Wednesday, September 4, 2019

Catching the DYSL de-Reg Drop

Dynasil (DYSL) de-registered from the SEC a few weeks ago, moving from the NASDAQ to OTC Pink.  To file the de-reg they bought out all shareholders holding less than 8k shares for $1.15, dropping common outstanding by 16%.  The company estimates a $900k annual savings from not filing with the SEC yet market cap has dropped by 35% from the day before they announced their intention.  Seems like an overreaction to me.

DYSL is a technology company.  They're push on R&D with an eye towards production. The latest 10-k notes 72 issued U.S. patents (up by 4 from the prior year) and 40 pending.  They operate in 3 business segments (from the 10-k):
Optics: The Optics segment encompasses four business units – Dynasil Fused Silica, Evaporated Metal Films, Hilger Crystals, and Optometrics – that manufacture commercial products, including optical crystals for sensing in the security and medical imaging markets, as well as optical components, optical coatings and optical materials for scientific instrumentation and other applications. 
Innovation and Development: The Innovation and Development segment (formerly known as the Contract Research segment) consists of the Radiation Monitoring Devices, Inc. (“RMD”) business unit, which is among the largest small business participants in United States (“U.S.”) government-funded research. 
Biomedical: The Biomedical segment consists of a single business unit, Dynasil Biomedical Corporation (“Dynasil Biomedical”), a medical technology incubator which owns rights to certain early stage medical technologies.
Their single largest R&D project up until a year ago was Xcede.  They formed a JV with the Mayo clinic in 2013 to commercialize this tissue sealant patch.  Unfortunately it didn't work out with the company finally closing the division in July 2018.  You can see how pleased the market was in the chart.  


I excitedly bought up shares in Dec '18/Jan '19 following the big drop and I wasn't the only one.  The CEO bought ~2M shares at $1 in Dec 2018 over the course of a couple large transactions.  I saw the Xcede cancellation as a blessing in disguise because it was costing the company a million per year.  I bought in hoping the company would turn those savings into profit.  

As the stock climbed back into the $1.20's I thought the gap would fill then the company announced their intention to de-register from the SEC.  Something I'm all too familiar with.  They estimate $900k annual savings so I can see their point of view.  I wish the SEC would give these small companies an option to stay reporting while saving money.  That put a stop to the stock rise pretty quickly.

The chart shows you just how the market feels about going dark.  I think this drop is a gift.  Apparently the CEO agrees as he bought 20k more shares just a few days ago.  With the de-registration we have forced selling by those who are not allowed to hold OTC or non-SEC reporting companies.  We have others deciding to get out because it's now a "risky dark stock".  The shareholder base is transitioning.  

Now the stock trades on the OTC Pink Current Information tier but I'm not sure it'll stay.  We may end up with a stop sign and movement to the Limited Info tier.  I hope they keep communicating and they said they would, but I wouldn't hold my breath on quarterlies
We intend to continue to prepare audited annual financial statements and periodic unaudited financial statements and plan to make available to our stockholders audited annual financial statements only. Nonetheless, Continuing Stockholders will have significantly less information about the Company and our business, operations, and financial performance than they have currently. We will continue to hold stockholder meetings as required under Delaware law, including annual meetings, or to take actions by written consent of our stockholders in lieu of meetings.
To accomplish the de-reg the company had to get below 300 shareholders "of-record" so they did a split and bought out all shareholders holding less than 8k shares for $1.15.  It was a reverse split then buyout then immediate forward split so in the end it amounted to a tender offer.  DYSL ended up buying back 2.8M shares, 16% of the common, for $3.2M.  Bank loan funded.

Financially I see the de-registration as a home run.  I thought it was a $2 stock beforehand so buying back 16% of the company at $1.15 is great.  And who can argue with saving $900k per year.  

The chart below shows my main reason for being here.  This is their annual earnings for the past 8 years.  "net earnings" is from the 10-k as is "Xcede" earnings.  I add those together then subtract out their estimated de-reg savings and divide by the new share count.  I'm not saying this is exactly what the company will earn and this is not a projection.  This is potential.  We have a company that could have earned ~$0.20 per year for the past 5 years with the measures now in place.  And it's trading in the low $0.80's!


The icing on the cake is real estate.  DYSL owns 3 buildings.  Unfortunately the company does not have current appraisals for them so I did some digging myself.  I am no real estate expert so take my estimates as junk but at least it's something.  I just compared similar buildings for sale in the area.  I get $4.5M total real estate value = $0.30 per share.  
  • 385 Cooper Road.  West Berlin, NJ 08091.  Manufacturing and office facility consisting of a one-story, masonry and steel building containing approximately 15,760 square feet.  "original to the corporation, prior to current records, but built in approximately 1960. The address at the time it was constructed was actually 195 N. Cooper Road, Berlin, NJ. The area was subsequently rezoned."  I estimate $1M value.  
  • 239 Cherry Street.  Ithaca, NY 14850.  A two-story, 44,000 square foot manufacturing and office facility. Received when purchased EMF in 2006. I’ll go with $2M value. 
  • Unit R1 Westwood Estate.  Margate, Kent CT9 4JL.  United Kingdom.  A two-story, 17,000 square foot manufacturing and office facility.  Got this one when purchased HILGER CRYSTALS LIMITED on July 19, 2010.  My estimate $1.5M value.  

