2023-09-27 08:30:00 ET
Summary
- Courage & Conviction Investing discusses why small cap investors should stay committed and have conviction in their ideas despite market drawdowns.
- Why he's never been more bullish on Advanced Emissions Solutions.
- Strategies around Red Robin, Farmer Brothers, Daktronics and Yield10 Bioscience and why he doesn't short stocks.
Listen below or on the go via Apple Podcasts or Spotify .
Courage & Conviction Investing returns to discuss why small cap investors should stay hungry and foolish (2:50), why he's never been longer on Advanced Emissions Solutions (13:50) and his thesis on Red Robin and Yield10 Bioscience (33:35).
Transcript
Rena Sherbill: Courage & Conviction Investing, super great to have you back on the show. Thanks for coming on.
Courage & Conviction Investing: Hi Rena, it’s great to be back. Thanks for having me. I had a blast last time and I was more than happy to get back on the phone and do it again.
RS : Yeah. Likewise, it was a lot of fun talking to you and we got a lot of love about that episode and I think a lot of interest around stocks that people may not have heard of or been paying enough attention to. So, super happy to get another episode from you and to investors.
So, with that in mind, we're at the end of September, and we both were just talking about the start of the years. There's the lunar calendar for those following along with the Jewish community, there’s the school year for parents of children or caretakers of young kids, or even older kids, they go to school too, I think.
So, how are you thinking about this time of the year as an investor looking at the market?
CCI : Yeah. So, unfortunately, the great Jimmy Buffett died and so with him endless summer died. But living in Boston and New England, and today is September 20th, minutes before the Fed and I would never try to pretend to guess the Fed. I have no idea what they're going to say. But it's just a quintessential New England day, crisp beer, humidity is gone, cool in the morning, sunny at night. And it has me in a frame of mind of kind of back to school.
And so as part of that back to school, cerebral taking a step back, I was going through some old podcasts and I relistened to Stewart Brand, a TED talk and I'm going to try to frame this a little. I'll see if I could -- I'm going to try to pull it off, but I think I can.
Stewart is a fascinating character who has - he moved in the right circles, was born in the right place, had a great upbringing with some - parents that let him explore and kind of be different. But just really quickly just to give people background on who Stewart Brand is. He was a military photographer, he went to Stanford. And then he in San Francisco was hanging out with Ken Kesey who wrote One Flew Over the Cuckoo's Nest. So, he was in this like psychedelic community, like start of the hippie, was like at the forefront of the hippie movement. Then he started a campaign to see a picture of the Earth for NASA. And then he starts The Whole Earth Catalog, which for four years was incredibly successful. Steve Job quoted him in the 2005 Stanford Commencement.
How impactful and how forward thinking this guy was, back in the day. In his last publication of the magazine he says, stay hungry stay foolish. That famous line that, that was Stewart Brand. Everyone's -- probably knows that. But then he goes on to Silicon Valley, he was at the forefront of computers. He was like the forefront of coding. He brought this -- he knew the editor of Rolling Stone. He wrote a few articles in like the early-70s about this.
And then from there, he goes on to start eventually, not like immediately after he goes on to start a foundation about like thinking farsightedly. I can't remember exactly the name of the foundation, but that -- given that back to school that school of thought that's kind of where I am because when we last spoke it was Nirvana.
I think I was up 46% in June, knocked the cover off the ball in July, was up 60 something plus. And then had a big drawdown in August and September has been rocky. So, it's kind of the pinnacle of the valley. We were at the pinnacle and it's definitely getting whacked.
But wanted to kind of pull that back because that's -- if you're a small cap investor, this is par for the course. You have to be willing to have conviction, your ideas, be willing to weather and withstand the drawdowns and kind of be committed to the art and the game. And you know I could obviously give you a long list of headwinds and how it's more difficult and with rising interest rates and higher charge-offs and credit cards and rising oil prices and negative sentiment.
And I can make the same macro laundry list of variables. But because of all those headwinds and all those challenges, everyone's well aware of you get these tremendous buying opportunities if you know your names, if you talk to management, if you spread out your bets. And so, I really view it as an opportunity as opposed to get nervous or overly concerned about these drawdowns because that's just the nature of the beast.
