Advertisements
Feeds:
Posts
Comments

Archive for the ‘Kona Grill Inc (NASDAQ:KONA)’ Category

Greenbackd Portfolio Q1 performance and update

March 1, 2009 marked the end of Greenbackd’s first quarter, so we thought we’d take the opportunity to update you on the performance of the Greenbackd Portfolio and the positions in the portfolio, discuss some changes in our valuation methodology since our first post and outline the future direction of Greenbackd.com.

First quarter performance of the Greenbackd Portfolio

We get many questions about the content and performance of the portfolio. We had originally planned to report on a six-monthly basis, but we have now decided to report on a quarterly basis so that we can address these questions on a more frequent basis. Although it is still too early to determine how Greenbackd’s strategy of investing in undervalued asset situations with a catalyst is performing, we’ve set out below a list of all the stocks we’ve included in the Greenbackd Portfolio and the absolute and relative performance of each at the close on the last trading day in our first quarter, Friday, February 28, 2009:

greenbackd-portfolio-performance-2009-q13The absolute total return across the current and former positions as at February 28, 2009 was -3.7%, which was +7.0% higher than the S&P500’s return over the same periods. A negative return for the first period is disappointing, but we are heartened by the fact that we outperformed the market by a small margin.

You may have noticed something odd about our presentation of performance. The S&P500 index declined by 18.0% in our first quarter (from 896.24 to 735.09). Our -3.7% performance might suggest an outperformance over the S&P500 index of +14.3%. We calculate our performance on a slightly different basis, recording the level of the S&P500 index on the day each stock is added to the portfolio and then comparing the performance of each stock against the index for the same holding period. The Total Relative performance, therefore, is the average performance of each stock against the performance of the S&P500 index for the same periods. As we discussed above, the holding period for Greenbackd’s positions has been too short to provide any meaningful information about the likely performance of the strategy over the long term (2 to 5 years), but we believe that the strategy should outperform the market by a small margin.

Greenbackd’s valuation methodology

We started Greenbackd in an effort to extend our understanding of asset-based valuation described by Benjamin Graham in the 1934 Edition of Security Analysis. Through some great discussion with our readers, many of whom work in the fund management industry as experienced analysts or even managing members of hedge funds, we have had the opportunity to refine our process. We believe that what started out as a pretty unsophisticated application of Graham’s liquidation value methodology has evolved into a more realistic analysis of the balance sheet and the relationship of certain disclosures in the financial statements to asset value. We’re not yet ready to send it into space, but we believe our analyses are now qualitatively more robust than when we started and that has manifest itself quantitatively in better performance (more on this below).

The two main differences between our early analyses and our more recent ones are as follows (these are truly cringe-worthy, but that’s why we undertook the exercise):

  1. We didn’t take account of the effect of off-balance sheet arrangements and contractual obligations. This caused us to enter into several positions we should have avoided, including BGP and VVTV.
  2. We were using overly optimistic estimates for the recovery rates of assets in liquidation. For example, we started using 50% of Gross PP&E. We now use 20% of Net PP&E. We now apply Graham’s formula as the base case and deviate only when we believe that Graham’s formulation doesn’t reflect reality.

The effect of these two broad errors in analysis was to create several “false positives,” which is to say that we added stocks to the portfolio that wouldn’t have passed our current, more rigorous standards. The performance of those “false positive” stocks has been almost uniformly negative, and dragged down the performance of the portfolio. As an exercise, we went back through all the positions we have opened since we started the site and applied our current criteria, which are more stringent and dour than our earlier standards. We found that we would not have opened positions in the following eight stocks:

  • BRN (-13.1% on an absolute basis and +4.9% on a relative basis)
  • BGP (-10.8% on an absolute basis and -21.6% on a relative basis)
  • COBR (-17.1% on an absolute basis and +3.6% on a relative basis)
  • HRT (-25.3% on an absolute basis and -9.7% on a relative basis)
  • KONA (+87.8% on an absolute basis and +81.9% on a relative basis)
  • MGAM (-24.2% on an absolute basis and -5.0% on a relative basis)
  • VVTV (-25.0% on an absolute basis and -23.1% on a relative basis)
  • ZLC (-72.0% on an absolute basis and -61.1% on a relative basis)

It seems we got lucky with KONA, but the performance of the balance of the stocks was wholly negative. The performance across all stocks listed above was -12.5% on an absolute basis and -3.9% on a relative basis. Excluding these eight stocks from our portfolio (i.e. treating the portfolio as if we had not entered into these positions) would have resulted in a slightly positive absolute return of +0.7% and a relative performance over the S&P500 of +12.5%. This is a compelling reason to apply the more dour and rigorous standards.

We like to think we’ve now learned out lesson and the more dour and rigorous standards are here to stay. Set out below is an example balance sheet summary (for Chicago Rivet & Machine Co. (AMEX:CVR)) showing our present base case discounts from book value (circled in red):

example-summary-2

Readers will note that these are the same base case discounts from book value suggested by Benjamin Graham in the 1934 Edition of Security Analysis, more fully described in our Valuing long-term and fixed assets post under the heading “Graham’s approach to valuing long-term and fixed assets.” Why we ever deviated from these standards in the first place is beyond us.

