Loyalist Angst - Fabrice Tayor's Response I'm getting a lot of anxious questions about Loyalist. Yesterday I finally got a hold of Andrew Ryu, the CEO, who just returned from Asia where he was conducting due diligence. Here's what's happening:
1) In terms of the markets, the company made a big mistake by not raising money when the stock was 79 cents. There are a lot of institutions that want to buy this stock. But they know the company has to raise more cash to grow, unless it wants to use its earnings but that would take a long time. So to grow quickly, the company needs to raise capital. These institutions therefore won't buy the stock in the market because they know a financing is coming, and these financings are typically done at a discount to the market price of 10% or more. Meanwhile, Mr. Ryu doesn't want to raise money with the stock at 50 cents. So there's an impasse, buyers are on the sidelines and sellers are growing as they panic (which they shouldn't).
I suggested a convertible debenture - a bond that pays investors interest but that can later be converted into shares at a higher price, say 80 cents. This incurs interest costs but they are manageable (let's say the company borrows $10 million at 7% - that means $700,000 of interest payments, which it can easily cover with earnings). It uses this money to grow and the stock price rises and the bonds convert.
Mr. Ryu, as it turns out, is having such conversations with dealers, who have pitched him this idea. So it may happen. That will break the log jam.
2) Meanwhile, business is going very well. The third quarter, which just ended, should by our reckoning produce record revenue and income. We would be disappointed if net profit was not a seven figure number (the first one ever). Q3 will only show partial contribution from the two latest acquisitions. We think the company's run-rate of revenue is about $55 million, with a net income of about $6 or $7 million.
Mr. Ryu, while in Asia, signed up $5 million of NEW business from agencies he's made contact with. This is on top of the run-rate mentioned above. So LOY is not just growing by acquisitions, it's growing organically too.
Also in the works is the long-awaited roll-up of agencies. Recall that agencies take 30% of tuition fees paid by students. So buying them would greatly enhance LOY's profitability and margins. The company has some targets in its crosshairs and will presumably pull the trigger when it raises the money required, hopefully by convertible debenture.
So there's a disconnect between the market and the business, which often happens when financings are concerned. The company did a poor job of managing the Street, and this has cost them momentum. But they can get it back by doing the right things, which we think they're doing.
We were buying stock this morning, picking up 110,000 at 49 cents. The stock has done this sort of swooning before, and buying it on dips like this has proven quite profitable.
Best regards,
Fabrice Taylor, CFA
Publisher