Oh no, it is worse… MTSL takes another $561 thousand torpedo

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.

USS John Young

In a recent posting (here) I wrote about the fourth quarter and full fiscal 2013 year earnings announcement by MER Telemanagement Solutions, an Israel based company that I have followed for quite a while.

I noted that the company had 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.

The termination of the Simple Mobile contract in itself was a disaster, but, unfortunately, things were even worse, with overall revenues and operating profit down significantly year-over-year and net income down $1 million to $1.4 million year-over-year when accounting for a one time $1 million tax charge in the company’s fiscal year 2012.

In my posting I included a computation table, trying to assess the impact of the Simple Mobile contract loss on the 2014 results based on previous results, and — oh, boy! — it was not pretty (here is a direct link to the table,) projecting a revenue drop of $3.6 million (or 28.5%) in 2014 and a net income drop well into the red.

Today, the company filed its 20-F filing with the Securities and Exchange Commission, and, unfortunately, things went from bad to worse. While I, in my table had estimated the Simple Mobile revenue contribution for 2013 to be 28.5%, it showed to be a staggering 33%.

As the company wrote in its very first qualitative statement in the 20-F filing:

If we do not replace the revenues generated by Simple Mobile LLC our operations and financial condition will be adversely affected.

Our principal customer during the three years ended December 31, 2013 was Simple Mobile LLC, a U.S.-based mobile virtual network operator, or MVNO, for whom we provided hosted billing services. In 2011, 2012 and 2013, sales attributable to this MVNO accounted for approximately 16.4%, 22.8% and 33.3% of our revenues, respectively. During 2012, Simple Mobile was acquired by TracFone and in 2013 TracFone migrated our hosted billing services to its own platform and did not renew its agreement with us, which ended in December 2013. If we are unable to replace the revenues generated by Simple Mobile LLC, our operating results and financial condition will be adversely affected.

Not exactly encouraging stuff.

The difference of 4.5% or $561 thousand between our previous estimate and the new announced results is significant enough in itself, but, unfortunately, there is more.

First, this means that the revenue contribution that has to be backed out of the 2014 projections are higher…. arghhh!…. leading to even more loss, in fact an additional loss of $453 thousand for a projected worst-case loss of $1.8 million in 2014.

Second, the significant increase in the Simple Mobile revenue contribution means that MER Teleamangement Solutions’ revenues that were not attributable to Simple Mobile declined a full 17.5% in 2013… a disaster of the highest magnitude.

Here is the updated table:

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

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

Oh, by the way, this worst case scenario, may not, in fact, be the worst case, since it assumes that the non-Simple Mobile revenue will be stable in 2014. If, instead, the drop in revenues continues, then we need to clear the decks for a much worse worst case.

Now, I hasten to say that there were some good news in the 20-F filing, albeit not much.

First and foremost, the company has reduced its payroll, laying of a large part of its staff. This, of course, was something that I knew had to happen, but that the company for some reason saw fit to not tell its shareholders was happening (read more about this and the company’s puzzling and, in my opinion, warped communications with its shareholders in my previous MER Telemanagement Solutions postings… you can use the nifty XREFs section to get them.)

The reduction is force is deep, but it does not make up for the loss off the Simple Mobile contract (to be fair to the company, almost nothing except a full scale roll-back of staffing in the very early part of 2013 could make up for the catastrophic loss of the Simple Mobile contract) and the extensive cost of winning and launching new managed service of cloud business. So, in spite of the lay-offs — a case of too little, too late — things are definitely looking bad.

Moreover, there were more somber language about the PFIC classification and its potentially adverse impact on United States based shareholders (read more about this here.) As I wrote I this earlier posting, the cash hoarded from the — now dead — contract with Simple Mobile may, in a ironic twist, become a poison pill for United States based holders of shares in MER Telemanagement Solutions.

Interestingly, today, on the tail-end of the filing of the 20-F, when investors (if they could — and cared to — read) should be heading for the hills, the company’s equity exploded. This could, of course, be caused by anything, including investor stupidity or leaking of information that the company is getting sold or having gained another customer, but it certainly does not mean that the company is doing well.

