Description

With Itasca Capital (ICL:CV) (ICLTF) at CAD $0.85 U.S. $0.68 you are basically buying the equivalent of subordinated debt yielding 12% at fair value with almost as much value in exposure to a share/warrant pack attached for free(97% upside free). On top of that there’s $1.59 in NOLs per share while it’s not all that inconceivable these will get utilized due to the presence of two majority shareholders who are experienced capital allocators.

Note: all figures are in USD. In the U.S. it trades at $0.68.

Why does this opportunity exist?

1. This is a $12 million company. 2. Complicated history without a dedicated shareholder base 3. Filings will, apparently legitimately, only reflect intrinsic value with a 3 month lag. 4. Press releases could have been more clear. 5. Note in the Kingsway comment thread even VIC members struggle with whats going on here. I certainly did/do.

Itasca Capital

Formerly Kobex Capital, the company has a complex history, none of that matters now except for the legacy $35 million in NOLs that start expiring 2026 until 2034.

Today, it’s a shell with executives Kyle Ceminara, Chairman of Ballantyne Strong and co-founder of Fundamental Global Investors having controlling stakes. Larry Swets, CEO and President of Kingsway Capital are not taking a salary. Legacy cash burn should not recur. Ceminara has taken control of Ballantyne Strong (BTN) which he is transforming into an investment company and Swets investment vehicle has been described by Goodies in the VIC Kingsway Financial (KFS) write-up.  

The shell invested $10 million into 1347 LLC which was the sponsor vehicle to the Limbach Holding SPAC, the warrants were discussed on VIC as well. The investment is carried at a book value of $10 million but that figure doesn’t reflect reality.  

Itasca got  $10 million worth of Class A Units that are senior and will remain senior in 1347 LLCs capital structure. It pays 12% annual in cash or kind. In addition once distributions have been made on all of the other outstanding classes of units, 44.44% of any balance in 1347 LLC will go to the holders of Class A Units.

The language is quite convoluted which I think is the result of future plans of the gentlemen involved. In practice I think 1347 LLC no longer has any liabilities to other classes of units except the Class A units. Admittedly, this is the weak point of this idea because I’m not 100% sure. I think it holds the following securities and expect there to be no other liabilities except those to Itasca at the present:

-2,843,515 shares of Limbach Holding (LMB) Common Stock

-400.000 preferred Limbach stock can turn into  800,000 shares of common stock issuable upon conversion of Preferred Stock,

-149,167 Limbach warrants, each exercisable to purchase one-half of one share of common stock at $11.50 per whole share, -

-500,000 Limbach warrants, each exercisable to purchase one share of common stock at an exercise price of $15.00 per share

-198,000 Limbach warrants, each exercisable to purchase one-half of one share of common stock at an exercise price of $11.50 per whole share.

Value of the securities in 1347:

This is how it adds up: 

Most important valuations are the Limbach common, which is market observable and the convertible mandatory redeemable preferred stock which has a $10 million cost base. I believe the warrants are likely worth a little bit more but to give you a baseline I've gone by the Black Scholes valuation. Adjust it as you like. It won't destroy the case if you put a lesser value on them.  

The preferred stock owned by 1347 puts a floor under this idea as it yields 8% in the first three years, 10% for another two and finally 12% in the final year. It is mandatory to be redeemed after that. The total current value of the package shows the Class A Units should be rather safe.  I’ve put a very, very conservative current value of $12 million on this security which is roughly equal to the market cap of Itasca. As input for the Black Scholes model I’ve used a risk free rate of 2.5% and 33% volatility. There’s also a publicly traded comparable unit at $2.25, previously discussed on VIC.

