PFIC… What was that again? — A double-edged sword

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

Conolly_SINKEX-300x272

My recent posting about MER Telemanagement Solutions, an Israel based technology company whose equity, MTSL, is traded on Nasdaq, resulted in some questions from readers of the blog.

In the posting (read it here,) which broadly speaking discussed MER Telemanagement Solutions’ quarterly earnings announcement in which the company announced (1) a new high in cash (and cash equivalents) on hand almost exclusively on the strength of a very profitable contract with Simple Mobile, a West-coast based MVNO whose managed services contract with MER Telemanagement Solutions had generated a guaranteed $300 thousand in revenues and cash every month throughout MER Telemanagement Solutions’ fiscal 2013 year; and (2) the end of this revenue and cash stream, effective as of December 31st, 2013.

In my posting, I pointed out that the straightforward economic loss of the Simple Mobile contract coupled with tremendous expenses related to capturing and launching new customers to replace the loss of the contract could hit MER Telemanagement Solutions and MTSL in ways that had the potential for simply bleeding MER Telemanagement Solutions out:

Also, with the loss of the contract revenue and its high margin there is now, I believe, a substantial risk that the company will be considered a PFIC by the IRS of the United States with serious tax implications for common shareholders in the United States. As the company wrote in its 20-F filing for its 2012 fiscal year:

We may in the future be classified as a passive foreign investment company, or PFIC, which will subject our U.S. investors to adverse tax rules.

This comment caused a couple of comments and questions to arise, intensifying as the per share price of MTSL inexplicably started rising when it should, in fact, decrease, reflecting the potential for loss in the first quarter.

Sidenote: I say inexplicably, but that is not really so. In fact, the price was rising, I believe, as part of a deliberate pattern of stimulating buys intended to pull a number of loss positions out of the fire (due to a series of speculative run-ups and subsequent implosions in the per share price of MTSL over the last year the majority, if not all, of the true free float of MTSL is seriously under water.) However, we will let this lie for now as it has only a tangential connection with the issue of PFIC, which is the point of this posting.

Let me attempt to address these question here (spoiler alert: A PFIC classification of MER Telemanagement Solutions may be really bad news for current United States based holders of MTSL shares and may adversely and seriously impact the per share price of MTSL.)

PFIC is shorthand for Passive Foreign Investment Company, an oddity in the United States tax code that was introduced because the United States Congress was concerned that persons investing in passive assets indirectly — through a foreign investment company — could gain a tax advantages relative to persons investing in the same assets directly.

The resulting law attempts to eliminate this problem, but, unfortunately, also have the potential to impact genuine foreign operating companies, for instance companies that are earning substantial passive income (such as a company that has a large war-chest, generating income.)

The way the law is written it attempts to identify a PFIC by way of two criteria. Either 75% of its gross income is passive income or more than 50% of its assets generate passive income.

I am grossly simplifying here, but if you read my previous postings, I am sure that you can see that there is a real possibility of MER Telemanagement Solutions being categorized as PFIC given its cash position (the result of cash gushing out of Simple Mobile for three years) and its off-the-cliff drop in revenues and income.

For MER Telemanagement Solutions itself the classification as a PFIC will really have very limited direct implications, but for United States based shareholders in MER Telemanagement Solutions it gets complicated and dirty very quickly.

First, any gain recognized by the shareholders becomes subject to ordinary income rates, rather than capital gains rates (a vast difference) and — hold on to your pants here — the gain is subject to a non-deductible interest charge over the holding period for the shares.

And it doesn’t end there. In special cases the income tax rate assessed will not be the United States based shareholder’s “normal” tax rate, but, rather, the highest marginal income tax rate in the United States.

It may be worth saying this again: Rather than paying between 15% and 20% in gain tax, United States based shareholders will be paying between 30% and 40% and they will be paying interest on the gain (deemed interest, in fact!)