With respect to the potential for the gain of new customers to change the fundamental situation of the company, it may be worth thinking deeply about the depth of the problem to be plugged. As I wrote in an earlier posting (here) where I discussed an, in my opinion, less-than-reputable and poorly researched article by Mr. Sujan Lahiri, a self-confessed post-for-profit contributor to Seeking Alpha:

Mr. Lahiri’s rather simplistic view continues throughout his article. For instance, he writes:

For instance, if MTSL were to land one large customer, EPS could easily grow from current $0.27 to $0.40 per share in the near future. Apply the industry average of P/E 15, and you have a $6.00 share. Another customer could mean $0.50 or $0.60, that’s a $7.50 or $9.00 share. Any extra customers directly add to the profit without a substantial increase in costs. The upside potential is therefore very large.

Well, let’s look at this. The assumption here is that a new customer would add something like $0.13 in earnings in the near future. In real terms this means yearly earnings (not revenues!) of $585 thousand or so, or just about $50 thousand per month. Assuming a liberal 20% margin, this amounts to $250 thousand in revenues per month.

With the Simple Mobile pricing a benchmark for per subscriber revenues, pointing to something like a quarter of a dollar per subscriber per month in revenues, this would mean that the fictive customer would have a subscriber count of one million.

MVNOs or MVNEs with 1 million subscribers are relatively rare, and, importantly, they don’t just emerge in one go (read about subscriber count in the MVNO world in an earlier posting here,) so I think that Mr. Lahiri’s projection of the “near future” earnings is… well… laughable.

So, new customers are definitely not a valid reason for a surge in the per share price of MTSL.

We’ll soon see what gives, I guess.

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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!

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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.

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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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MNDO dividend speculation — a bad neighborhood

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.

17620vOn January 23rd, 2014, I wrote a posting (here) about how someone or something had bought perhaps 750 thousand shares of MNDO, the equity of Mind CTI, a micro-cap that I have written about in the past (refer to the XREFs section (here) to get a handle on previous articles about Mind CTI.)

This purchase — at a simple average purchase price of $2.19 per share — represented an investment of at least $1.6 million. A tidy sum by any measure.

Dividend March 2013Yesterday, Mind CTI announced that it had received court approval for a dividend in the amount of $0.24 per share (under Israeli company law, a company that distributes profit must seek court approval for such distribution in certain circumstances where profit and distribution is reasonably close to each other or distribution exceeds profit, and, since Mind CTI’s dividend policy essentially sets a regular dividend equal to EBITDA, the company routinely seeks and gets such approval.)

On a pre-tax basis, a dividend of $0.24 per share equals a yield of more than 10%, a unique gold-standard for profit sharing that I have written about in the past (here.) In fact, had you bought MNDO on one of the its annual regular-as-a-clockwork-post-dividend-payout-drop-in-per-share-price excursions, your yield would be close to 15%, unparalleled in the world of micro-cap technology stocks.

There is a distinct possibility that the buyer of the 750 thousand shares has extremely short-term interests in MNDO, gambling, in essence, on achieving a two-for-one benefit, in the form of an increase in the per share price in the time period leading up to the dividend issue and the actual dividend payment itself.

If so, the buyer is, of course, playing with fire since, when you take into effect the mandatory tax withholding and the aforementioned regular-as-a-clockwork-post-dividend-payout-drop-in-per-share-price, there can be no assurance that an average exit price of $2.19 plus some margin (to account for the tax withholding) can be achieved. In fact, even if the per share price does increase over the coming period, 750 thousand shares is so much out of proportion to the average daily volume that the actual exit can cause a collapse in the per share price, making the speculative dividend play a loser.

I sure hope that whoever engineered the purchase knows what he or she is doing. Normally you would, of course, assume so, but I am a bit jaded as I keep running into investment professionals who does not appear to grasp that dividends are a zero-sum game and that the very nature of Mind CTI’s dividends, which are so large and so spaced out in time as to make the automatic post-dividend adjustment of the per share price sufficiently significant that the market simply absorb it the same way that it can for, say, a quarterly dividend paid by a utility, makes it negative-sum game.

Crudely speaking, unless the entry point is timed meticulously, a dividend speculator will lose his or her shirt on MNDO.

Regardless of this particular buyer’s intelligence, the developments have not been good lately. The purchase, which, as it must for low liquidity stocks, happened piece-meal, drove the per share price from $2.10 to $2.25.

