Evercel Inc. - EVRC

Great assets, strong track record, grim governance. Can investors hope for better?

Post-Holiday greetings! Now that the whirlwind is over, I have time for one final 2021 post. It has been a very good year for me, investment-wise. But of course, not everything I own has worked. For some laggard holdings, I believe the market simply has yet to appreciate their manifest qualities. For others, the pain is largely self-inflicted. This post is about one of the latter.

Introducing Evercel Inc.!

Evercel is wonderful. It’s got great assets, lots of cash, a history of success, a bright future, and it is cheap. But, Evercel is also terrible. It treats transparency and shareholder disclosure as afterthoughts, has poorly-disclosed related-party transactions in abundance, a history of grossly overcompensating its management, and an ever-changing board of directors.

So why do I own it? Well, despite the absolute state of the company’s governance, all these problems are fixable.

Evercel is more of an investment platform than a traditional company. The firm likes to make two or three big investments at a time in turnaround opportunities or in under-appreciated growth companies. Once the turnaround is accomplished or the growth thesis plays out, Evercel sells and looks to allocate the cash to the next opportunity. This incarnation of Evercel began around 2012, and the results to date have been remarkable! In 2012, Evercel invested $18 million in a thermal printer company, Printronix, ultimately reaping a total of $80 million over 9 years for an IRR exceeding 20%. In 2017 and 2018, Evercel invested $10 million in shares and convertible notes of Sharpspring and nearly doubled its investment in just 19 months. Last year, the company partnered with others to buy out ZAGG, Inc., a retailer of mobile phone accessories. The acquisition is going well.

All good things. You might think that with such strong results, Evercel’s share price would follow suit. But Evercel shares are in a 2-year holding pattern and are down 34% this year. The problems sit firmly with the company’s leadership.

• Awful disclosure. The company’s “investor page,” if one can even call it that, includes only the most recent set of financials, plus a smattering of press releases. No older reports, no proxy statements, nothing.

• Disregard for all conventional reporting timelines and requirements. Historically, Evercel has released its annual financial data when it is good and ready, sometimes as late as 10 months following the end of the fiscal year. This is unacceptable for any firm, let alone a public company. Shareholders deserve to know the results of the previous year well before the current year is mostly through. Additionally, the company has been far too casual about conducting required shareholder meetings.

• Conflicted management. From 2012 on, all of the company’s investment have been made in tandem with a company controlled by the former (as of last week) CEO. This related party has received millions in management and services fees and a percentage of investment gains. The particulars of these arrangements have not been revealed to shareholders beyond the most cursory details. Shareholders have been left in the dark as a meaningful proportion of Evercel’s profits accrued to the former CEO’s interest.

Now, about this CEO. Former CEO, as he resigned last week. I don’t know him. Despite efforts on my end, we have never communicated. I am not going to ascribe any malice to him or level any accusations. I have been privy to the internal operations of a few different public companies, enough to know that public perception and internal reality can differ radically. I must compliment Evercel’s former CEO on his investment acumen. He does seem to be tremendously talented! The deals he executed on for Evercel were fantastic. But I do not think he was the right person to run Evercel. A CEO must communicate well, and should take great pains to ensure any and all related-party transactions are fully and carefully disclosed and open to examination by investors. I am not opposed to reasonable related-party transactions, especially at small companies. Sometimes the perfect warehouse is the one that the CFO owns, or the company secretary’s law firm does great work for reasonable rates. But I am strongly opposed to company insiders receiving investor funds in a manner and degree not known to and repeatedly approved by shareholders. In an information vacuum, investors cannot be faulted for assuming the worst, and Evercel’s disclosures around related-party transactions have been dismal for far too long.

These long-simmering issues came to a head a few months back, when a dissident group of shareholders, lead by Evercel’s long-time chairman, attempted to take control. At issue were the chronic reporting delays, difficulties with the audit process and shareholder meetings, and the CEO’s outsized compensation and related-party transactions.

It got a bit nasty and personal.

Here are the dissident shareholders’ letters and press releases.

The responses by the incumbent board of directors can be found on Evercel’s investor page.