Second, there is a paper burden here that is well beyond the casual investors, traders, and speculators (I, unfortunately, do not believe that casual investors, traders, and speculators are plagued by detailed knowledge of the environment that they are operating in, which, of course is why they a-l-w-a-y-s lose money in the market.) Essentially, he or she must make a baffling election between mark-to-market or qualified electing fund treatment, both of which are just as confusing as they sound and require certain detailed disclosures by the PFIC (good luck in getting a company to provide disclosure beyond what it has provided in its filings with the SEC.)

How bad is PFIC classification for a United States based shareholder? Well, I think it is very bad. In fact, I think the acronym PFIC was chosen by some fiendish soul in United States Congress with a twisted sense of humor because it also is the acronym for Progressive Familial Intrahepatic Cholestasis, a very nasty liver disease, to signify precisely how bad it is.

I said before that for MER Telemanagement Solutions itself the classification as a PFIC will have very limited direct implications. Likewise, the classification will not have any direct implications for MTSL shareholders that are not based in the United States. However, the operative word here is direct.

A classification as an PFIC is adverse and will make any sensible investor think twice before he or she invests in MER Telemanagement Solutions by way of MTSL, and, so, we have an indirect effect on both MER Telemanagement Solutions and its non-United States based shareholders in that the price per share of MTSL will drop — perhaps a lot!

The irony should not escape us here. The successful looting of Simple Mobile and accumulation of loads of cash may very well be a textbook case of a Pyrrhic victory.

Yes, that’s also a beaut of a double-whammy. First, a drop because of the changes in the fundamentals and, second, a further drop because of a perverted tax treatment.

Now, over time, the PFIC issue will, of course, go away, since, in all probability, MER Telemanagement Solutions will start bleeding, rapidly eating away of the cash (and cash equivalent) asset that is the underlying problem. But, as a solution there is not much comfort to be had here, I think.

Perhaps this is why the company was talking about M&A alternatives in its earnings report? Well, this is certainly going to be interesting!

Donations, please….

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Breaking, pre-open news — MER Telemanagement in near extremis

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

??????????????????Breaking pre-open news

Yesterday, after the close of the market, MER Telemanagment Solutions, an Israel based technology company whose equity is traded on Nasdaq, reported its fourth quarter and full year results for the company’s fiscal year 2013, and, frankly, in my opinion it is not looking good.

As the reader of this blog will know I have followed MER Telemanagement Solutions and its equity MTSL, for a while now, noting since the outset that the loss of the Simple Mobile contract constitutes a clear and present danger to the company and its shareholders. If you are new to this issue, you can start reading here and go backwards or you can use the nifty XREFs section to here.

Revenues and operating profit are down significantly year-over-year and net income was down $1 million to $1.4 year-over-year when accounting for a one time $1 million tax charge in the company’s fiscal year 2012.

The $1 million one-time charge in fiscal year 2012, which somewhat masks the enormous drop in net income in fiscal year 2013, was described in the company’s 20-F filing for the 2012 fiscal year:

Taxes on Income.

We recorded taxes on income of $736,000 for the year ended December 31, 2012, compared to taxes on income of $10,000 for the year ended December 31, 2011. Our taxes on income for the year ended December 31, 2012 are primarily attributable to a $1,050,000 charge related to the tax assessment from the Israeli tax authorities relating to an Israeli court’s decision with respect to our 1997 to 1999 tax years, net of a deferred tax asset recognition of $371,000 based on an estimate of future taxable profits and losses in the tax jurisdictions in which we operate, which is expected to be utilize in the foreseeable future. Our low level of taxes on income for the year ended December 31, 2011 is primarily attributable to the utilization of deferred tax assets by our subsidiary in Hong Kong and the state income taxes in the U.S.

Moreover, in the current earnings release the company confirmed that the fourth quarter marked the end of the revenue contribution from the all-important Simple Mobile contract, so, going forward, each fiscal quarter will have $900 thousand, or so, less in revenue and perhaps $450 thousand less in net income, which most probably will result in a loss in each quarter.