With the per share price now having reverted to $2.10 and assuming an average buy price of $2.19, the mystery purchaser is faced with a negative balance of almost $70 thousand.

Should the dividend clock ring tomorrow, the purchaser would, if he or she attempted to exit immediately, face a net loss somewhere in the neighborhood of $200 thousand when taxes plus downward pressure on the per share price are taken into account.

That, of course, is a pretty bad neighborhood to be in, so perhaps the purchaser has other plans.

Participate, please….

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A horrible symmetry

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.

Tomorrow, Thursday, August 15th, 2013, is most likely the day that MER Telemanagement Solutions, a company that I have followed extensively (go here for the latest posting,) releases it results for the second quarter of fiscal year 2013.

Monday, August 12th, 2013, Unitek Global Services, another company that I have followed extensively (go here for the latest posting) released its 10-K for 2012, including a significant amount of restatement for preceding periods.

I wont get into the details of what is going on with Unitek Global Services (read the earlier postings!,) except to say that the company has been going through some interesting times and is now emerging from a very dark cave that it was put into courtesy of fraud in one of its divisions and trigger-happy investors. The important point is that, in my opinion, the restatement in the 10-K was far less radical than it could have been, and, so, I had no issue with it (in fact, not only did I have no issue with the restatement, but I discovered a diamond-in-the-
rough in the 10-K filing, which I plan to excavate, polish, and exhibit in a blog posting in the near future.)

Regardless of the absence of bad news — and possibly stimulated by an overall down market-days, the market, today, reacted negatively to the 10-K, pushing down the per share price of UNTK, the company’s equity. The push-down was on relatively modest volume, but was still significant.

I was not, per se, surprised about the price drop. Frankly, it takes a PhD to decipher the 10-K and understand its restatements and, reflecting the fact that the company is being litigated by some angry shareholders, including, of all things, a Union pension fund that wants $165 thousand from someone, somewhere or they are going to break some kneecaps, damn’it!, it has far more doom and gloom and caveats than usual.

I am not going to get into the details here, but MER Telemanagement Solutions’ equity, MTSL, has been quite volatile lately, reflecting, I think, a lot of short term traders who are back for a second helping after having amassed and lost riches by trading in MTSL over a very brief period in late 2012 and early 2013 (again, read the earlier postings.)

Today, MTSL took off again, evidence of a powerful dose of speculation about what tomorrow will bring.

So really no surprise here. I think UNTK will normalize rather quickly as Unitek Global Services pushes out the pending earnings statements for the first and second quarter of fiscal year 2013 (and, I think, uncovers the diamond-in-the-rough that I have found,) and I think MTSL can go almost anywhere (up, down, or sideways,) depending on what the company says in its earnings results (I view the results as pretty deterministic, with the wildcard being the company’s presentation — something that the company has had enormous difficulties with in the past) and the mood of the emotion driven speculators.

What is a surprise is the symmetry. Almost as if they were possessed UNTK went down $0.25 and MTSL went up $0.25, as shown below. Spooky!

Symmetry

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MTSL comes crashing to the ground

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.

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2550351665_a2b1ca8bdf_oLet me hasten to say that this posting is about the last days’ run-up and subsequent collapse of the per share price of MTSL, the equity of MER Telemanagement Solution.

As far as I know, MER Telemanagement Solutions, the company, is fine and dandy (in fact, see here how fine I suspect it is.)

MTSL, the company’s equity is another matter, having experienced a 15% drop in per share price from $2.29 (as of August 7th, 2013) to $1.96 (as of 11 a.m., EST, today, August 9th, 2013,) without any adverse news from the company or the media.

Do I hear “What the Dickens is going on?

Actually, I am teasing. We know full well what is going on.

The first speculative craze and its collapse

MER Telemanagement Solutions is an Israel based company that I have written about in the past, primarily related to a speculative craze that played out around the company’s equity in late 2012 and early 2013, ending with a tremendous crash with the per share price of MTSL dropping from $5.11 to $1.56 in a very short time period — first from $5.11 to $3, or so, in a blink of an eye, and, subsequently, in a couple of months dropping further, to $1.56 — leaving a number of shareholders stranded with equity positions that were under water.

The cause of the 2012/2013 speculative run-up and subsequent collapse in the per share price is some thing that I written extensively about before, during, and after it occurred.