After the Class A Unit has been satisfied Itasca takes 44% of the $39.27 million remaining.  That’s about $17.28 million or $0.78 per share. Translating it all into a current net asset value per Itasca share I get to the following:

Ultimately the safety of this investment depends on the financial health of the underlying Limbach Holdings (LMB). Limbach has just shored up its balance sheet by taking out a nasty 16% loan through an equity raise which improves that safety quite a bit. Here’s the Limbach pro-forma balance sheet:

Buysider Dane Capital estimates $20 million EBITDA for Limbach in 2017 although they could be somewhat biased. I’m not as sure of the number but it’s financial position and earnings power appear safe enough to have confidence in my conservative valuation of the preferred.

To add to the complexity 1347 may convert a preferred share into two shares of Limbach.

I’ve shown that even when Limbach Holdings shares are down 50% or 100% it doesn’t mean an Itasca Capital investment won’t show a positive return. In fact returns can be just fine as long as the company keeps paying on its preferred and has the financial wherewithal to redeem it. When it happens because of a market downturn, the returns have a good probability of being amazing on a relative basis.

Let’s see what happens to the value of securities in 1347 when the stars align, shares go to $28 and the preferred gets converted in about 4 years:

And what it means for the value of Itasca shares:

I didn’t change the NOL valuation. It helps a lot, as far as utilization goes, when Itasca gets a larger influx of capital but on the other hand we are 4 years closer to the first of these expiring.

Clearly, a large advance in the share price of Limbach results in a much larger advance in Itasca’s intrinsic value without corresponding downside risk.

Speculation

I think there’s a case for Itasca Capital purely on the current value of the securities. The NOLs may be dismissed entirely. On the other hand we have two driven capital allocators with lots of equity who would love to utilize them. The language in the press releases/filings is such that I think they are planning to acquire something with 1347 LLC possibly using debt which makes sense given the NOLs. If you look at the time left on the NOLs and the capital available at 1347 LLC it is not inconceivable they can use them in full.

Trump’s administration lowering the tax rate would negatively affect their value but Limbach is one of those companies burdened with a near 40% tax rate. Trump lowering taxes would be a huge net benefit to both Limbach and Itasca. If his administration fails to do so, well that makes the NOLs more valuable.

Swets in the 2015 annual shareholder letter:

"Another interesting opportunity is Kobex Capital Corp. (“Kobex”). We made an investment in Kobex in the second half of 2015, based on its significant discount to cash value, with the goal of investing in opportunities with other like-minded shareholders. Kobex could become either an interesting permanent capital vehicle to manage or a merger vehicle as it transforms to Itasca Capital Ltd. should its shareholders agree. We invested below its cash value and expect Kobex to convert its deferred tax asset into tangible value. Time will tell. "

I expect the board and management team will be very focused on getting the company above $15 in a few years and to this end communicating its value to the investor community at large. With the company very closely held there’s only very limited float. Limbach may have uplisted to the NASDAQ, which is good, it’s still impossible for ETF’s to add it. That would require at least a 50% float and would unlock some mandatory buying.  

How to play this

You can acquire Itasca shares directly in Canada (CVE:ICL) or the U.S. (ICLTF) but these are available in limited quantity. It is after all a nano cap at the moment. Because of the interest in the company expressed in the Kingsway Capital thread, this being my best idea that’s investable for U.S. investors and there are several alternative ways to get exposure, I thought it would be worthwhile to write it up. Kingsway owns ~30%, see VIC write-up of both Itasca AND a direct stake in 1347 LLC, Ballantyne Strong (BTN) owns ~30% as well. Ballantyne’s, controlled by Ceminara went on a bit of a run lately and it doesn’t get you as much exposure. The first option doesn’t look so bad to me given the writeup by Googie, referenced earlier.

Catalyst

-Value should show up on the balance sheet*

-1347 liquidating

*Pursuant to IAS 28 – Investments in Associates and Joint Ventures, the Company accounts for its investment in 1347 LLC under the equity method of accounting on a three-month lag basis. For the period ended September 30, 2016, the investment in 1347 LLC is reported on cost basis since the investment was made in this quarter, except that the investment reflects the Preferential Accrual of 1% per month prorated for the holding period in the third quarter of 2016.

SEDAR filing Itasca