Also, with the loss of the contract revenue and its high margin there is now, I believe, a substantial risk that the company will be considered a PFIC by the IRS of the United States with serious tax implications for common shareholders in the United States. As the company wrote in its 20-F filing for its 2012 fiscal year:

We may in the future be classified as a passive foreign investment company, or PFIC, which will subject our U.S. investors to adverse tax rules.

Holders of our ordinary shares who are United States residents face income tax risks. There is a substantial risk that we may become a PFIC. Our treatment as a PFIC could result in a reduction in the after-tax return to the holders of our ordinary shares and would likely cause a reduction in the value of such shares. For U.S. Federal income tax purposes, we will be classified as a PFIC for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, cash is considered to be an asset which produces passive income. As a result of our relatively substantial cash position at the time, we believe that we were a PFIC in certain periods over the last few years under a literal application of the asset test described above, which looks solely to the market value of our assets. We do not believe that we were a PFIC in 2012. If we are classified in the future as a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules.

The company’s earnings release contained no indications of cost-control measures or new deals, relying rather on the tired we-see-opportunities approach that we have seen from previous quarterly announcements and that I commented on in an earlier posting (here):

In fact, ever since the termination of the Simple Mobile contract was announced it has been clear that the company … is heading directly for exsanguination.

To avoid death, immediate action is needed on two simultaneous fronts: New sales and cost control.

The instinct in a tech company is to overcome a revenue crisis by bringing in new revenues. However, given the sales cycle time for enterprise software sales and the trailing revenue curves for managed services sales, the company’s areas of expertise, the pursuit of additional revenues alone is not going to solve the problem. Rather, the company has to immediately reduce its expenses while, at the same time, building up its sales effort.

Instead of addressing the situation heads-on in its first quarter earnings announcement, the company engaged in some sort of combined danse macabre and tap dance, which I certainly did not find reassuring.

It is hard to give the casual reader a sense of just how catastrophic the loss of the Simple Mobile contract coupled with the company refusal to reduce cost and it hell-bent pursuit of new business at great expense and risk is (read here about how bad it can get when you engage in what I consider to be reckless pursuit of new deals instead of buckling down down and controlling expenses,) but perhaps this table — greatly simplified and making sweeping assumptions where information is not available — can provide some insight:

(c) Per Jacobsen, 2013 and 2014. All rights reserved

(c) Per Jacobsen, 2013 and 2014. All rights reserved

As you can see, the Simple Mobile contract’s revenue and margin contribution was integral to the company’s performance and without it, the company will be hemorrhaging.

Acknowledging this imminent distress, which is now so obvious that no amount of voodoo or fancy leg-work will make it go away, the company closed its earnings announcement by stating that it is considering M&A options at this point, which I interpret to mean that either a fire-sale or a last-ditch clutching on to another company for buoyancy may be imminent. Either way, focusing on M&A — which, as we, know is associated with huge transaction costs and enormous risks — is bad news for the shareholders, I think.

The company did not offer any details about an upcoming earnings call in its earnings release.

Given the excessive — and completely unsubstantiated — speculative run-ups that have taken place over the last year (read more about this by starting here,) there is absolutely no way to predict what will happen to the per share price of MTSL in the very short run, but I am fairly certain that in the near and medium term, once whatever silly movement the market will make today and over the next week has completed its cycle, we will see another substantial drop in the per share price.

I would be remiss if I did not issue an early warning as well. Based on historic developments, I am fully expecting another SeekingAlpha article to arrive soon with unpredictable results (read about the previously published MTSL-centric SeekingAlpha article by Mr. Sujan Lahiri (here) — in my opinion, a prime example of bad research, wrong conclusions, and biased research aimed at generating a short-term run-up in the per share price of an equity.)

It appears that it is time to fire those emergency flares.

Donations, please….