In my postings I identified that the run-up in the per share price from the sub $2 level to $5.11 in the period from late 2012 to the middle of March of 2013 was entirely speculative because it was known with near certainty that the company would lose its single most important contract, jeopardizing almost 25% of the company’s revenues and virtually annihilating its operating margin, causing the company to register a tremendous drop in net income, possibly, in fact, bringing the company into a situation where it would incur net losses.

As anticipated, the company did, indeed lose the contract, and the market reacted promptly and violently, punishing the speculators who, frankly, for the most part had not cared to understand the company’s business, financials, or outlook, but rather had followed other speculators in the manner of lemmings, and creating a large number of what is commonly referred to as bagholders (speculative investment involve the equivalent of passing a bag up the line until there no longer is someone to pass it up to, leaving the last holder of the bag, the bagholder, stuck with the bag,) experiencing realized and unrealized losses of up to 250%.

Here is a chart that clearly shows the action:

MTSL first run up and collapse-jpg

Whoever the bagholders were, for sure, they experienced significant pain.

Cashews for silver — finding value in the wasteland

When the meltdown in the per share price was complete, however, MTSL went from being a speculative dead trap to being one of the most compelling value investments that one could find in the middle of 2013. Here is why…

First, the company secured three new deals that in the long run may help in offsetting some — if not all — of the loss of revenue and margin that was caused by the the loss of the key contract. Second, the company made it clear that it was ready to pull the trigger on cost reductions if needed. Third, the company’s market capitalization dropped to $7.2 million, while its cash position grew to $5.26 million, reflecting the addition of $1.1 million in cash in the first quarter of fiscal year 2013. Fourth, it was confirmed that the impact of the loss of the key contract would not be felt before 2014.

Moreover, the $5.26 million in free cash on hand should be understood in the context of the company having no debt and having quarterly net income in excess of $300 thousand, pointing towards a net income of $1.2 million or better for the 2013 year, of which, of course, $300 thousand, or so, is already in hand. Assuming that there are no accounting games at play, the remaining $900 thousand could be added to the cash on hand, for free cash on hand of perhaps $6.2 million at the end of 2013 (see an important disclaimer about this cash in a previous posting (here.))

Update

On August 15th, 2013, the MER Telemangement Solutions released it earnings results for the second quarter of the 2013 fiscal year. Remarkably, the cash on hand grew by $340 thousand, or so, to $5.6 million and strongly headed for my estimate of $6.2 million at the end of the year.

That’s right! In a bull market where value investments were getting harder and harder to find, MER Telemanagement Solutions could (hypothetically and grossly simplifying the market dynamics, of course) be bought for $7.2 million, valuing the company’s operations, infrastructure, goodwill, intellectual property rights, pipeline, backlog, and future customer revenues at $1 million — $366 thousand less than the net income of 2012.

In other words, the entire company could (hypothetically and simplistically, again) be acquired for a net consideration of $1 million, or so — less than the amount of net income that the company will probably generate in its fiscal year 2013.

From a value investor standpoint this is as good as it gets — in fact it was like trading cashews for silver, and I was in. And if I had any doubts (I always do, of course,) I was encouraged by the fact that the total number of shares is incredibly low (four and half million, or so,) and the free float is a fraction of that.

The second speculative craze and its collapse

Over the last month some other investors have started muscling into the opportunity, securing up to 400 thousand shares over two trading days, July 3rd, 2013, and August 5th, 2013.

In an equity with very limited float, this sort of volume — and its resulting impact on the per share price — is notable, and on August 6th, 2013, subsequent to the buing on August 5th, 2013, which raised the per share price from $1.82 to $1.95, the market reacted in yet another speculative craze, raising the per share price from $1.97 to $2.29 on a trading volume of $227 thousand shares, stimulated heavily, I believe, by the momentum traders from Profit.ly (read more about this here.)

Well, the run up was, of course, speculative (there had been no news,) and from August 7th, 2013, through today, the run-up has collapsed, and, as I am writing this, the collapse continues.

