Thursday, September 21, 2017

Major Change for SOFT, WPCS, MRCR

Tiny companies meander through life with peaks and valleys along the way.  These three stocks have all had major announcements recently which perfectly illustrate life in this unloved corner of the stock market.  Rather than the good, the bad, and the ugly I think we have the good, the bad, and the who knows.  

I like to buy tiny companies with potential.  Sometimes that potential turns into reality (as seems to be happening with MRCR), sometimes the potential gets replaced with other potential (WPCS), and sometimes the potential turns into a fire that burns the company to the ground (SOFT, maybe).  MRCR and WPCS are definitely actionable if you think there's value to be had while SOFT is so illiquid and uncertain it may not be. 

WPCS is a low voltage electrical contractor who recently announced they are merging with DropCar.  MRCR is a construction business that de-registered from the SEC in 2004 then filed reports with OTC Markets for a decade before disappearing from the public eye in 2014.  Just today MRCR posted reports to the public for the first time in 3 years and got removed from the dreaded OTC Markets Stop Designation List.  SOFT was selling off business lines a year ago to concentrate on a new high potential division...then a few days ago they put out an 8k announcing everything is for sale including their domain listing and NOLs.

SOFT
We can start with the bad news. Actually it might be good but I’m guessing on bad. Sure seems like they have put up the white flag.

I first wrote about SOFT in Nov 2016 when the stock was at $1. They were selling off their main business line, PLM, to focus on a high potential division called HomeView. They also had the legacy European division SofTech Srl remaining. You can read more about it in my original post. HomeView is an app that homeowners could use to track all maintenance, manuals, etc for everything in their home.  The app could make money by recommending service providers for whatever is needed.  Their goal was to make HomeView the default data record during home purchases in a similar way as Carfax is for used car purchases. In the PLM sale they had valued SofTech Srl at about $300k = $0.38 per share.

Unfortunately things haven’t been going as planned at SOFT. They have not filed an SEC report in months so OTC Markets downgraded them to the Stop Designation List. They are late one 10Q and a 10K. SOFT did put out an NT-10k and it was not encouraging, HomeView is still “pre-revenue” and SofTech Srl is their only revenue source.

I have emailed questions in to the CEO a few times over the past couple months without any response (he used to respond to me).  The stock has been at $0.16 the past few months which is a market cap of $120k with no debt! Much cheaper than a house here in San Diego, but also possibly less valuable.

So the bad/sad/funny news came a couple days ago in an 8k. It seems they are throwing in the towel and selling off everything they can. I have no idea how to value any of this so I will just sit here with my shares. The news did trigger a transaction to bring the share price up to $0.55. The stock is just so thin. Here’s what the company had to say:
Hilco Streambank ( www.hilcostreambank.com ), in a joint venture with Modern IP, LLC, has been retained by SofTech, Inc. to sell its stock ticker symbol, SOFT, as well as related IP assets including its trademark and domain name 
The ticker symbol is currently registered on the NASDAQ exchange. Other assets included in the sale consist of the SofTech.com domain name and SofTech ® trademark registered in the United States. 
Additionally, the company is making its public shell including its significant net operating loss carryforwards (“NOLs”) available. The public shell may be a useful vehicle for a private company to become public through a reverse merger or to serve as a roll-up entity for an acquirer.
Take SOFT as an example of what can happen when the potential is not realized.  I had expected them to sell off SofTech Srl but that has not happened.  I hoped HomeView would catch on.  I also expected they could survive longer than this on the cash they got from the PLM sale and if not they could get financing.  Maybe they are not encouraged by the potential anymore.  Maybe they're up against a wall and sick of pushing.  

WPCS
This is a fun one that falls into the category of “I have no idea how to value this.”  I first wrote about WPCS in Dec 2015 at $1.46 and the stock has bounced between 1.25 and 1.50 ever since.  We now sit at $1.23.  They had sold off a lot of old business lines and were organizing around their one profitable division, Suisun.  WPCS was an electrical contractor for low voltage wiring.  For example if a new hospital was built maybe WPCS would wire up all the network cables.  

Over the past couple years the company expanded into Texas and got into the security wiring business.  Think cameras, window sensors, and whatnot.  I thought this would be good and initially the results were encouraging but after a year or so they shut that down.  Now the company is back to only the Suisun operations.  

A few weeks ago WPCS announced a merger with DropCar.  Frankly I was floored and still can't really believe it.  Seems to me WPCS is giving up on the wiring business and just trying to get as much value for shareholders as they can.  Or potential value at least.  Not too different from SOFT but WPCS has a taker.  I can respect the CEO and board for really going after the economic interest of their bosses, the shareholders.  This goes to show you how much change can occur at these little companies.  They have given the electrical business a go then decided the best way to give shareholders a return is hand over the stock symbol to a high tech startup.  If nothing else it is exciting!  

DropCar is a new, high tech Uber-like company.  I would never buy into an IPO like this but I will stick around for the ride because it's the type of company that can make a stock go crazy with hype.  A true potential disrupter.  DropCar is a phone app based car valet service.  Kind of like Uber if you want to ride in your own car and live in an area with horrid parking.  They exist only in New York and have plans to expand all around the country and world.  I think this business model can work in any place with extreme parking.  

DropCar has two packages.  In one they will have a valet meet you wherever you are driving and the valet will drive around your car for you while you are in your appointment or whatever.  In another they will meet you at your house and park your car long term in their facility just outside the city.  Imagine you live in New York City, Chicago, etc where parking is impossible.  Maybe you're a parent who wants to take your own car because it has your kids' car seats and diaper bag.  You drive to your doctor appointment and a DropCar valet meets you there so you don't have to find parking.  The valet drives around the block for an hour while you have your appointment then you take the car and go on your way.  The valet vanishes back into the night like a parking ninja.  It's an on-call valet through a phone app.  

The "merger" with DropCar sounds to me more like just selling the stock symbol.  After the transaction DropCar's current shareholders will own 85% of the entity while we WPCS shareholders will get 15%.  It makes no sense to keep around the WPCS low voltage electrical Suisun operations so I imagine they'll spin that off or sell the division at some point.  

Take WPCS as an example of how far these tiny companies will go to survive.  We now have this totally new potential in DropCar.  

MRCR
And now to my favorite update.  I've written about MRCR a few times and I'd recommend you read them if you're new to the story.  It's a cheap stock run by an 80 year old main shareholder CEO.  They de-registered from the SEC and stopped posting reports anywhere online a few years ago but the CEO would still give you a report if you asked for it.  I bought in because the stock is cheap and I've always thought the CEO would have to do something, anything, at some point.  

It's possible we have hit that point.  For the past couple years the stock has been between $0.25 and $0.50 until a month and a half ago when the CEO decided to put out his first communication in almost 3 years.  He gave out some numbers and a quote for the ages:
It is perplexing to me why the market price for Moro’s stock has recently been trading in the OTC marketplace for about $.50 per share which is 38% of book value. There is, in my opinion, a disconnect here which should eventually be recognized by the investment world.
I don't know how the stock price can be "perplexing" when he hasn't communicated with the market in years.  "No one in the world even knows if my company still exists, and I can't believe the stock price is so low!"...give me a break.  Anyhow the press release shot the stock up to $0.80-ish level we sit at now.

Then today MRCR officially got moved off the OTC Markets Stop Designation List and onto their Pink Current Information tier.  They posted financial reports online for the first time in almost 3 years.  Financially it costs $5k to post reports online through OTC Markets, or at least that's what it costs for the Pink Limited Information tier.

So the question is what does it mean that MRCR has come back to the light with a press release and some reports.  To be clear, I have no idea so all I can do is speculate.  You should not take my guesses as fact.  The company has come back to the light but that does not mean they'll stay there.  This may be the last reports we ever see from them.

But my optimistic self thinks the old CEO is now ready to sell.  I think he stopped communicating because business conditions were bad and he didn't feel it was a good time to sell the company.  They were also shedding an unwanted division.  I bought this stock partially because I figured at some point the CEO would sell the whole thing for a couple bucks.  The fact that he's now communicating makes me think maybe he's ready.

--Dan
disclosure: long MRCR, SOFT, WPCS

5 comments:

  1. Haven't gone through the filings in depth, but at first glance MRCR is trading at ~2.5x 2016 pretax income (excluding the $1MM bad debt expense)?

    Nice find Dan!

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  2. Have you looked into the canadian nano-micro cap market? Lot's of bargains there too.

    I have been trying to look into Europe as well, but have yet to find a good screener for that.

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    1. No I pretty much stay in the US. I know a lot of micro cap people online are in Canada but I've never looked.

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  3. Just finished the financials.

    1) Actually operating margins doubled in 2016 to 3.4% comparing with ~1.40% average for 4 years before that. And in 1H 2017 they managed to keep that level. Still horrible, but looks improving :)

    2) At current price of $1.10 it is still cheap to earnings (P/E=7, P/FCF=2.5), but EV/Operating earnings is kinda rich at ~5.

    So, Dan, probably you're right, and it only makes sense to hold in hopes for a sell for smth around $2. Although I don't feel a lot of safety margin entering at current price...

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    1. Sorry, was taking about MRCR.

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