Update on the holdings in the Greenbackd Portfolio

Leading on from our discussion above, four of the stocks we picked using the initial, overly optimistic criteria no longer meet our more stringent standards but haven’t yet been removed from the portfolio. We’re going to take our medicine now and do just that. To make it clear, these stocks aren’t being removed because the value has deteriorated, but because we made a mistake adding them to the portfolio in the first place. As much as we’d like to treat these positions as void ab initio (“invalid from the beginning”), we’re not going to do that. We’ve made a full accounting of the impact they’ve had on the portfolio in the First quarter performance of the Greenbackd Portfolio section above, but we don’t want them affecting our future performance. The stocks to be removed from the Greenbackd Portfolio and their absolute and relative returns are as follows:

  • BRN (-13.1% on an absolute basis and +4.9% on a relative basis)
  • HRT (-25.3% on an absolute basis and -9.7% on a relative basis)
  • MGAM (-24.2% on an absolute basis and -5.0% on a relative basis)
  • COBR (-17.1% on an absolute basis and +3.6% on a relative basis)

We’ll provide a more full discussion of where we went wrong with these stocks at a later date, but suffice it to say for present purposes that all were errors from the second bullet point in the Greenbackd’s valuation methodology section above (i.e. overly optimistic estimates for the recovery rates of assets in liquidation).

There are fifteen stocks remaining in the Greenbackd Portfolio:

Eight of these positions (ABTL, ACLS, ARCW, CAPS, CRC, CRGN, NSTR, and VOXX) are trading at or below our nominal purchase price and initial valuations. The remaining seven positions (AVGN, DITC, IKAN, MATH, NENG, NTII, and SOAP) are trading above our intial purchase price but are still at varying discounts to our valuations. We’ll provide a more full update on these positions over the course of this week.

The future of Greenbackd.com

We are going to trial some small changes to the layout of the site over the next few weeks. We’ve already made the first change: the newest comments now appear at the top of the list. We’ll also be amalgamating some pages and adding some new ones, including a page dedicated to tracking the portfolio with links to the analyses. We’re also considering some options for generating income from the site. At the moment, Greenbackd is a labor of love. We try to create new content every week day, and to get the stock analyses up just after midnight Eastern Standard Time, so that they’re available before the markets open the following day. More than 80% of the stocks that are currently trading at a premium to the price at which we originally identified them (NTII, SOAP, IKAN, DITC, NENG, MATH and AVGN) traded for a period at a discount to the price at which we identified them. This means that there are plenty of opportunities to trade on our ideas (not that we suggest you do that). If you find the ideas here compelling and you get some value from them, you can support our efforts by making a donation via PayPal.

We look forward to bringing you the best undervalued asset situations we can dig up in the next quarter.

Advertisements

Read Full Post »

The Official Activist Investing Blog has published its list of activist investments for December (the investments with links are to our latest update at the time of this post):

Ticker Company Name Activist Investor
ACLS Axcelis Technologies Inc Sterling Capital
AEPI AEP Industries KSA Capital
ARS Arris Group Shamrock Activist Value fund
ATML Atmel Corp. Microchip Technology
AVGN Avigen Inc Biotechnology Value Fund
BCSB BCSB Bancorp Financial Edge Fund
BIOD Biodel Inc Moab Partners
CAMD California Micro Devices Corp Dialectic Capital Management
CKEC Carmike Cinemas Mark Cuban
CPWM Cost Plus Stephens Investment Management
CRXX CombinatoRX, Incorporated Biotechnology Value Fund
CTO Consolidated Tomoka Land Co Wintergreen Advisers
DANKY Danka Business Systems PLC DCML LLC
DDS Dillard’s Inc. Barington Capital; Clinton Group
DIN DineEquity Inc Southeastern Asset Management
DPS Dr Pepper Snapple Group Trian Fund
DUSA DUSA Pharmaceuticals SRB Management
DVD Dover Motorsports GAMCO
ESIO Electro Scientific Industries Nieremberg Investment Management
FIC Fair Isaac Corp Sandell Asset Management
FSFG First Savings Financial Group Joseph Stilwell
GGP General Growth Properties Pershing Square Capital
GLOB.OB Global Med Technologies Victory Park Capital
HIFN Hifn, Inc Adaptec, Inc
ICGN ICAgen, Inc Xmark Opportunity Partners
INFS InFocus Corp Nery Capital Partners
ITP Intertape Polymer Group KSA Capital Management
JAVA Sun Microsystems Southeastern Asset Management
JTX Jackson Hewitt Tax Service Shamrock
KANA.OB Kana Software KVO Capital Management
KFS Kingsway Financial Services Joseph Stilwell
KONA Kona Grill Mill Road Capital
LAQ The Latin America Equity Fund City of London Investment Management Co
LCAV LCA-Vision Inc. Stephen Joffe
MAG Magnetek Inc Riley Investment Management
MATH.PK Mathstar, Inc Salvatore Muoio; Zannet Opportunity Fund
MGAM Multimedia Games Dolphin Limited Partnership
MGLN Magellan Health Services Shamrock
MOVE Move Inc. Nierenberg Investment Management
MVCO Meadow Valley Corp Carpe Diem Capital
NDD Neuberger Berman Dividend Advantage Fund Western Investment
NTMD Nitromed Inc Deerfield Capital
OFIX Orthofix International Ramius Capital;
OPTV OpenTV Corp. Discovery Equity Partners
ORNG Orange 21 Costa Brava Partnership
PHMD PhotoMedex, Inc. James Sight
PIF Insured Municipal Income Fund Bulldog Investors
PPCO PenWest Pharmaceuticals Perceptive Advisors
PRXI Premier Exhibitions, Inc Sellers Capital
RDC Rowan Companies Steel Partners
RHIE RHI Entertainment Baupost Group
RIVR River Valley Bancorp Davee Thomas
SLRY Salary.com Cannell Capital
SLTC Selectica, Inc Versata
SUG Southern Union Co Sandell Asset Management
SUTM.OB Sun-Times Media Group Inc. K Capital
TIER Tier Technologies Inc Discovery Equity Partners
TLGD Tollgrade Communications Inc Bradford Capital
TMI TM Entertainment & Media Bulldog Investors
TRGL Toreador Resources Nanes Delorme Partners
TRMA Trico Marine Kistefos AS
TXCC TranSwitch Corp Brener International Group
TXI Texas Industries Southeastern Asset Management
WBSN Websense Inc Shamrock
WEDC White Electronic Designs Corp Wynnefield Capital
WOC Wilshire Enterprises Bulldog Investors
WRLS Telular Corp Simcoe Partners