Here is a chart that shows the initial buy on August 5th, 2013, and the subsequent speculative run-up and the (ongoing) collapse:

MTSL second run up and collapse-jpg

So, a few momentum traders made some money, and a bunch of them lost their shirt? Big deal… After all, momentum traders (whether swing or day traders) are, literally, habitual losers, as described in Paul B. Farrell’s blog, The Wall Street War Zone (here):

The bottom line is simple — most traders are losers. Earlier, Forbes reported on a study that the “North American Securities Administrators found that 77% of day traders lost money.” Now comes more evidence, BusinessWeek was reporting that 82% of all day traders lose money. That data comes from a recent study by a couple professors at the University of Taipei working in conjunction with University of California behavioral finance professors Terry Odean and Brad Barber. And yes, that is the same Odean and Barber who researched 66,400 Wall Street investors a decade ago and concluded, “The more you trade the less you earn.” …

The only people who really make money trading on a regular basis are the service professionals, especially the commission brokers. These pros make their commissions no matter how much investors and traders lose. Even in bear markets their ads paint a deceptive picture aimed at the wannabe trader’s super-confident but addictive and self-sabotaging genes—ads designed to convince naïve wannabe traders that the pros have some special secret that’ll beat the market—secrets they’re willing to share for a fee, naturally.

The truth is: They can’t … they never do … and they never will beat the market … no matter how long they try … trading’s a loser‘s game. But as I found out one more time in this “debate,” as I do in every “debate” with an expert who may be making a living selling trading secrets … I may as well have been trying to convince Raven the chimpanzee that eventually he too would lose, and lose big.

In that respect however, chimpanzees are superior to human traders. The trader’s DNA control their brains, they have no choice but to keep chasing the impossible dream that they can beat the market. The truth is, they’re addicted to losing. The pros know this, so they can take advantage of the wannabe traders never-ending delusional “winner’s fantasy.” And the game goes on ad infinitum, with the pros having a big laugh as they rake off big fees and commissions and get rich off the 82 percent of all traders who are repeat losers.

It ain’t over yet

All this silly trading activity aside, the fundamental value proposition for MER Telemanagement Solutions is, of course, intact, since the run-up and subsequent collapse had everything to do with momentum traders and blind followers and nothing to do with the fundamentals of the business.

Let me repeat that…. There are no fundamentals and business information that I know of that explains the last days’ changes in the per share price of MTSL, and, as far as I know, the business and the business outlook of MER Telemanagement is substantially the same as it was last week. Moreover, I am seeing a lot of activity from groups and individuals that I would characterize as being ultra-short-term opportunity driven. Therefore, I conclude that the rather crazy price movement of the last days is related to nothing more than speculation.

And here is where it gets really interesting. On or about August 15th, 2013, the company will release its earnings results for the second quarter of it 2013 fiscal year (historically, the company has issued its earnings releases on a Thursday, and in the case of the earnings release for the second quarter, it has typically released these in the second or third week of August.)

The earnings results in the first quarter were, by any objective measure, excellent, but their presentation of the results (the messaging, if you will) was poor, causing the market to react negatively (something that I wrote extensively about here.)

Ceteris paribus, this quarter’s result should also be excellent, confirming that there is significant investment opportunity around MTSL. And so, if the company is able to craft its presentation of these results in a way that is not horrible, the next days are going to be interesting with a dynamics of a collapsing per share price in the day, or days, leading up to the announcement of excellent results.

We will see what happens next, guess. If you are contemplating a blind follower style, speculative trade in MTSL (and, in particular, if you came here by way of a link from Profit.ly or some other, similar, junk broadcast service or chat board,such as thelion.com,) I urge you to read my words of caution (here,) and I remind you that you need to read the disclaimer in the About section.)

Update

On August 15th, 2013, the MER Telemangement Solutions did indeed release its earnings results for the second quarter of the 2013 fiscal year, and, yes, the results were excellent. However, astonishingly, the company repeated its error from the announcement of the earnings results for the first quarter, crafting an evasive and weak release (something that I wrote in detail about here.) The market’s reaction was immediate and severe, and as of the close of the market day on August 16th, 2013, the per share price of MTSL had dropped to $1.87, down from $2.26 before the earnings release, a 17.25% loss of market value over a period of two days.

Donations, please….

If you have enjoyed this blog’s twelve month journey through the MER Telemanagement Solutions affair, you can express your appreciation through donation via PayPal right now.   For this type of posting an on-going donation of $50 per three months or a one-off donation of $20 is suggested.