after evaluating the market’s reaction to the transaction, the opportunities for HomeView, potential partnerships, merger and/or acquisition opportunities and other pertinent factors."
Beyond that the company will certainly be sustaining losses as HomeView is developed and launched.  The question is do they have enough cash to get to the light at the end of the tunnel, and how bright is that light
"We expect to sustain operating losses for the foreseeable future"
"We will retain SofTech Srl, our subsidiary in Italy that is a value added reseller of CAD and PLM technologies and services. However, that entity has incurred operating losses for three consecutive fiscal years. HomeView, our newly released data management solution for the residential property market, is a pre-revenue technology."


--Dan
disclosure: long SOFT

7 comments:

  1. I think this idea makes little sense. The technology appears stupid to me. Homeowners are not that responsible. I see few people buying this software. And I don't understand how the bidding for maintenance contracts is supposed to work.

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    1. I guess you won't be downloading the app then

      I own this stock for the numbers and potential. We don't have a balance sheet post PLM sale but the proxy estimates NCAV to be around $1.91. The stock is at $0.75 so it's a net-net priced at 39% of NCAV.

      HomeView may or may not work out. I don't know. If it doesn't I lose my $0.75. If it does I think I'll make more than $0.75.

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  2. Replies
    1. Bids drop away without news and they are now almost 3 months late in filing their quarterly report. Bid/ask has been around 0.50/1.00 for the past few months then recently that dropped to 0.15/1.00.

      Without a quarterly they've dropped off the OTCQB tier at OTC Markets and are now on the Stop Designation List. I'll have to ask the company what's going on. We know they sold off almost everything that was generating revenue so it's all a question of will HomeView catch on.

      Market cap is only $113k now...that's cheap. But will they survive?

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  3. Ya, it looks interesting. Its pretty much a startup so I don't really know how to value it but one would expect a basket of these would provide satisfactory returns. Thanks for the extra color around the pricing. I've learned a fair amount from your blog.

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    Replies
    1. You must've read the fairly educational section then :)

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