RS : I host The Cannabis Investing Podcast and to me this sounds exactly like or very similar to the cannabis industry. And if you have conviction in the long-term picture, there is reason to still be invested. But I also understand all the headwinds coming at people, all the bad news, all the drawdowns and how that makes people nervous and gives investors concerns.
So, I guess one thing that I would ask you based on what you just mentioned is how do you know that you're in a small cap stock for the right reasons? And the headwinds that are coming at you are just headwinds that may kind of dispel or dissipate as the weeks and months move on.
And how do you know that the fundamentals may be changing? I mean, I know that this is very unique to particular stocks, but in general, if you could assuage investors’ fears of when to stay dedicated and when to get off of the investment?
CCI : Yeah, I mean, I think like we talked about last time, you have to know when you're wrong in this game. I think that's what really separates the people that are very successful and can do this for a long period of time that have longevity.
And the way I run the portfolio is fairly concentrated. So, my top five positions are usually 50% to 70% which is pretty aggressive, 15% usually my max. But you just – you have to know the names and you can't be -- if the thesis does change, you have to take a loss and you have to get out and that's just part of the process. But the other thing is kind of scaling into the names.
So, I'll give you an example. So, this is a company that we own, Farmer Brothers (FARM). And it's a wholesale coffee roasting company. It's been around 100 years. Ticker is 'FARM'. And they had two businesses. They had a routes business where they would deliver the product to restaurants, hotels, convenience stores. And then they had a direct ship business and they built the state of the art factory in Northlake, Texas. And they took on a lot of debt and they ran the business kind of poorly.
And so, some activists came in, they acquired a 15% stake in the company and like I want to stay in the high 5s or 6 and then they became directors and they had a standstill agreement. So, couple of months ago, they reached an agreement with TreeHouse Foods to sell Northlake, Texas as well as the money losing direct ship business. So, the purchase price was $100 million. There was $8 million in legal fees and costs. So, they netted $92 million.
Now, some of that price was also some of the inventory. So it's a little hard to get it like a precise dollar figure. But just to frame to see how like irrational and inefficient the markets are, prior to this company doing this deal, the company was like $2. And so there's 20 million shares, I assume. So it's a $40 million market cap. They had $105 million in net debt. They announced the deal. The stock shoots up from like $2 to $3.60, 10 times the volume trades. And then the meme and the hot money kind of dissipate. The deal does close. But then like two weeks - last week the stock drifts all the way back to $1.82.
So, pre-deal you got a company $40 million market cap, $105 million in debt. Yeah, they did own the factory, but they literally had a gun to their head that if they didn't get the same refi, they're going to go bankrupt, got the deal done and closed the deal. And remarkably, the equity was valued at the same price when a company had like 15 million in net debt. Yeah, they don't have the factory, but the thing, it had a round trip from $2 to $3.60, under $2. And so, I aggressively was buying between $1.82 and $2.05. They came out, the management got let go, or they agreed to get let go. Probably because the board pushed them out because they were making a lot of money.
They did make a lot of good changes finally, but the conference call was really good. The forward outlook is really good. And there are some really good tailwinds going on here. So the stock comes -- it was like $2.80 yesterday. So, I didn't get involved till after this because I wasn't comfortable with the balance sheet.
But when I saw this deal, and it was going to go through, I started buying it at $3, bought more at $2.50 and then got really aggressive between -- in the low 2’s. So from the initial purchase price of $3 to $1.80 that's a 40% drawdown. But I had done enough work on the business and the valuation and we had the comfort of the activists on the 15%. They want to protect their investment, that the business was actually shaping up. And you also have a tailwind because coffee bean prices are actually now kind of oversupplied.
So, that's a huge tailwind going forward. But there are a number of other tailwinds to the business, they brought in this AI algorithm that's going to -- it's already improved margins like a couple 100 basis points. The conference call was fantastic.
I don't want to spend too much more time on it, but it's a perfect example of, okay, I bought a 5% position at $3 and it goes down 40% in your face. But if you've done enough work in the business and evaluation and are following closely you have enough conviction to continue to add because you're buying at a much better - it gives - the market gives you an opportunity to acquire more shares at a better price. And lo and behold, the sky is not falling and the thing bounces from $1.80 to $2.80.
