SODI- Solitron Devices

[thepupil]

I appreciate the bid at $4.12. This "data entry error" was so large relative to earnings that the level of incompetence to not catch it when reporting earnings indicates (to me at least)

 

1) a level of sheer incompetence running the business and financials. i knew these guys were shit capital allocators, but the business seemed okay.

 

2) fraud

 

Call it the bottom, call me overreacting but not noticing why your earnings went up big for no apparent reason is just lunacy. I'd rather have slimy fraudy ARCP juicing FFO by 10-20% to raise equity than this kind of incompetence.

[Tim Eriksen]

I appreciate the bid at $4.12. This "data entry error" was so large relative to earnings that the level of incompetence to not catch it when reporting earnings indicates (to me at least)

 

1) a level of sheer incompetence running the business and financials. i knew these guys were shit capital allocators, but the business seemed okay.

 

2) fraud

 

Call it the bottom, call me overreacting but not noticing why your earnings went up big for no apparent reason is just lunacy. I'd rather have slimy fraudy ARCP juicing FFO by 10-20% to raise equity than this kind of incompetence.

 

It is basically a cost plus business.  The government audits them in terms of costs so IMO the fraud risk is very very small.  The restatement has nothing to do with the nature of the business either, so that only leaves one reasonable choice.

 

So is the revelation a negative or ultimately a positive?  Short term it scares some people off, but I would think long term it increases the likelihood of real change.  It certainly provides a stronger argument for it.   

[valueyoda]

Operational controls are simply not that tight as previously assumed, but no big business issues. I have implored the board to initiate a $1.5mln-$2mln as soon as possible, both through market operations and a tender offer of $4.5, combined with a reverse stock split, to take advantage of the fact that stock price remains struggling and to show shareholders that they are serious about shareholder value creation.

[thepupil]

yep, I'm probably  the idiot getting out of my remaining at a 2% loss (I dramatically sized down when Swensen and crew left).

 

I'm rooting for you guys and hope you all make a lot of money. I just can't honestly say I would invest today knowing what I do. So it was time to move on from what was a subscale small position that should've been bigger or 0.

[valueyoda]

can't blame you, it has been a frustrating struggle. Management should really step up now and make a forceful signal that shareholders matter and signal a strategic plan going forward.

[Tim Eriksen]

yep, I'm probably  the idiot getting out of my remaining at a 2% loss (I dramatically sized down when Swensen and crew left).

 

I'm rooting for you guys and hope you all make a lot of money. I just can't honestly say I would invest today knowing what I do. So it was time to move on from what was a subscale small position that should've been bigger or 0.

 

I do understand the difficulty of holding any investment when you lose confidence in management, but you are selling at 2x earnings net of cash.  For me, I never had confidence in management.  It wasn't part of the thesis.  The unusual spike in earnings was meaningless to me as I assumed it was just an accounting quirk.  That they have to restate down to about 10 cents in EPS for the quarter is not a problem. Still a good quarter. 

 

I do not expect management to do anything in response.  I do not think they understand value creation, nor the value of buybacks when prices are ridiculously low.  Incredibly I am not sure they really understand how frustrated shareholders are. 

[oddballstocks]

yep, I'm probably  the idiot getting out of my remaining at a 2% loss (I dramatically sized down when Swensen and crew left).

 

I'm rooting for you guys and hope you all make a lot of money. I just can't honestly say I would invest today knowing what I do. So it was time to move on from what was a subscale small position that should've been bigger or 0.

 

I do understand the difficulty of holding any investment when you lose confidence in management, but you are selling at 2x earnings net of cash.  For me, I never had confidence in management.  It wasn't part of the thesis.  The unusual spike in earnings was meaningless to me as I assumed it was just an accounting quirk.  That they have to restate down to about 10 cents in EPS for the quarter is not a problem. Still a good quarter. 

 

I do not expect management to do anything in response.  I do not think they understand value creation, nor the value of buybacks when prices are ridiculously low.  Incredibly I am not sure they really understand how frustrated shareholders are.

 

Tim,

 

Completely agree.  Any respect I had for management was lost when I met them.  They don't understand how angry shareholders are, but interestingly their lawyer does seem to get it.  Had a good discussion with him, he gets it, said that Saraf has his head in the sand and is afraid everyone is out to get him.

[thepupil]

yep, I'm probably  the idiot getting out of my remaining at a 2% loss (I dramatically sized down when Swensen and crew left).