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No Comment: What speculation looks like — MTSL/MER Telemanagement

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

Revenue and margin drop off — Volcano eruptions in per share price

MTSL chart R-O-O chart3

And… From the company’s 20-F filing for fiscal year 2012:

During 2012, Simple Mobile was acquired by TracFone and in October 2012, we renewed our agreement with them to provide for minimum monthly payments of $300,000 during the year ending December 31, 2013. Recently, we were advised that TracFone intends to migrate the hosted billing services to their own platform. It is unlikely that we will receive significant revenues from TracFone in 2014, which will adversely affect our operating results.

And… extracted from the company’s 20-F filings from fiscal years 2008 through 2012:

2010 - 2012 Revenues MTSL -- Adjusted

References

Recognizing Speculation in Equities – MER Telemanagement Solutions redux
Chicken coming home to roost
The sting of the scorpion – MER Telemanagement Solutions proves me right… again
Stand Fast — The near-final chapter of the saga of MER Telemanagement Solutions

Dont be a Mooch!

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Chicken coming home to roost

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

1a34430vAs a general rule, I do not allow myself to be possessed by the common market maker conspiracy theory, the rampant paranoid notion that market makers manipulate stocks for their own gains.

Likewise, I don’t allow myself to be carried away in the pump and dump hysteria, where any momentum in a stock is followed by amateur speculators, traders, and investors yelling foul.

However, I do believe that there are equities that are extremely susceptible to manipulation, such as MTSL, the equity of MER Telemanagement Solutions, which I have written extensively about in this blog (refer to the XREFs section for more information about MER Telemanagement Solutions.)

The epicenter for such manipulation is frequently SeekingAlpha, because, as I wrote in a recent posting about a particularly unfortunate SeekingAlpha article that appears to have had a pumping effect on MTSL (here,):

…to achieve a run-up, we need information dissemination on a vast scale. Simply put, we need a channel — preferably one that provides indiscriminate and rapid access to mainstream online media.

SeekingAlpha, through its direct feed into other news streams, is such a channel. For instance, articles written on SeekingAlpha gets replicated in the Headlines section on the associated equity page on Yahoo Finance, providing not only near-instantaneous distribution, but also an air of credibility that alternative channels, such as investor and trader newsletters, cannot achieve.

The bumpy road for Mr. Sujan Lahiri

My posting was not written in a vacuum. I had been commenting on the SeekingAlpha article, which had been written by some hapless fellow named Sujan Lahiri, pointing out that the article was factually wrong on a number of counts. Mr. Lahiri, in turn, had initially attempted to respond in a calm and objective manner, but eventually got exasperated and started accusing me of being a bear.

Here is Mr. Lahiri’s last response to my probing comments:

You seem to be very bearish about MTSL. Instead of me writing a new posting, why don’t you write your own article and get it published on this website? If done well, SA might pay you $150, and shares MTSL could drop. Let the market decide.

This comment is extremely interesting — not just because of its infantile nature, which collides head-on with Mr. Lahiri’s attempt to come across as a mature value investor, performing in depth analysis, but also because it reveals that Mr. Lahiri is focused on writing for money, apparently banking on receiving the $150 per article that SeekingAlpha guarantees plus whatever reader-count based commission he can get.

In my posting about Mr. Lahiri’s article, I had shown him the courtesy of not assuming that his intent in writing the article was less than honorable (as I have written about in the past, as a matter of universal truth, when you see people doing or expressing something that is obviously wrong, then the only question is one of whether you are dealing with a crime or stupidity,) but, frankly, his comment about the $150 coupled with an earlier observation in his article, stating that he had taken a position in MTSL before publishing his SeekingAlpha article, makes me feel not so sure as to what side of the criminal/stupid seesaw he belongs to.