Now, they're going to have to string together a couple of good quarters here to make the Street really believe it. But one of the directors of the activist actually bought some shares on the 15th, which is a good sign because he hadn't been in the market for a long time. But that's like a good example that you have to be able to have something go down 40% in your face and not be afraid that if you've done your work that you think you're buying it at a good valuation to aggressively add more. So, I went from 5%. I took it up to my max 15%, 16%.
And so that's kind of one example, but clearly there are times that you're wrong. If the thesis changes, you have to take your medicine and get out oftentimes, the sooner the better.
RS : And speaking of which there was a company that we got into last time , Advanced Emissions Solutions ( ADES ). And you've had an update since there was also some management changes. A CEO and a COO change. Curious how you're thinking about ADES now in-light of those developments.
CCI : So, I've never been longer. When we owned it, I owned a lot and I've just continued to add. So, I went from long to longer. I spoke with Bob Rasmus last week. The CEO for about 45 minutes. They're presenting on the 28th at Gabelli in New York City. I think it'll be on Zoom or maybe there'll be a replay.
But I just, I take a step back and just talking about missing the forest for the trees like this PFAS situation is real, right? Like these are huge tectonic shifts that happen in markets because policy at the EPA gets set like, set every 10 years, like it doesn't just happen. And so, given the big settlement with 3M ( MMM ) and all the litigation that, it's proven that the stuff is cancerous. It's a major problem for society.
The fact that perhaps by year-end this is going to get - this is going to become law, and ADES is one of the best and direct, most direct ways to play this theme and the market cap is like $60 million, $70 million. Nothing's changed in the thesis and I had a really good conversation with Bob. He's really excited about it.
And just to frame this, so Bob starts, he put up $1.8 million of his own money, slightly above market to buy the stock and he's taking a $50,000 salary with like a $50,000 cash bonus and his options are struck at $3 and then he has restricted stock units that are much higher strike price. So, clearly he's excited and this guy's a really wealthy guy. I think he's donated a lot of money to Notre Dame, and he sure as heck doesn't need the money. I can tell you that.
So he, without getting into too many details, he just said, listen, I got recruited, really wasn't interested. He said he was happy playing golf and hunting and fishing and had all these friends. But when I got – was asked and I end up doing a lot of homework and I did my own independent work and I got really, really excited about it and it was enough for him to get off the sidelines and kind of get back into the game.
And so I had a good conversation with him, just his attitude, how he thinks about business, how he thinks about the company, how he thinks about how undersupplied granular activated carbon is and he's got a lot of good ideas, and hopefully they'll provide an update in November after the Q3 numbers, just in terms of the roadmap, framework where they are, what they're trying to do, the balance sheet – he’s well over the balance sheet.
He has a lot of different ideas there. So, I feel great about it. It's my biggest position by far. And I just - I think if you take a step back and maybe this isn’t the imagination or maybe it's wild optimism.
Let's just say this thing gets enacted at the end of December by the EPA and say it's even 10 parts PPT, parts per trillion. This is going to be on Wall Street Journal, Financial Times, Bloomberg, Seeking Alpha. It's going to be on every newscast, Fox News, CNN, what have you. 99% of the world has never even heard of PFAS and it's just going to be a lag effect in terms of how quickly people connect the dots, as to how can I directly play this massive theme?
And ADES is one of the only publicly traded companies where you could directly participate and they successfully make the upgrades to the Red Corbin Kentucky and Red River Louisiana plants, where they hope to get the £60 million of granular activated carbon production.
This is like one of the few ways that you could directly play it. And so, the kind of the saying, like nothing happens for like years and then everything happens in a week, I think that's what's going to -- what could happen. Actually no one knows the future, but there's just a lot of ways to win here. The valuation is really low. I'm excited about Bob, I'm excited about the new management team. And so, I've bet accordingly and it's only money. So, we'll find out.
RS : How would you contextualize the management change - just as evidence of transitioning and growing as a company?
CCI : So, I've had conversations with Greg. Greg was a nice guy. His background is more CFO, so he was a CPA, knew the numbers really well. Nice guy. I had some good calls with Greg. But I think, I'm speculating here, the board wanted someone that’s run big, multifaceted companies. If you look at the COO announcement, it's one of his key lieutenants. And this guy ran multiple mines, really complex operational background.