 

I'm rooting for you guys and hope you all make a lot of money. I just can't honestly say I would invest today knowing what I do. So it was time to move on from what was a subscale small position that should've been bigger or 0.

 

I do understand the difficulty of holding any investment when you lose confidence in management, but you are selling at 2x earnings net of cash.  For me, I never had confidence in management.  It wasn't part of the thesis.  The unusual spike in earnings was meaningless to me as I assumed it was just an accounting quirk.  That they have to restate down to about 10 cents in EPS for the quarter is not a problem. Still a good quarter. 

 

I do not expect management to do anything in response.  I do not think they understand value creation, nor the value of buybacks when prices are ridiculously low.  Incredibly I am not sure they really understand how frustrated shareholders are.

 

I never had confidence in management either (I mean that's why this is so cheap) but the nature of this restatement is just bizarre to me and in the presence of the other yellow flags (auditor turnover) over the past few years, this was the last straw.

 

Selling at 2X ex cash sure sounds like an idiotic thing to do. But another way of putting it is I'm selling at about 1/2 of fair value given the large percentage of company value tied up in cash (which in the absence of a road to Damascus moment for management is worth most 100% of balance sheet value). I can buy other companies at slightly lower discounts where I have more faith in management.

 

I'm assuming this capital light attractive business is only worth a 10 multiple because of its concentration/tech risk over the long term and because it is unduly burdened by a high management pay. Please please please prove me wrong and get the CEO to cut pay, make value  increasing investments with excess cash to increase monetization of the NOL and become the next Singleton.

 

You can use this post as a case study of why people sell at bottoms.

[ragnarisapirate]

yep, I'm probably  the idiot getting out of my remaining at a 2% loss (I dramatically sized down when Swensen and crew left).

 

I'm rooting for you guys and hope you all make a lot of money. I just can't honestly say I would invest today knowing what I do. So it was time to move on from what was a subscale small position that should've been bigger or 0.

 

I do understand the difficulty of holding any investment when you lose confidence in management, but you are selling at 2x earnings net of cash.  For me, I never had confidence in management.  It wasn't part of the thesis.  The unusual spike in earnings was meaningless to me as I assumed it was just an accounting quirk.  That they have to restate down to about 10 cents in EPS for the quarter is not a problem. Still a good quarter. 

 

I do not expect management to do anything in response.  I do not think they understand value creation, nor the value of buybacks when prices are ridiculously low.  Incredibly I am not sure they really understand how frustrated shareholders are.

 

Tim,

 

Completely agree.  Any respect I had for management was lost when I met them.  They don't understand how angry shareholders are, but interestingly their lawyer does seem to get it.  Had a good discussion with him, he gets it, said that Saraf has his head in the sand and is afraid everyone is out to get him.

 

+1

[Hielko]

yep, I'm probably  the idiot getting out of my remaining at a 2% loss (I dramatically sized down when Swensen and crew left).

 

I'm rooting for you guys and hope you all make a lot of money. I just can't honestly say I would invest today knowing what I do. So it was time to move on from what was a subscale small position that should've been bigger or 0.

 

I do understand the difficulty of holding any investment when you lose confidence in management, but you are selling at 2x earnings net of cash.

That is IMO an incredible misleading metric when a business has a large cash balance since a company can trade at a 2x PE ex cash and at the same time trade at a small discount to intrinsic value.

 

With an average net income of less than $1 million/year and a cash balance of ~$7.5 million a best case scenario value is probably something like $17.5 million. Given the large amount of options outstanding with a low strike the effective market cap of the company is currently at $10.5 million. That is a 40% discount and I don't think that is an incredible attractive deal given the crap capital allocation at the company, the low probability that something meaningful will change before Saraf steps down/dies, succession risk when this happens and since recently the apparent ignorance of management with regards to their operating performance.

 

PS. I'am wondering who the new directors are and wtf they are doing on the board... http://www.sec.gov/Archives/edgar/data/91668/000121390015000228/f8k011215_solitrondevices.htm

[valueyoda]

The board expansion is a sneaky way to strengthen Shevach's position. He knows that at the upcoming Annual Meeting the board members won't get enough support to get re-elected, therefore he tries to include additional friends on the board beforehand. One directors is not independent. Hopefully, Mr. Chiste will bring some financial experience to the table. I am not going to play Mr. Nice Guy anymore with Shevach and the board at this stage. It is getting annoyingly frustrating.