As I showed in my posting it is relatively easy to demonstrate that Mr. Lahiri’s SeekingAlpha article is less than a master-piece, and in my comments on SeekingAlpha I had pointed out four things that, right of the bat, were factually incorrect in the article:

  • MTSL is not the leader in the space of companies that serve MVNOs. Far from it i, in fact. Ask ourself who services Traq, or, for instance the large Italian MVNOs. MTSL is a bit player in the MVNO/BSS space.
  • The price did not slide from +$5 because of the tax issue, but, rather, because of the loss of the ONLY MVNO contract it had, and, also, the one contract that provided substantially 25% of the revenues and ALL of the margin.
  • Addition of more MVNO/managed services contracts will not swing the company to some incredible EPS immediately, even if these contracts are withe large MVNOs. In fact, it will take years for the contracts to provide material contributions and, in the short to medium term, they will actually hurt the margin — perhaps even considerably.
  • The marque customers quoted are on the TEM side, a business segment that, at best, is static, and, in fact, according to the company is declining. Moreover, to mention these companies is like Dunkin Donuts announcing that it has sold one donut to an employee in GE.

These factual problems where never addressed by Mr. Lahiri in his comment section, and, in fact, in his comments he addressed precisely zero of the deficiencies that were identified by readers of his article.

What he did do was pull a Halo Effect out of his hat, claiming that the — highly speculative — market’s reaction to his posting was prima facie evidence that his article was accurate:

I guess the market agrees with me, shares are up 25% since publication of this article.

This is, of course, abject nonsense, mostly similar to a pyromaniac setting a house ablaze by pouring 20 gallons of gas on the structure and lighting a match and then claiming that the resulting wholesale destruction of the house demonstrates that it was a fire-hazard. Just plain idiotic.

The article’s aggressive pumping (clearly visible even in the article name which included the terms “Low Downside, Multi-Bagger Upside”) did indeed result in a significant jump in the per share price. However, as it is always the case when the market reacts to shaky information, the chickens did eventually come home to roost, and as of 11:30 a.m., EST, today, Januar 27th, 2014, the per share price of MTSL is, in fact a full 10% lower than it was on November 19th, 2013, the day that Mr. Lahiri posted his ill-intended or ill-thought-out article.

So, with some glee towards Mr. Lahiri (but no prejudice or malice towards MER Telemangement Solutions, MTSL, or investors in MER Telemanagement Solution,) I allow myself to stoop to an infantile level and say: I guess the market agrees with me, shares are down 10% since publication of Mr. Lahiri’s article.

Back to MER Telemanagement Solutions

The drop in per share price accelerated when MER Telemangement Solutions recently announced that a three-year commitment contract from third quarter of 2013 had been terminated (read more about this in a recent posting, here.)

This event, the taking-on of a service contract that, apparently, was highly risky should give the company’s board of directors pause. For, as I wrote in the posting in which I dissected Mr. Lahiri’s article:

And it gets worse… For one has to ask why it was not possible for the company to sell additional MVNO/managed services contracts or, for that matter, MVNO/cloud or mobile banking solutions over the last three to four years, and, then, suddenly, when the Simple Mobile contract is in the wind, deals starts pouring in. One possible answer, and it is a nasty one, is that the company has become less picky and more willing to, on a deal-by-deal basis, run risks related to the three dimensions that we spoke about above: 1) revenue profile, 2) costs, and 3) risk.

Customer acquisition is a difficult discipline, but it gets somewhat easier if you abandon all risk management. However, as any operating executive will tell you, once you abandon risk management in order to increase the pace of bookings, you are set up for a serious beating.

For MER Telemangement Solutions, the first round of the beating is already being doled out, but there may be more beatings to come.

First, it is not yet clear if the termination of the three-year contract constitutes a clean break with each party owing the other party nothing, and, second, it is not clear whether MER Telemanagement Solutions has to make adjustments to its results to account for the terminated contract.

The first question is at its roots probably a question of contract law and who did what to whom and who was hurt by whom… Hopefully, it will be an amicable dissolution. If it is not, the two companies can end up in some nasty litigation.

The second question is on of how the deal was treated in the results for third quarter, I think, since (and I am going from memory here) the deal was struck in September of 2013 and announced in October… Hopefully, the deal was treated in a straightforward manner and the accounting impact will be minimal.

These two questions unfortunately goes to the heart of two other matters. The first matter is how much unrecoverable expenses MER Telemanagement Solutions took on to win and service the deal. The second matter is whether or not the securities class action lawyers will begin circling around the company once the fourth quarter results are announced.