And I think the board needed that comfort that these people would find a way to get this thing into production to make the CapEx investments on time, on budget hopefully ahead of time and under budget because you need to get to GAC, granular activated carbon production to really capitalize on the big opportunity here, because the powder activated carbon is more for - there are - it's mostly, it's largely for coal-fired emissions.
So, it takes out some of the really toxic chemicals in the - they kind of spray it on the coal when you burn it, it does remove a lot of the toxins, but coal has gone way down and it's kind of in secular decline. So the powder activated business is fine, there's some value there, but it's really the granular activated carbon business that everyone's excited about because of the water treatment side.
RS : And what would throw you off your extremely bullish position or what might make you think twice about it?
CCI : They have to make the CapEx investments on time and on budget and they have to set the framework and the timeline for the Street. The Street has some visibility and can kind of monitor this. And so, if they had any major hiccups in terms of doing that or there was like material cost overruns to do that, then that would be problematic because they have, say like $70 million in cash and the CapEx is like $95 million.
They've already started spending some of that. But there is a little bit of a funding shortfall. And so as you get closer to finalization, the closer you are to on time and on budget, the better it is that we don't have to raise capital.
No, I think that they could raise debt and perhaps they could do something creative like a ESG type of bond because you're taking coal waste and you're converting it to a product that treats PFAS. So like what's more ESG than that? Like you're taking a product that was completely waste and you're converting it to something that helps the environment. So, I think that they can tap the debt market. That's the debt, if they needed to. That's the bet that I'm making.
The bear case is they're going to have to dilute the equity to get across the finish line and therefore there's no reason to get involved until there's more visibility there.
But when I take a step back, I say, well, wait a second, like you have Red River, you have Corbin, which is, they bought Arch, which has all these patents and they have by 30 year bituminous coal supply. So, it's vertically integrated. It should be low cost. And you're spending $95 million in upgrades. Like you're telling me, you can't raise another $20 million of debt, given all that – all those assets.
But we already know that, the granular activated market is probably under supplied without PFAS. So, there are tailwinds to that business as well and at least in the U.S. it's really an oligopoly. So, Calgon is the dominant player, but ADES will be a material player.
So, I just love the risk reward here and it's certainly kind of frontier market. It's highly imaginative and there are probably a lot of buy-siders that would like to get involved, but because of lack of liquidity or because it's a little bit of an R&D project, they're kind of on the sidelines. And so, I don't have those mandates that I have to worry about.
Like they might, but if they pull this off, the stock is not going to be $2, the question is they’re going to be $10, right? It's not going to stop at $5, it's going to go to $10 and then we're talking, this is like a two year view here.
But just to, as like a quick segue, just talking about thinking farsightedly and being an investor and like really embracing that mindset, it's hard to do because you have this Robinhood gamification.
But when I launched back in May of 2020 I had my Fab Five portfolio. My number three pick was ticker ( AMR ), Alpha Metallurgical. And needless to say, I botched this. I had a great thesis and I talked to management and I was on the calls and because of the nature of the capital that I had, I couldn't hold the position, without getting into too many details. But to make a long story short, that stock has gone from $5 to $250, plus it paid a $10 dividend.
So that's 50 times in three years. So, I was there and I didn't take advantage of it and there are reasons for that and because of my capital and look I wouldn't still be in it for 50x, but it just goes to show you like, and that's the most extreme example that there's no place like small caps in terms of returns, but you really have to embrace that investment mindset.
And it's hard to do. It's hard to do when you play as concentrated as I do. Right, when you say you have 15% size positions. When you get a 15% -- you get a 50% drawdown to your names. It's not easy. Anyway just, but there have been so many multi-baggers that I've – and I've had some plenty of things that crashed and burned, right? I got the thesis completely wrong and it didn't work.
So, I don't want to just simply cherry pick, but just the way the game works is because of the slugging percentage, I think we talked about this last time.
Another example is this company Daktronics, ( DAKT ). I wrote this up privately. I never got to publish it publicly, like $2.35 in December. Then they had some balance sheet issues because the supply chain and they had to get covenant relief from their bank. But the balance sheet was fine. If you go to like Times Square, the big billboards, you go to these sports stadiums like they had a very good position.
