Long iGo (IGOI / IGOID)

Shell Company with "Free" NOLs

iGO is an unlisted nano-cap shell company trading slightly above net current asset value that has substantial off-balance sheet net operating loss carryforwards (NOLs). The company is controlled by affiliates of hedge fund manager Warren Lichenstein and has outsourced all operations while management figures out how to harvest the NOLs. Due to the extremely small market cap, limited liquidity, and less than clear timeline, iGO is likely only suitable for personal accounts.

I estimate that iGo has an adjusted net current asset value of $7.8m vs. a pre-reverse/forward split market cap of $9.4m. The company carries $65.8m in federal, state, and foreign net operating loss deferred tax assets off its balance sheet (a valuation allowance has been recorded). Value realization will stem from the purchase of a profitable business to harvest the NOLs. Unfortunately the timing of such a transaction is not clear, but Lichenstein's entities have been very proactive in moving their plan forward since taking a stake, suggesting to me that iGo is receiving the necessary attention.

Greenlight Capital recently took advantage of a similar situation involving BioFuel Energy (BIOF). After giving its lenders the keys to its operating assets, BioFuel was left with $10.1m in cash and $62.6m in net operating loss deferred tax assets. Greenlight proposed a reverse merger with JBGL Capital, a developer, to harvest the NOLs. BioFuel shares are up over ~400% year-to-date.

Please see below for important disclosures.

Background

In its previous form, iGo designed, manufactured, and sold power, audio, battery, and protection accessories for mobile electronic devices such as laptops, smartphones, and tablets. However, the nature of the business has fundamentally changed with the involvement of Lichenstein's holding companies. On July 11, 2013, iGo announced that Steel Excel planned to tender for up to 44% of outstanding shares at a price of $3.95 (23% above the current share price). Steel Excel (SXCL) is a subsidiary of Lichenstein's holding company, Steel Partners (SPLP). (Note that both are interesting investments on their own). Prior to the reverse/forward split (see below), Steel Excel owned 44.7% of the company while Adage Capital owned 7.5% of shares. These proportions have likely increased due to the reverse/forward split.

On October 10, 2013, iGo entered into an agreement with SP Corporate Services, an affiliate of Steel Partners, for the provision of all management and administrative services at an annual cost of $372,000. On December 23, 2013, iGo completed its transformation into a shell company by entering into a licensing agreement with Incipio Technologies. Incipio will manage the manufacture and sale of iGo branded battery, charger, and power products. iGo will no longer have any employees and will only be a conduit for receiving licensing royalties and holding assets. Incipio will pay iGo a set percentage of non-Walmart net sales and a set percentage of net profits from sales to Walmart. iGo's only major costs will be the $372,000 in management payments to SP Corporate Services and $50,000 in total annual non-employee director cash retainers. I expect royalties and some minimal interest income to offset a large portion of these costs.

Lichenstein effectively controls the company. In addition to the fact that management is employed by a Steel Partners affiliate, two of the four board members are also related to the Steel family of companies. On December 18, 2013, iGo decided to deregister its shares and stop making financial filings since it has fewer than 300 holders of record. The last filing was the 2013 10-K, but the company may issues press releases and some information may be available in the future from Steel Excel filings. iGo recently completed a 1:250 contemporaneous reverse/forward split to force the cash out of small shareholders. Effective as of July 28, 2014, iGo shares reverse split by 1:250 and subsequently forward split by 250:1. Shares will trade as IGOID for 20 business days before reverting back to IGOI. Small lot shareholders and those with fractional shares received $3.35/pre-split share in cash.

Valuation

It is easier to see upside to the current share price than it is to quantify that upside. Before the recent reverse/forward split, iGo was trading at ~$3.20/share with 2.9m shares and a market cap of $9.4m. Unfortunately, we do not know exactly how many shares were eliminated in exchange for $3.35/pre-split share in cash.

I conservatively estimate that the ex-NOL value of the company is $7.8m (vs. a book value of $8.3m). I include $6.9m in cash and $2.1m in short-term investments (a muni fund). I haircut inventories by 15%, but note that these have already been written down and will mostly be purchased by Incipio as part of the licensing agreement. I exclude other assets and I fully value liabilities.

My estimated value of $7.8m is $1.6m below the pre-reverse/forward split market cap and excludes the value of $65.8m of federal, state, and foreign deferred tax assets. So there is a small hurdle of $1.6m (2.4% of deferred tax asset value) to jump over before investors are breakeven, with the balance of NOL value being upside.

Path Forward & Key Issues

The present value of the NOLs will depend on the timing of their realization, which is contingent on three factors: 1) M&A by iGo to purchase profitable operations; 2) The magnitude of annual profitability at the purchased business; and 3) Any Section 382 limitations on annual NOL use due to past ownership changes. Unfortunately, all three of these factors are difficult to forecast. The faster the NOLs are harvested, the more valuable they are.

Steel Excel has been relatively quick to make changes at iGo, with only a year having elapsed since their share tender offer was announced. Lichenstein is a talented and deliberate investor, so I believe all of the recent corporate action at iGo suggests that the company has not been forgotten and that there is a plan in place for value maximization. I would expect some sort of M&A to bring profitable operations into the company within the next 1-2 years, but I have no specific knowledge.

The ability to use the NOLs in light of possible Section 382 constraints is the other key issue. Section 382 of the Internal Revenue Code limits the use of NOLs if there has been an ownership change. The rules for determining a change of ownership are relatively complex. In its most recent 10-K, iGo states that it may be subject to Section 382 limitations due to past ownership changes:

"We anticipate that the sale of common stock in our initial public offering and in subsequent private offerings, as well as the issuance of our common stock for acquisitions, coupled with prior sales of common stock could cause an annual limitation on the use of our net operating loss carryforwards pursuant to the change in ownership provisions of Section 382 of the Internal Revenue Code of 1986, as amended. This limitation is expected to have a material effect on the timing of and our ability to use the net operating loss carryforwards in the future."

However, management continues to take action to minimize Section 382 risks. The Board of Directors retained the right to block the recent reverse/forward split if it might impair iGo's NOLs, but the split went ahead. So I don't think the issue of Section 382 applicability is as clear as the 10-K disclosure makes it seem. In the worst case, where Section 382 does limit NOL usage, the NOLs still have some limited value. The company can still use NOLs each year equal to the federal long-term tax exempt rate (currently 3.27%, but this will rise with interest rates) times the value of the company at the time of the ownership change. Given the difficulty in determining if, let alone when, a change in ownership occurred, this formula is not so useful to investors. But it does give an idea of the order of magnitude of the limits imposed by Section 382 if they come into play.

Risks

1) iGo is not listed on an exchange and no longer makes financial filings (has "gone dark"), limiting liquidity.

2) The company's executives, directors, and principal shareholders control the company with 52.6% of shares outstanding, including 44.7% owned by Steel Excel (both figures pre-reverse/forward split).

3) The company has no full time employees and all operations are conducted by a third-party via a licensing.

4) Executive and administrative services are provided by a related party for an annual fee.

5) NOL use may be limited by federal law due to changes in ownership and is dependent on future profitability.

Important Disclaimer

The above text is the view of the author alone and is for informational and educational purposes only. It should not be construed as investment advice or a solicitation to buy or sell securities. The author may hold a position in the securities mentioned, and does not have to provide updates for changes to his view. The author does not warrant his work for correctness or accuracy. Perform your own due diligence before making investment decisions.

Catalysts

1) M&A by iGo whereby the company purchases profitable operations to harvest the NOLs.