One thing is for sure. The company has to be more careful about who it signs up for its managed service offering — particularly given the fragile state it will be in after having lost the Simple Mobile contract, potentially affecting perhaps 25% of its revenues and more or less all of its gross margin and net income.

And now for something completely different…

The above is pretty heavy stuff, so, while we are on the subject of chickens, I invite you to visit an earlier posting in which I discussed chicken crossing the road à la Hemmingway, Niccolò Machiavelli, and Jacques Derrida (here.)

Participate, please….

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Favorite postings?

Having posted a list of this blog’s five most popular postings in 2013 (here,) I received a couple of inquiries as to which of the 2013 postings were my favorites.

So, without further ado, here is my list of this blog’s eight most interesting postings in 2013 (yes, I suffer from Perfect Child Syndrome and, am, therefore, unable to limit myself to five postings):

  • A $350,000 house for a nickel down — FORTY does it again. A posting that, among other things, discusses the liquidity issue inherent in FORTY, the equity of Formula Systems, and points out how ridiculous the trades in the equity by offering the reader the opportunity to for a payment of only less than $1,000 buy either the new One World Trade Center in Manhattan or a Nimitz class carrier (find it here)
  • Grundsaudaag — It is happening again. A posting that discusses the effect of a (badly written, badly researched, and pretty much wrong on all points) SeekingAlpha article on the per share price of MTSL, the equity of MER Telemanagement Solutions (find it here)
  • Fabergé egg in the rubble. A posting that illustrates how careful reading of filings with the Securities and Exchange Commission is not a waste of time (find it here)
  • Terminal endings — murder and suicide. A posting that discusses a murder at AOL’s Patch subsidiary and a meticulously planned, executed, and documented suicide in Kansas City (find it here)
  • Question of the week — Busyness in business. A posting that discusses the true level of executive busyness (including that of Ms. Sheryl Sandberg, as of this week a billionaire,) which may, in fact, be an urban myth (find it here)
  • Handguns, amputation, and silence. A posting about powerful revolvers, ballistics, and the power of escaping gas (find it here)
  • Pushing that button… — The bigger picture of the 2013 ClickSoftware proxy. A posting about the apathy of investors and the considerable potential power that they have, but refuse to wield (find it here)
  • Violence and overwhelming rapid force — Heinz Guderian. A posting about General Heinz Guderian, Apple, and the power of the schwerpunktprinzip (find it here)

All right… For the sake of completeness is my list of this blog’s six most interesting postings in 2012 (“why six?” you ask? “I don’t know,” I say):

  • Fiscal Cliff and NASCAR? A posting about the disgraceful American Taxpayer Relief Act of 2012 (H.R. 8) (find it here)
  • Pearl Harbor and 9-11 — Teaching your enemy how to fight. A posting about how Pearl Harbor, kantai kessen, 9-11, and the education of your enemies (find it here)
  • Pursuit to the Point of Failure — Catastrophic turning points in war and business. A posting about Napoleon, Moscow, Boridono, Stalingrad, and IBM (find it here)
  • Web-sites Getting 12 Billion Hits in Three Months — No, it is not Yahoo, Facebook, or Google. A posting about the National Weather Service, a mission-critical government agency under constant lobby assault (find it here)
  • Adlertag — Meritocracy be damned. A posting about the Battle of Britain and the colossal blunder of the hapless Colonel Joseph Schmid, Luftwaffe’s chief intelligence officer (find it here)
  • Olympic$ — Chasing the gold. A posting about the pursuit of gold and dollars at the Olympics (find it here)

Time to top up your contributions.

With the new year rolling around (and new subscription expenses emerging!) I want to encourage you to support the blog. $20 is a good amount, but if you are strapped after the holidays, you may want to consider something less. Any donations are welcome, and, as usual, you can contribute via PayPal:


Action!

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

4976468511_5a6f17288b_oToday was a crazy day with two monumental events unfolding at warp speed.