This was a profitable business and there was a lag between when they were going to realize that the price increases to pass through the higher cost. And so the stock crashed from like $5 to like, I don't know, $1.25. And we got involved at like $2.35.
Lo and behold, an activist gets involved. They got the bank debt, which was not even a problem, it's not even that leverage resolved. The price kicks came in, the business got better, supply chain costs got improved, and the stock goes from $2.50 to $10 to 4x in less than a year. And that's only in small, I mean, notwithstanding like Nvidia ( NVDA ), which set an incredible run off the lows. But in Facebook ( META ) and whatnot. I don't play in those names, but if there's - there's no place like small caps if you want to put a big percentage returns, but you have to space out the bets and you just need to get one or two, hopefully two right? And it's amazing, the power compounding of a multi-bagger.
RS : How do you start? How do you get started with your small cap stocks? Does it start from kind of a big picture perspective? Do you have the stock in mind? Are you just paying attention to the stories? And so you kind of see the stocks jump out at you? What's your process like?
CCI : It’s bottoms up. I read a lot of news and I like to see, inflection points. So, if something moves significantly, I want to understand why because that means the market was wrong. So, either positively, I don't short, but if there’s a dramatic move up or down, that's because the market was wrong. So, the consensus view was wrong. And so, when you get these inflection points they take – the forces that created these conditions take time to gather, like think about a storm and you have the right set of circumstances for it to become a hurricane or a big event.
And so, when you get these dramatic departures, both good and bad from consensus, it can be like a trend and so I read a lot of news and there's no set framework, or checklist or quantitative screen. It's more like a TJX, a treasure trove, like what are you going to find? That's the adventure. What am I going to learn today?
But that said, you do have to be discerning because not everything that glitters is gold and you can go off in some misadventures and waste a bunch of time and chew up capital. But that's what makes it fun is Don Quixote, those quixotic misadventures. Because otherwise it would just wouldn't be that fun.
RS : Is it basic discipline and kind of the things that you were mentioning at the onset of this interview, in terms of staying disciplined and in terms of your emotional investing? Or is there anything else that you would point to in terms of not getting lost in the sauce there?
CCI : I probably could be more disciplined.
RS : We all could be.
CCI : Yeah, I mean, I wish, I'm not. Again, the top names are like 50% to 75% of the book because I try not to go more than 15% on a name. But I'm not afraid to have five 15% bets. And so with the other 25% or 50% I'm doing a lot of tinkering, which arguably you could say it's a complete waste of time because that sucks up bandwidth and you maybe could have been learning more about your core thesis and again been doing more work.
But then again, like we're talking about Steve Jobs. There's something to be said about being lost in the wilderness. And you probably grow more as a person and as an artist because this is to me, it's art.
RS : Yeah, I love that you call it that. I love that you call it that. Yeah.
CCI : So, this is the canvas and it's a game, right? You’ve listened to like some of these billionaires, like it's not, they'd have 10 generations of wealth, it's not the money, it's just the game that they love, that they picked and for whatever reason this step, particular skill set happens to reward them in terms of capital as opposed to like a different form of recognition. So, it's just kind of the game that I happen to love. And so…
RS : The game chose you. You don't necessarily choose the game.
CCI : Something like that.
RS : Why don't you short stocks? Do you want to articulate that a bit?
CCI : I'm an optimist. And I've trained myself to be that way, because I used to be really skeptical and critical, but I learned from my great and late mentor. I don't know if I mentioned him before.
RS : You did.
CCI : Rodney Thomas.
RS : Yeah, Rodney Thomas.
CCI : It’s just better to be optimistic. Like it's just a better way to go through life and you don't want to like, I hope this company crashes. I hope these people lose their jobs. Like, I hope the product fails. Like, it's just not a good -- it's not a good way to be. And I get why it exists and I get why it prevents markets from getting bubbly.
And you want to have a two-sided market for liquidity and all that stuff, but it just seems like invariably the shorts play dirty oftentimes, not everyone, not the Jimmy Chanos of the world. But they just -- they want it to happen now when they -- when you're short a stock that has bad fundamentals, like it can go down really, really quickly and you're trying to get the stock to capitulate.