Seeking to drum up shareholder support, the incumbent directors pledged to resume quarterly reporting and eventually, return to SEC-reporting status. When the war of words was over, investors returned a mixed verdict, reëlecting the incumbent directors but also voting to expand the board to include three new independent directors. Call it a mild victory for the activists. Also call it an uncomfortable outcome for Evercel, with some frosty board meetings sure to result. Sure enough, it would not hold. Last week, the CEO announced his resignation, and Evercel revealed the former CEO’s company had sued Evercel over its purported right to sell 17% of Evercel’s shares outstanding back to Evercel at fair market value. The company disputes this obligation.

So, that’s the short version. Evercel has produced enough drama this year to last most companies a decade. Let’s take a break from the shenanigans to look at what Evercel’s assets are actually worth.

First, there’s the cash. Following the sale of its Printronix subsidiary, Evercel has $48 million in cash and notes and zero debt at the parent company level. Then, Current Technologies. Current is a software provider for influencer marketing management. Though Evercel says Current will soon have recurring revenue of $1-2 million annually, I don’t put any value on this investment. Finally, there’s ZAGG, Inc. Evercel invested $36 million for its equity stake in ZAGG and presently owns a 44% economic stake. (Evercel owns 80% of an LLC which owns a 55% stake in ZAGG’s parent company. True to form, the other 20% of this LLC is held by an entity controlled by the former CEO. Evercel consolidates the ZAGG investment.)

There is good reason to believe ZAGG is worth more now than when Evercel bought it in the midst of the COVID economic recovery. ZAGG, Inc. earns around $50 million in annual EBITDA. At a modest 6x multiple, the entity would be worth $300 million. Against this, ZAGG has $75 million in senior debt and (at March 31, 2021) $40 million in line of credit borrowings. There is also $9.4 million escrowed for payment to former shareholders, since ZAGG’s PPP borrowings were approved for forgiveness. This leaves equity value of $175.6 million, of which 44% is attributable to Evercel, or $77.3 million. A double on a levered investment in a turnaround situation made just before an economic recovery passes the basic “reasonability” test. It’s probably a bit conservative. But still, let’s stress test this a bit. Even if we assume EBITDA of $40 million and just a 5x multiple, Evercel’s stake is worth $33.3 million. We can also go the other way and project some growth and multiple expansion. A 7x multiple on $60 million would mean equity value to Evercel of $130 million.

And that’s the sum of it. $48 million in cash and an equity investment worth perhaps $50-100 million comes to $98-148 million, or about $2.97-$4.48 per Evercel share. Evercel shares currently go for $1.97, a 34-56% discount to my conservatively calculated net asset value. This value could increase substantially if the ZAGG investment continues to perform well, or if the company finds productive uses for its balance sheet cash. Obviously, the company’s value depends heavily on the value of its interest in ZAGG. But I think I have been adequately cautious there.

This discount is likely to remain until Evercel gets its corporate governance issues ironed out. I am hopeful on that front. With the CEO’s departure, future investments the company makes will not be burdened by poorly-disclosed related party transactions. The “ick” factor will dissipate with time, especially if the company follows through on its pledge to begin regular quarterly reporting and achieve a higher-tier OTC listing status, or even a NASDAQ listing.

It will take time for this to happen. First, the company must deal with the lawsuit by the former CEO and his company’s put right on Evercel shares. Fortunately, the company has adequate liquidity even if it is forced to repurchase these 5.5 million shares. In my view, the most likely outcome is a settlement in which Evercel repurchases the majority of these shares, and in return tacitly agrees not to challenge the validity of certain historical related-party transactions.

It’s likely that somebody with some pull at Evercel will eventually read this post. My message to this person is as follows:

You have a great company. Evercel has a lot to be proud of, but the market is justifiably skeptical of recent failures in governance and communication. Please, please do the right things here. Commit to transparency and timely reporting. Disclose all remaining related-party transactions and relationships in detail. Select a new CEO who will prioritize communication with shareholders and has a sterling reputation. Incentivize this CEO well. Give your investors details about the company’s strategy and performance, and regain our trust. And if the large discount to fair value remains after all this, commit to closing it by any means necessary.

I hope Evercel listens. I also hope that any Evercel shareholders who read this will contact me. This is one of the “loneliest” of all the investments I hold. It seems like nobody else out there is paying attention. Let’s commiserate!

Thanks for reading and Happy New Year!

Alluvial Capital Management, LLC holds shares of Evercel, Inc. for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.