[Tim Eriksen]

 

That is IMO an incredible misleading metric when a business has a large cash balance since a company can trade at a 2x PE ex cash and at the same time trade at a small discount to intrinsic value.

 

 

1. The PE ex cash does rise to 3.2x once adjusting for stock options.  Maybe you find that material, I do not.

2. Maybe you think a 40% discount is small, once again I do not. 

3. Crap allocation is wasteful spending and acquisitions.  They have not done that, they have just sat on cash, which is bad, but it could be worse. 

 

As for the new directors.  It is not surprising.  Management nearly always acts to entrench themselves.  It comes at a price.  In my mind they have willingly said screw you to large shareholders.  I would be shocked if any of them are ever re-elected.     

[Hielko]

 

That is IMO an incredible misleading metric when a business has a large cash balance since a company can trade at a 2x PE ex cash and at the same time trade at a small discount to intrinsic value.

 

 

1. The PE ex cash does rise to 3.2x once adjusting for stock options.  Maybe you find that material, I do not.

Perhaps I sounded a bit too harsh in my reaction. Have a bit of a pet peeve against ex-cash PE ratio's because they never properly communicate how cheap/expensive something is in my opinion.

 

2. Maybe you think a 40% discount is small, once again I do not.

A 40% discount to intrinsic value is usually a good deal, but this is IMO a 40% discount to a best case scenario where Saraf suddenly sees the light today w.r.t. capital allocation. Since that is almost certainly not going to happen the current discount is at least partly justified and the discount to intrinsic value is lower. Perhaps a lot lower, but it depends on your assumptions wrt to the future trajectory of capital allocation at the company. Will there be major change in a couple of years or is this going to take 10+ years?

 

3. Crap allocation is wasteful spending and acquisitions.  They have not done that, they have just sat on cash, which is bad, but it could be worse.

It depends a bit on the time horizon. At some point it is actually better to actively destroy value and overpay 100% for a new business than passively destroy value by keeping cash on the balance sheet. If you have a 10% opportunity cost and you keep the cash 10 years on the balance sheet the value of a dollar today is less than $0.40. Paying $2 for a business that is worth $1 would be a lot better, especially considering the NOLs at Solitron, the additional tax assets that would be created by overpaying and a potential increase in reinvestment opportunities (increasing the value of future cash flows).

 

As for the new directors.  It is not surprising.  Management nearly always acts to entrench themselves.  It comes at a price.  In my mind they have willingly said screw you to large shareholders.  I would be shocked if any of them are ever re-elected.

Agreed

[Tim Eriksen]

Solitron filed a NT-10Q yesterday.  The delay in their filing is related to the previously announced restatement.

 

http://www.sec.gov/Archives/edgar/data/91668/000121390015000325/extf10q1114_solitrondevice.htm

 

The filing says that the company expects to report net income of $238,000 for the quarter ($0.10 per share).  Solid performance.  Cash should be about $3.50 per share. 

[Tim Eriksen]

Since it is all public.  ECM issued a press release today

http://www.prnewswire.com/news-releases/solitron-shareholder-eriksen-capital-management-outraged-at-board-actions-300024677.html

 

WEST PALM BEACH, Fla., Jan. 22, 2015 /PRNewswire/ -- Eriksen Capital Management, the owner of 6.3% of Solitron Devices (SODI) shares, has a sent a letter to the Board expressing its outrage at the board's recent actions. 

 

Summary of the facts:

 

1. Prior to 2013, Solitron failed to hold an annual meeting for over ten years.

 

2. It took a shareholder lawsuit for the board to hold its annual meeting in 2013.  At that meeting, shareholders rejected two of the company's four board nominees.  Management responded by reappointing one of those nominees anyway.

 

3. At the 2014 annual meeting, shareholders rejected the board's sole nominee.

 

4. After that meeting large shareholders reached out to the company and submitted potential candidates.  The board ignored them all.

 

5. On January 12, 2015 Solitron filed an 8-K with the SEC stating that on January 12 the board voted to increase its size to five members and appointed Dwight Aubrey and John Chiste to fill the two vacancies.  Due to a staggered board shareholders cannot vote on either appointee until 2017.

 

6. We believe Solitron made a false statement in its 8-k filing on January 12, 2015. Solitron states that "Mr. Chiste is a director and Chairman of the Audit Committee of Forward Industries, Inc."  The truth is Mr. Chiste was voted out as a director by shareholders (along with the rest of Forward Industries nominees) in a proxy contest that was certified on January 5, 2015. 