Let's talk numbers.  
  • 14.8M shares common following the de-registration
  • stock price $0.805
  • market cap $11.9M
  • BV $22.3M in 2018 vs $20.4M in 2017
  • rev $40.7M vs $37.2M
  • net income $1.8M vs $2.2M
    • see my table above for what it could have been 
  • no preferred or warrants
Valuation:
As reported by the most recent 10-k, the stock is trading at about 1/2 of book value, 1/4 of sales, and 6x earnings.  My table shows the company could be earning $0.20 which would put us at 4x earnings.  We have $0.30 in real estate.  For a price of $0.80.  

That's fundamentals and it's fine but we have to consider the other half of the equation.  The stock market is all about perception and extrapolation.  Fortune telling.  Look at the chart.  How it dove down following Xcede's demise.  How it dropped after the SEC de-registration.  This is forced selling on top of people giving up.  The stock sits at support.  This is a buy point.  




I don't see how the stock is worth less than a couple bucks and I think it'll recover to over $1 as the de-registration forced selling fades away.  I see potential for much more.  The products, divisions, and market is exciting.  This is one of those companies that could hit an R&D home run.  "Could" being the key word there...

Risk:
Let me leave you with the all important topic of risk.  Main one to me is the company never communicates again.  They say they will do annuals but who knows.  Or maybe they just don't know what they're doing, after all they spent years pursuing Xcede and nothing came of it.  Could be the de-registration selling is not done and the stock continues its fall.  

--Dan
disclosure: long DYSL

11 comments:

  1. If you take the last 4 quarters, earnings amount to 600k (-263k + 76k + -93k + 880k). So Price to current earnings ratio is 11.9 M / 0.6 M = 20.
    Operating cash flow was negative. It seems that the earnings trend is negative. Probably this explains why the stock trades for 80 Cents.

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  2. Hi Dan,

    I took a quick look at this, but I think you shouldn't ignore the results from the 3rd quarter of 2019 that was released a few days after the completion of the tender offer. I suspect those (bad) results have more to do with the current price than selling because people don't want to own this anymore. In the last three quarters the company didn't spend a significant amount of money on the Biomedical business anymore, but at the same time earnings were almost zero.

    Also, adding back the full $900,000 in costs savings is a bit too optimistic because the company will incur significantly higher interest expenses because they had to incur quite a bit of debt to repurchase all those shares. Additionally, perhaps we should think about taxes as well at some point, even though they seem to have a lot of tax assets currently.

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    Replies
    1. The stock was flat for a month prior to that 10Q and a few days afterwards. Then it dropped 10% the day form 25 was filed. Since Form 25 volume has picked up significantly and it dropped another 20%. That's what I'm looking at

      For sure we can't just add back the whole $900k estimated savings and similarly we can't add back the Xcede costs. I was just trying to say the company has some wind at its back with these items

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  3. Would exclude goodwill from book value. Probably tax asset as well, on the logic that i) if we're looking at downside protection from balance sheet, the tax asset is likely lost and ii) you're not tax-effecting your earnings #s. Which gets you to market cap roughly equaling tangible book value, even before any other haircuts.

    Those adjustments notwithstanding, am torn on the idea. Always intrigued where insiders may see value. Just wanted to flag the BV issue.

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    Replies
    1. yeah. that's why I highlighted the real estate as something they hold with more hard value

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  4. I don't have any objection to buying dark companies, but what I do object to is a CEO that lives in Naples, FL (per LinkedIn) despite all the company's facilities being in the Northeast. Even more, the company pays for his (long) commute and away-from-home living expenses! A high price to pay for a CEO that hasn't had a successful tenure. I also agree with Alpha Vulture's comment above that Q3 earnings look bad...as perhaps would be expected for a company that has decided to voluntarily go dark.

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    1. As far as volunteering to go dark, I don't reach much into it. It's a lot of work on their side, they don't see the benefit, and costs them a lot of money. From my side as a shareholder I see the good and bad. It can work out but may not. gives them more opportunity to hide shady stuff and disappear...

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  5. Maybe you've seen QCCO before. The company is dark but still publishes financials. Based on the current Q1 2019 quarter, the following figures result: Book value 38 millions, profit 210k (3 months), turnover 26 million (3 months), operating cash flow 6.7 Mio. (3 months). Turnover and profits did go up compared to prior year but the stock price did not react yet.
    For a market cap of 7.5 Mio, this stock is pretty cheap.

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    Replies
    1. I looked at that one a couple years ago when it was written up here: http://deepvalueideas.com/2016/01/26/qcco/

      I don't own any. May look kinda cheap. Just doens't excite me.

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  6. Thanks for the update and heads up. Paybox had some similarities and ended up being a total home run.

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