And so, to really like, magnify the returns and I just think it's kind of like dirty in my view, people could debate that. But I just don't like who wants to wake up in the morning and say, oh what company is going to crash? What company is going to fail? Like it's just not for me, it's just not the way I'm wired.
RS : This is the sensitive art of investing. I like it. It doesn't all have to be one way, it could be many different things.
You want to share with investors any other stocks that you're thinking about or points of interest or points of light or ways to be thinking about small caps these days?
CCI : Yeah, I mean, I want to talk two more names. So Red Robin ( RRGB ), which I've written on , and that's a top five position for me. I'm in it like, well, I've been adding recently, but it was lying in like the 13s, and it's gone from like 12 to almost 16 and now it's in the 8s. I did speak with G.J. Hart the CEO, couple weeks ago. And I spoke with Todd Wilson the CFO, had a really good talk with those guys. They really know the business. They’re really trying to turnaround the brand. They're playing in a long game.
We got really specific in terms of like the menu and the different quartiles and the stores, and how they brought - like all the enhancements they made to the menu and the philosophy of hire more people and the open grills. But it's completely like it because I'm sized up in this thing and it's, say I'm long at like 12 and now it's like in the 8s. But I don't understand why, notwithstanding the macro. I am talking with Todd tomorrow, just to catch up because he spoke at a couple of conferences like it seemed like a comment he made was out of context, but I wanted to just hop on the phone with him, but I had a really good time.
RS : What was the comment? Just out of curiosity.
CCI : It's just, I guess September, the restaurant industry, the traffic is down in September, which you have hurricanes and you have gas prices and student loans resetting, the moratorium has been lifted. And it could have been any confluence of events, but like the stocks got cut in half from the July highs.
And I don't think anything's really changed with the business. And my thesis is these companies, they guide it to 1.3 billion in revenue that the mid-point of the EBITDA $77.5 million. So, the enterprise value is like sub-300 million. So, it trades cheap.
There isn't a lot of free cash flow generation because they're investing it back in the business and the interest rates are high, but they've done sales leasebacks where they've paid down that 12% debt and then they've actually bought back a little bit of stock.
So, I don't really know why it's gotten cut in half and notwithstanding just a negative sentiment towards small caps and maybe there's some big macro long short book and that happens to be in that basket. But I'm sticking with it. I've been adding here and I'm going to see this one through unless the thesis is dramatic. It's a dramatic departure on the thesis.
But if you take a step back and cover those $1.3 billion in revenue, an extra 200 bps in EBITDA margins, that's $26 million. And so, it's not -- what they're doing is they moved away from discounting and they've upped the product quality. They've upped the service because they're fully staffed, and it's really just a -- this is a margin story more than a sales story.
So, I don't really care what the comps are. I don't want to be like double digits negative, but if they're down 5% the margins are better and you’re doing the right thing for the brand and the business that's fine. And so, I'm happy to weather that drawdown again par for the course.
And then tying back to the stay hungry, stay foolish, I have one other stock, it's called Yield10 Bioscience . Ticker is ( YTEN ). And so this is absolutely fascinating. But let me be crystal clear. This is - this could go to zero. Okay. So, this is 100% binary. And I'll explain the thesis, but I want to be crystal clear, like if they run out of capital by December 1st, this is a zero. So anyway, just mention that.
But what they do is, these are MIT scientists and they’ve developed this seed, Camelina. And it's oily, it's a cover crop. So, you plant it after the harvest in the fall and in the winter. So it's a cover crop. So it prevents erosion and the fertilizer runoff. So it's good for farmers and then you harvest it in the spring.
And so, there's hockey stick growth for SAF, sustainable aviation fuel and renewable diesel. And so, a lot of the big refiners are converting some of their refineries because they know to meet the Paris Accord and the mandates, they need to get on board with this. But you physically can't divert the soybean and corn supply to just make biofuels. And so what these guys have done is, they've spent years developing this seed that's weed resistant, that can be double stack.
So, it can be planted, unlike these different herbicides you need on the soil and they've thought off the whole value chain. So, they have the relationships with the farmers a lot of times in Canada, Western Canada and they have a seed that they've developed that you can grow at scale.