First, the trading volume for MNDO, Mind CTI’s NASDAQ traded equity, increased dramatically, possibly reflecting very good news from the company and the expectation of another dividend in the 10% yield class.

Second, MER Telemanagement Solutions fell flat on its head again, announcing the cancellation of a three year contract that it had entered into in the third or fourth quarter of its 2013 fiscal year, causing a near-immediate drop in the per share price of its equity.

Mind CTI

I have written extensively about Mind CTI, an Israeli company that I follow with a lot of interest – primarily because I think that MNDO, the company’s equity, yields a significant earnings opportunity for myself, but also because the trading patterns that were found around MNDO in relation to the annual dividend payouts by MIND CTI during the period from 2009 through 2012 (but, I hasten to say, are no longer be in effect) are intellectually interesting.

If you are new to Mind CTI go to my recent posting about Mind CTI’s third quarter (here) and work your way back through earlier postings to get a sense of why I think MNDO is a gem.

As I wrote in an earlier posting (here,) long time followers of Mind CTI and MNDO were watching for two inter-connected issues as the company closed out its third quarter:

First, there will be a focus on net income, with the expectation that third quarter earnings for fiscal year 2013 will dictate the disposition of the annual dividend (Mind CTI has what is perhaps the strongest dividend track-record of any technology stocks in the market today, and, accordingly, its investor base is extremely stable — read more about Mind CTI’s dividend here.) Second, there will be a focus on the progress made on the acquisition and the obvious question of whether or not Mind CTI, which has strong cash reserves and strong free cash flow, can achieve a meaningful acquisition while maintaining its dividend track-record.) Currently, however, the consensus appears to be that almost regardless of the quarterly results, the per share price of MNDO will begin an ascent after or around the day of the earnings release with the only question being how radical this ascent will be.

As I wrote about in the posting discussing the third quarter’s results (here,) the company addressed both these issues in its earnings release for the third quarter of its 2013 fiscal year, confirming its intent to issue a dividend and undertake an acquisition.

And that would have been enough to make anyone who were following the company sit up and pay attention. But, wait!, there is more!

One of the key challenges facing MIND CTI in 2013 was the loss of some key high margin contract, impacting five to ten percent of the company’s revenue and, of course, the company’s gross margin.

The company responded to this challenge in a most unusual way, increasing its staffing profile, gambling that if it increased its staffing it could attract more work and, therefore, generate more revenue, and, eventually, make up for the lost margin.

Increasing your burn while increasing profitability is a tall order and certainly not something that most companies could pull off. But Mind CTI is not most companies and on December 23rd, 2013, the company released a press release with the excellent news that the strategy appears to be succeeding and had lead to two “meaningful” wins:

“We are pleased to announce these two new important wins. For the last few years we have focused on preparing the company for such potential wins. We have maintained a global presence and have increased our workforce to enable support of these larger prospects in our pipeline as they turn into new projects. These latest wins show how MIND’s solutions are gaining market share”, said Monica Iancu, President and CEO of MIND CTI. “We continue to experience increased interest in our solutions and we expect to meet our goal of internal growth.”

If you had snoozed through the third quarter announcement, then now was the time to pay attention.

And today somebody did. In the 11:30 a.m. to 4 p.m. trading window, close to one million of the outstanding MNDO shares were traded, causing an 8% spike in the per share price. This volume should be contrasted to an average daily trading volume of less than 50 thousand shares and a float of slightly less than 19 million shares.

The effect was immediate and noticable. For my portfolio, for instance, it caused a near-immediate leap of more than $40 thousand, a tidy sum by any standard.

Much of the gain would disappear later in the day. An interesting fact in itself — for what does it signify when a buying frenzy does not create a sustainable increase in the per share price?

Something was definitely cooking with MNDO today, and I can’t wait to see what happens next.

MER Telemanagement Solutions

MER Telemanagement Solutions is another Israeli company that I follow with great interest and that I think could eventually, over time be an interesting investment object.