Unfortunately it gets worse.  Mr. Chiste, who owned no stock in Forward, supported spending company resources to work against large shareholders.  During the proxy battle, Mr. Chiste was accused of voting to issue preferred stock just before the proxy vote in order to try and tilt the election in its favor.  Shareholders thoroughly rejected his leadership as Forward's slate got clobbered by nearly 3 to 1. 

 

Incredibly, Solitron not only wants Mr. Chiste as a director, they placed him on their Nominating Committee to help select other directors.  Solitron needs directors who are also shareholders that passionately care about the future of the company, not ones with a history of fighting against shareholders.  Mr. Chiste should be asked to resign immediately.

 

There is clearly a board and management problem at Solitron.  We intend to fight with shareholders to fix both.

 

Tim Eriksen

Eriksen Capital Management

tim@eriksencapital.com

 

We also filed an amended 13D

http://www.sec.gov/Archives/edgar/data/91668/000114420415003301/0001144204-15-003301-index.htm

 

 

[valueyoda]

I have sent comparable letters over the last week to the board and CEO. Shevach has a grotesque perspective on what constitutes shareholder value. I fully support all plans.

[oddballstocks]

This is crazy.  Saraf is extremely disrespectful, extremely.  I think it's time for him to go, Saraf needs to be shown the door.  He only owns 30% of the stock, there is enough weight to get him out.  It's whether he'll go.  Maybe someone will have to forcefully remove him.

 

I put together a blog post on this, I took a break from editing to come here.  Not much ruffles my feathers, I take almost all of life in stride.  But this has me very angry.  It's a sense of injustice. 

 

Half of me wants to hear about someone flying down and screaming out Saraf and making change happen.  The other half wants to see shareholders take the higher road and boot this scummy guy using his own tricks.

 

Investments are supposed to be cold and calculated.  Everything by the numbers etc.  I probably should have sold my position and moved on silently.  But I feel wronged, so much so that I'd be willing to end up losing out opportunity cost-wise to see the right thing done.  Saraf kicked out of his company and someone who will do right by the owners taking over.  While the math says I should sell and put this into something else I'm going to hang on just because I feel so strongly about this.  Maybe emotions are bad for investors, but investors without emotions would never force change at the corporate level.

[oddballstocks]

Here is the post: http://www.oddballstocks.com/2015/01/solitron-and-mis-management-shenanigans.html

 

 

[ScottHall]

This is crazy.  Saraf is extremely disrespectful, extremely.  I think it's time for him to go, Saraf needs to be shown the door.  He only owns 30% of the stock, there is enough weight to get him out.  It's whether he'll go.  Maybe someone will have to forcefully remove him.

 

I put together a blog post on this, I took a break from editing to come here.  Not much ruffles my feathers, I take almost all of life in stride.  But this has me very angry.  It's a sense of injustice. 

 

Half of me wants to hear about someone flying down and screaming out Saraf and making change happen.  The other half wants to see shareholders take the higher road and boot this scummy guy using his own tricks.

 

Investments are supposed to be cold and calculated.  Everything by the numbers etc.  I probably should have sold my position and moved on silently.  But I feel wronged, so much so that I'd be willing to end up losing out opportunity cost-wise to see the right thing done. Saraf kicked out of his company and someone who will do right by the owners taking over.  While the math says I should sell and put this into something else I'm going to hang on just because I feel so strongly about this.  Maybe emotions are bad for investors, but investors without emotions would never force change at the corporate level.

 

And so Oddball's journey towards becoming a legendary investor begins...

[Tim Eriksen]

Solitron filed an amended 8-K today.  The incorrect information was "inadvertent."

 

Boy don't we all feel better knowing it was just incompetence or poor attention to detail.  Of course it brings up all kinds of questions.  Obviously someone provided the information to the Nominating Committee or it wouldn't have been included.  Why did that person not provide an update?  The Nominating Committee's due diligence should have quickly discovered he was subject to a proxy battle, and the date of the vote.  Did Chiste inform them of the proxy result?  If he did not, why not?  Why did the committee not check?  Why did they not check the filing?.....

 

Don't get me wrong I do believe it truly was just incompetence.     

 

Of course the real outrage is Chiste's history as a director and Solitron's willingness to bring him on as a director.  If anyone has a copy the lawsuit McKenna v. Forward Industries i would love to see it.  I am told it is by the  former CFO against Chiste and rest of the board for wrongful termination.   

[valueyoda]

I have attached a letter I received from Shevach and the board regarding a proposal to institute a $1.5mln-$2mln share buyback to take advantage of the lagging share price, either through open market purchases or through a tender offer. It seems that Shevach is unwilling to pursue that at this point in time. He remains very unresponsive to other strategic and financial proposals put forward. If he doesn't believe that a share buyback is an effective use of cash at this point in time, he should lay out a comprehensive strategic plan how he wants to use the net cash pile going forward, including a sense of potential M&A activity.

 

I fully support all proposals laid out by Tim Eriksen. I will present a comprehensive proposal as well this month. At this point, I believe that a share buyback (combined with a stock split) combined with value-accretive M&A would be the best way to go forward to take advantage of the undervalued stock price and to utilize the NOLs. If the board remains unresponsive, a quick and dirty sale of the company with the loss of NOLs  would even be preferable to the status quo.

Letter_Solitron.pdf

[Hielko]

Thanks for sharing the letter.

[Travis Wiedower]

That letter from Shevach is a joke. Does he want a pat on the back from shareholders because Solitron settled debt obligations in 2013 and made some improvements (like an annual meeting) that were mostly forced in by those same shareholders? He is clearly not changing. I got out of this in early 2014 but I wish you all the best of luck.

[Tim Eriksen]

I have attached a letter I received from Shevach and the board regarding a proposal to institute a $1.5mln-$2mln share buyback to take advantage of the lagging share price, either through open market purchases or through a tender offer. It seems that Shevach is unwilling to pursue that at this point in time. He remains very unresponsive to other strategic and financial proposals put forward. If he doesn't believe that a share buyback is an effective use of cash at this point in time, he should lay out a comprehensive strategic plan how he wants to use the net cash pile going forward, including a sense of potential M&A activity.

 

I fully support all proposals laid out by Tim Eriksen. I will present a comprehensive proposal as well this month. At this point, I believe that a share buyback (combined with a stock split) combined with value-accretive M&A would be the best way to go forward to take advantage of the undervalued stock price and to utilize the NOLs. If the board remains unresponsive, a quick and dirty sale of the company with the loss of NOLs  would even be preferable to the status quo.

 

Shevach doesn't get it.  Yes he has successfully resolved debt and environmental issues favorably.  However, he doesn't even understand the purpose of a reverse/forward split to reduce shareholder costs and reduce outstanding shares.  I specifically asked the question at last year's annual meeting. 

 

Other than a brief spike the stock has traded below 3 times earnings net of cash for fifteen years.  He is clueless on proper capital allocation, and the board is either clueless or just rubber stamping what he wants.  I am not going to give the benefit of the doubt to a CEO and board that knowingly and willfully disregarded Delaware corporate law that requires holding an annual meeting for what appears to be nearly 17 years.  It is inexcusable.  His treatment of shareholders is insulting.   

[Tim Eriksen]

Since it hasn't been mentioned, I would point out that Forward Industries and their former CFO James McKenna settled his whistle blower suit. This was relevant because John Chiste, who Solitron just brought on to its Board, was a director at Forward and a key figure in the charges by McKenna.

 

The suit, McKenna v. Forward Industries, Inc., which included Mr. Chiste as a defendant, accused him, along with other directors of Forward, of issuing preferred stock at a substantial discount to insiders, and their friends, which resulted in Forward reporting a material weakness in internal controls; of retroactively approving a non-justified 400% increase from $30,000 to $152,000 in annual rent that benefitted Board Chairman Johnson, of ignoring Board Chairman Johnson’s violations in regarding to managing $2 million of the company’s funds which resulted in a loss of $800,000; of voting to support an illegal issuance of preferred in stock in 2014 (i.e. without full board approval, in violation of NASDAQ rule 5635(d)), and Forward’s governing documents); of threatening Mr. McKenna with destruction of his career if he pursued legal action; and of illegal termination of Mr. McKenna’s employment. 

 

Here is the 8-k regarding the settlement. 

http://www.sec.gov/Archives/edgar/data/38264/000100329715000063/forward8-k2-18.htm

 

While there is no acknowledgement of wrongdoing (how convenient for Mr. Chiste), Forward offered McKenna his job back along with back pay.  He declined but will receive termination benefits, stock options, legal costs, etc.  Basically they gave him everything he seemed entitled to for being wrongfully terminated.