Friday, December 8, 2017

Riding the Wave of Agitation at PRAC

One thing that encourages me to buy into a stock is change. Change creates opportunity and can cause a stock to soar. It doesn’t always work out but the potential is there.

Productive Technologies Corp (PRAC) is undergoing serious change. Or at least one dissident director is pushing hard for serious change. Jesse Levine, the CFO, is fighting for control of the company with his uncle, the chairman. The company de-registered from the SEC in 2006 and vanished. The stock tanked, with a bottom of less than a penny in 2012. Out of nowhere Levine started putting out press releases in Sept 2017 discussing his desire to start a dividend and realize the value of PRAC for shareholders. Why the change of heart you ask? I don’t care. What matters is we have a large inside shareholder pushing for major change in a dead stock.

Before going further I want you to look at the chart below and let’s talk about stocks.  The de-registration in 2006 took place at 0.20. It hung out in that range for few years then dropped to nothing, sitting at 0.01 - 0.02 for a couple years. This sort of thing happens when investors don’t know if the company even exists. As of 2012 it's a stock we know nothing about; the latest info being a 10Q from 2005 showing 3M shares outstanding, $3M BV, and maybe $20M in annual revenue. There the stock sits at a penny, giving a market cap of $30k...meaning perception is the company does not exist. Would you buy that? To me it's a screaming buy even though you’ve had no update for 7 years. As long as the company is still in business that just has to be a great buy. Sometimes you have to buy based on the limited information in front of you. Fast forward a few years to 2017 and the stock now sits at $0.40 giving a 40x return!  All from a company staying in business and someone getting fed up with the stock price. How many 40x returns have your realized?!  This is why I buy the ugly stocks I do.  This is why IOMT and EKCS and the rest of them.



Back to reality. I did not buy at 0.01 because I didn’t know of this company. I recently bought at 0.35 after Levine started putting out his press releases. I have not seen financial statements. I bought because I saw a dark company undergoing major agitation. If the agitator is correct and successful then I expect to win big. If not, then…

Current Status
Levine set up a very nice website to communicate with PRAC shareholders.  I highly recommend you check it out.  There you can find his letters to shareholders, ideas for the company's future, and legal filings from the litigation.  If nothing else you have to get some confidence on the potential value by all the work and money Levine is putting into this.

You have to read through the shareholder letters.  I'll give a summary.  Levine doesn't think the current company management is doing enough to maximize shareholder value.  He thinks the company should institute a regular dividend and issue a special dividend now.  He is trying to put together a meeting.  If you are a large shareholder then he wants to talk with you.  He may get into a proxy fight and he'd like control of the company.

Levine put out the first letter on Sept 26, 2017 with the stock at $0.19.  He says he may put out a tender offer.  He lays out ideas to maximize value such as selling off assets.  He recommends hiring an investment banker to value the company and he definitely thinks there's value to be had: "If we are able to carry out our business plan for the Company, we believe the amount you could receive per share may meaningfully exceed the current PTC price per share."

The strange part is Levine is CFO of the company.  He is a co-founder!  This points to potential as well as situational craziness.  I mean who else would know the value and potential more than someone this close to the company.  He is fighting with the chairman of the board, Samuel Seidman, who is also his uncle.  Levine and his dad are "large shareholders."  Unfortunately I do not know the exact share count and inside ownership at this time.  As of the last 10k in 2004 there were 2.7M shares out and Levine owned 5% while Seidman held 9%.

Financial Statements
I have not seen any financials since the NT-10k filed with the SEC in Apr 2006 which stated annual revenue of $23M and EPS of -$0.17.  The last 10k in 2004 shows 2.7M shares, rev $28M, BV $3.3M, EPS $0.26. 

I'm not sure what financials Levine has access to and I know that's a weird thing to say about a CFO.  On his website he says 1% shareholders can fill out a form to get financial statements from them (not it!).  I emailed his website about getting financials but got no response.  His first shareholder letter says the following: "However, we currently do not have enough information to make a well-considered tender offer. We have requested PTC's financial statements. Shareholders who own at least 1% of PTC can request information about PTC and Atlas and review these financial statements. There is a form you are required to fill out. Our attorney's office (see contact information above) can assist you."  So I don't know what he has or doesn't have.  If any 1% holders out there are reading this I'd love to see whatever numbers are available. 

Levine does give us a hint on numbers in shareholder letter four.  Some quotes:
"It is our belief there are approximately two million PTC shares outstanding that are not in dispute. If this share estimate is not accurate, then values per share below could change. Also, we believe Messrs. Seidman and Stupay sought to issue themselves shares during 2016. We dispute the legitimacy of such shares and have excluded them for purposes of the value ranges below. Further, Messrs. Seidman and Stupay have disputed warrant shares authorized to me in 2012, and we have excluded the warrant shares solely for purpose of the value estimates below."

"-Factory and Equipment: Current information not yet known. Based on prior appraisals and information, we believe these assets could be worth $0.60 to $0.85 per undisputed share."

"-Ongoing operations: Current information not yet known. Assuming PTC/Atlas is earning operating income of $300,000 to $500,000 per annum, and assuming a 5x multiple, this represents $0.75 to $1.24 per undisputed share prior to debt. If operations were better managed or purchased by a strategic buyer that could build PTC/Atlas products more efficiently, the value for PTC shares could be higher."

"-Per annum salaries, wages and benefits being paid by PTC/Atlas to Messrs. Seidman and Stupay: Current information not yet known. We believe overhead for Seidman and Stupay could be $0.08 per undisputed share or more. We question the effectiveness of Seidman and Stupay and believe this amount would be better spent on operations or regular ongoing dividends to PTC Shareholders."
Litigation
There is some back and forth suing going on which I do not understand.  Levine's website has a contact form you can fill out to have his lawyer email you court documents.  I did just that and received hundreds of pages of documents.  What fun reading!...not.  I browsed through and it seems both sides are suing each other.  I can't tell who started it or exactly the charges.  I am no lawyer so if you're interested I suggest you get these documents and read up on your own. 

Here's my take.  Control of the company is at stake and I'm not sure where everyone stands.  Looks like the company was in trouble in 2011 and Levine came to the rescue with some sort of financing.  Levine claims to have been awarded 800k warrants which would be ~20% of the outstanding stock as of 2012.  Seidman says there were no warrants.  There's a lot of back and forth.  Seidman also issued himself 350k shares which Levine is not happy about. 

There were some glimpses into the financials buried in the court documents.  A blog reader was nice enough to send me some relevant quotes (thanks again Paul):
"While under Seidman’s primary control from 2000 to 2011, the value of PTC and its wholly owned subsidiary Old Atlas declined. For instance, in 1999, the net income of Old Atlas was approximately $975,000. But in 2011, the net income of Old Atlas was approximately negative $4,750,000 according to PTC’s financial statements."

"In 2010, PTC and Old Atlas lacked the working capital to satisfy their lending obligations and in early 2011, a judgment in excess of $4.3 million was entered against PTC and Old Atlas."

"For instance, in 2015, the net income of Atlas had risen to approximately $1.5 million according to PTC’s financial statements (an increase in excess of $6 million from the net income of Old Atlas in 2011)."

 "According to a Quarterly Report filed by PTC with the Securities and Exchange Commission on May 20, 2005, there were 2,747,500 shares of PTC common stock outstanding as of May 13, 2005. [...] As of February 2012, it was calculated for purposes of Jesse’s Warrant that 795,540 shares would represent 20 percent of the common stock of PTC (including the 795,540 as issued shares)."

"In March 2016, Seidman and Stupay attempted to dilute the value of shares held by other PTC stockholders by issuing new shares to Seidman (355,120 shares), Stupay (117,647 shares), and Jesse (93,516 shares) based on claims of deferred compensation from 2007. Upon information and belief, these additional shares requested by Seidman and Stupay are the basis for PTC’s claims in the District relating to shares “wrongfully” possessed by Jesse. Ignoring this incorrect and self-interested transaction, it is believed that there are currently less than 2,200,000 shares of PTC common stock outstanding."
Valuation
The question, as always, is what's the stock worth.  In this case I personally bought before seeing any financials.  I'm buying into the situation and potential.  All I know about numbers are what was last reported to the SEC in 2006 plus the bits we get from Levine's fourth letter and the court documents. 

What I see is this.  Company was able to earn $0.7M a decade ago with revenue over $20M, 2.7M shares, $3.3M BV.  Levine's fourth letter points at a stock value of $1.27 - $2.01 plus he has a lot of ideas on his website to increase value.  Court documents note Atlas (PRAC's main subsidiary) has income of $1.5M in 2015. 

I'll say stock value is somewhere north of $1 with potential for much higher.  Maybe a few bucks but we don't have that visibility.  We have to see the financials and one question is normalized earnings through the ups and downs.  Latest price is $0.40.

We have a highly motivated insider pushing hard for change so let's see how it plays out. 

--Dan
disclosure: long PRAC

7 comments:

  1. I know almost nothing about this situation, but after briefly skimming some of the legal documents I believe that there is material info here that you're leaving out and/or are unaware of:
    1) The "Levine Family" (including Jesse) appear to be being sued by Atlas for "misappropriating" a portion of a legal settlement Atlas was due to receive from General Motors.
    2) Jesse Levine was Chief Executive of Atlas before being "involuntarily terminated" in 3/2016
    3) If, as you state, the parent company "deregister[ed] from the SEC and vanished" in 2006, it's interesting that maximizing shareholder value became a burning issue for the CFO/Treasurer only years later, after he was terminated from, and became embroiled in a seemingly unrelated legal dispute with the parent company's most valuable (only?) subsidiary.

    *** This post is for entertainment value only and is not meant as legal or investment advice.

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    1. Thank you.

      I’m sure Levine is acting selfishly. It just happens that what’s good for him now is also good for minority shareholders. My feeling is he wants out and that’s fine with me. I hope he brings some light to the situation and forces some value to be realized

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    2. Btw I am sure this is not the only information I have left out. I am only outlining my thinking which is focused only on what I perceive as the main points.

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  2. This is pretty crazy and hilarious. I can't believe you invested in this, without any financials. Evidently no one would be fighting and sueing each other over no money at stake. So I get why you want a piece of the action, but nonetheless it's pretty crazy. I wonder what Buffett and Munger would say about this.

    Burty

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    1. It’s a small position. Definitely a crazy situation.

      Similar to my buy into QDLC a couple years ago

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  3. Dan -
    I actually downloaded some of the Suit from PACER. There are claims and counterclaims going on for hundreds of pages, as you said. The whole thing is super weird. Seidman btw seems to be 83 years old. It's very much a he said she said thing.

    It gets even weirder - PRAC, the Delaware incorporated owner of Atlas LLC (also Delaware), hasn't been properly registered in Michigan in over 15 years. Truly odd. I don't know where Levine gets the 1% ownership needed for financial info - this is a Delaware corp so all shareholders should be able to get info. Of course you may need to sue in Chancery court to get it..

    I think Levine is involved in automated parking garages (that's what I got from the suit).

    Anyway, it's sort of a binary bet - either it will rocket back down to 0 or go up to $1 or so if Levine gets his way.

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