However, while Mind CTI is a paragon of virtue when it comes to communicating in an open and straightforward manner with its investors and, so to speak, talking-the-talk-and-walking-the-walk, MER Telemanagement Solutions is an investor’s worst nightmare, a company that is oblique in its communications.

As I have written about in the past (here,) I believe, in fact, that the company’s communication style has the potential to seriously hurt the company in the long run, exposing it, among other things, to litigation and market speculation risks.

And that is really a shame since the company, in my view, has potential for carving out a nice little niche in the OSS/BSS marketspace addressing MVNOs and MVNEs.

The communications issues range in scope, but regardless of how small or large they are, they are consistently adding unacceptable risk to any investment thesis that could be applied to MTSL, the company’s equity.

Today marked another milestone in MER Telemanagement Solutions seemingly endless history of communications issues. Having announced the signing up of SBC Communications, LLC, a somewhat mysterious communications outfit out of South Carolina, for a multi-year contract on October 15th, 2013, the company today announced the termination of the same contract, noting that the agreement was being terminated because of SBC Communications, LLC’s failure to fulfill its obligations.

The original announcement had been a bit awkward, because of SBC Communications, LLC’s similarity in name to SBC Communications, Inc. (now AT&T) and the press release’s reference to SBC Communications, LLC as a “… large U. S. based service provider of internet, cable TV, home phone and wireless services,” probably stretching the definition of large quite a bit, since, in my book, Verizon is large, but SBC Communications, LLC is not and may, in fact, be very small (for a quite similar issue with DataXoom, another MER Telemanagement Solutions’ customer, read my earlier posting here.)

This awkwardness, however, pales when compared to this new announcement, telling us that the deal, which had propelled the per share price of MTSL from $1.85, or so, to approximately $2.75, was, in fact, dead as a door nail.

Naturally, today’s announcement caused a significant drop — OK, more of a freefall — of the per share price of MTSL, erasing almost 15% of the capitalization of MER Telemanagement Solutions in a blink of an eye.

Now, granted, the deal was never with AT&T, and, as they say, caveat emptor, but, still, this is just plain embarrassing, not to say costly to a lot of traders and investors.

Moreover, with today’s announcement, the per share price is effectively back at where it was at in the third quarter of last year, which is hardly satisfactory.

But it gets worse. With this misstep (and possible accounting ramifications) and the expected terminal events for a contract with Simple Mobile contract (read more about this here,) the fourth quarter of the 2013 fiscal year and/or first quarter of the 2014 fiscal year may very well prove to be an unmitigated disaster, and, so, in a spectacular case of — in tennis parlance — unforced errors, the per share price of MTSL may be headed towards a the $1.50 mark, a 52 week low.

And, as bad as it is, it can quickly get much worse. Should, for instance, SBC Communications, LLC, sue MER Telemanagement Solutions for breach of contract (stranger things have happened in the world of OSS/BSS supply) or should the security class action lawyers smell blood (as they did with Unitek Global Services,) all bets would be off.

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Out with the old

Fireworks over Houston, TexasWelcome to 2014! We have modified our copyright statement to allow for the change of year, so this is your opportunity to take a fresh look at the policies that govern your use of this blog (go to the About section, here.)

Last year our (recurring) readership grew just about 500%.

Our spontaneous readership varied up to 1,000%, depending on what articles we posted.

The most popular postings were:

  • Liquidity — Would you like to buy an M1 Abrams tank for $18,500? (Find it here)
  • What is wrong with ClickSoftware? (Find it here)
  • MTSL comes crashing to the ground (Find it here)
  • The predictable derivations from unpredictability — Unitek Global Services seesawing (Find it here)
  • MER Telemanagement does it again (Find it here)

Time to top up your contributions.

With the new year rolling around (and new subscription expenses emerging!) I want to encourage you to support the blog. $20 is a good amount, but if you are strapped after the holidays, you may want to consider something less. Any donations are welcome, and, as usual, you can contribute via PayPal: