Activist Investors Took This Company Over, Restructured Debt, Got a Compliance Problem Solved, and Now Needs to Tackle Cap Ex.

This company reported $22.44M of net income and $0.69 of EPS on Friday an it earned $249,849 in operating income.

Almost all of that headline is a one-time, non-cash gain on a debt restructuring, and anyone who anchors on it is going to be very confused in September. The real story in this 10-Q isn’t the accounting. It’s that the single number my thesis rested on moved the wrong way.

I bought this on a two-part bet: an activist control group with a track record of cleaning up small companies and selling them, and roughly $2M of annual hosting savings that would finally close the gap between what the business earns and what it owes its lenders. Instead, server costs rose while operating income fell by half. I believe this is likely to do dual costs of two server sources accumulating while the company switches hosts.

Plenty went right for this company this past quarter too. Their going concern is gone, the first covenant test passed clean, and equity flipped from an $(11.5M) deficit to positive $16.4M. That is a genuinely different balance sheet than the one I wrote up in July. Activist investors now own the majority of the outstanding shares and I think they’ll probably sell off this business once a turn around is successfully executed. That’s precisely why I own this stock.