But they have a -- they signed a nonbinding letter of intent with Marathon Petroleum ( MPC ), the $60 billion market cap refining company. And so, Marathon put up a million dollars in a convert and they had 120 days to negotiate a deal and that exclusivity ended on August 25th. And so, I don't know what happened nor could they.
I have spoken with all of our peoples twice. He obviously couldn't comment specifically about private negotiations, but because the deal hadn't got finalized, they were trying to negotiate an investment and an offtake agreement. So, they had to do a secondary and this would be fascinating to readers that are people really in the weeds.
So, on August 2nd, they filed the S-1 to raise capital, but it was a best efforts deal and in a best efforts deal there's some nuances here. So, I want to just keep it - I don't want to be super specific, but essentially there's like a provision that when they market the S-1 in a best efforts deal, people that do take up on the deal can be short the stock.
So in a bought deal, you announce a deal, you probably price under market. You fill up the book, it gets priced and it gets - it's done. This thing was out dangling for a couple of days. So they were out trying to market to fill up the book and you had a lot of structured guys that came in. And so the stock went from $2.20 to $1 by the time the thing was done. And then they priced the deal at $0.65. It came with five year warrants at $0.65.
And so talking about signaling the noise, the stock got decimated because of the dilution, but they had to raise the capital because the exclusivity ended and they are talking to other big oil companies. And there's a Omega-3 angle as well. So, here we have a - I'm in like the $0.60 on this one. Because I had a small position like a foothold and I did like to buy more. But if they don't get a deal, this hangs vapor in a couple of months. But I'm looking at a company that's – arguably it developed this incredibly innovative seed to spawn a new industry in terms of Camelina.
That arguably is empirically going to be one of the sources of biofuels because you can't just have soybean and corn oil. There's an Omega-3 aspect. The market cap right now is like $5 million, notwithstanding the warrants. But at the end of the day, if Oliver doesn't get a deal and they also - they're talking to Mitsubishi, the big refiner in Japan, the big conglomerate giant. And so, it's a binary bet and I just think the upside is so big, but make no mistake if they don't get a deal because they can't get to terms. It's going to be a donut. So, that's staying hungry and staying foolish.
RS : Binary indeed. How low do you let it go before you start rethinking things?
CCI : Well, that's kind of my whole point. You can’t – that the price – the signaling mechanisms have been disengaged, because of the structure guys. So they shorted the hell out of this thing, knocked it down and then they arguably bought the deal. They could - there's technical ways to do it. Right. So, it's supposed to be a different pools of capital, but they have the warrants at $0.65. So, they could have shorted the deal and they don't have to - they're playing for zero. And then if the thing goes bananas because they got a deal that they can cover at $0.65.
So, they could have aggressively shorted at $0.45 because arguably these guys ruin the company, but when the Fed funds is 5.5% and you can't raise equity capital unless you get a deal, then they have you over a barrel. And the science is arguably unbelievable. The value chains are well thought out, the burn rate is only a $1 million a month in this company.
This isn't like a biotech burn $5 million, $10 million a month. So, I've really thought this through, but at the end of the day, it's 1st and 10 on our 10 yard line with two minutes to go and Oliver needs to be Tom Brady. This is the two minute zone baby, and you’ve got to do it.
RS : Right, more small cap artistry.
CCI : Yeah, you got - are you Tom Brady? We'll find out. If not, it's going to be another expensive zero added to my collection.
RS : Well, Courage & Conviction Investing this has been another great conversation. I think a lot of thoughtful ideas and thoughtful strategies to keep in mind for investors. You run Second Wind Capital . For those looking for more insight, ideas, more engagement, more direct access and for your free articles. Check out Courage & Conviction Investing . I'll leave you with the last word, final thoughts, final sentiments for our audience.
CCI : Again thanks for having me. Stewart Brand said it best: Stay hungry, stay foolish. Don't be afraid of the drawdowns, have conviction in your ideas, space out the bets, and it pays to be an optimist in America. But again, I really appreciate the time and it's always fun to connect with you.
RS : Yeah, absolutely. I really appreciate it too and here's to the next one. Hope it's soon.
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