Read Full Post »

Welcome back to Greenbackd and happy new year for 2009. We hope that you had a good break. There have been a number of positive developments in the companies we discussed last year. Set out below is an update on those positions we had open in the Greenbackd Portfolio at the close of 2008:

  • Trilogy has increased its stake in ABTL to 7.4%. ABTL is up 18.6% since our first post but we are maintaining our position because we think it’s still worth 50% more.
  • BVF has endorsed the MNOV offer for AVGN. AVGN is up 20% since our first post but we are holding on because we think the merger presents an opportunity for AVGN’s stockholders to receive around $1.20 per share in cash (almost 60% higher than AVGN’s $0.78 close Friday) and the possibility of “an extraordinary, uncapped return” if MNOV is successful post-merger.
  • BRN has filed its September 10Q and we believe that its liquidation value has increased from $6.52 per share to $6.91 per share. The stock is up 41% since our initial post. We still see the liquidation value some 40% higher than BRN’s Friday close of $4.95, so we will maintain our position.
  • CRC is down 6.3% from our initial post. Other than the retirement of the CFO, we have no other news to report. With CRC in a liquidity crisis, the retirement of the CFO is a worrying development. That said, we see CRC’s liquidation value at around $2.45 per share, which is more than 450% higher than its Friday close of $0.43, so we propose to maintain our position.
  • A group of “high-powered executives” plan to save INFS from “New York sharks.” The stock is up 15.9% to $0.73 since our initial post. Its liquidating value is still some 58% higher at $1.15 per share and so we are maintaining the position.
  • We’ve closed our position in KONA for an 88% gain in 18 days.
  • A new activist investor has filed a 13D for MATH and is lobbying the company to liquidate. MATH is up 17.7% since our first post but it’s still trading at half its liquidating value and a little more than half its net cash backing, so we’re maintaining our position.
  • ZLC is off 16.8% from our initial post. We’ve estimated its liquidation value at $7.63 per share, which is still 90% higher than its $4.01 close Friday, so we are maintaining our position in ZLC.

Although it is still too early to determine how Greenbackd’s strategy of investing in undervalued asset situations with a catalyst is performing, we’ve set out below a list of all the stocks we’ve included in the Greenbackd Portfolio and the absolute and relative performance of each. This is the standardized format we propose to adopt to track Greenbackd’s performance at 6-monthly intervals:

Current holdings (As at January 5, 2009)

greenbackd-portfolio-current-holdings-performance

Former holdings (As at date of our closure of the position)greenbackd-portfolio-former-holdings-performance

The absolute total return across the current and former positions as at January 5, 2009 is 14.2%, which is 8.4% higher than the S&P500’s return over the same periods. As we discussed above, the holding periods for Greenbackd’s positions has been too short to provide any meaningful information about the likely performance of the strategy over the long term (2 to 5 years), but we believe that the strategy should outperform the market by a small margin.

We look forward to bringing you the best undervalued asset situations we can dig up in 2009.

Read Full Post »

We’ve decided to exit our position in Kona Grill Inc (NASDAQ:KONA). We first posted about KONA on December 15, 2008 when the stock had last traded at $1.31. At Friday’s $2.46 close, our theoretical profit on the play of $1.15 equates to an absolute gain for holding KONA of 87.8%. The S&P 500 closed December 12, 2008 at 879.73 and closed Friday at 931.80 (+5.9%), so we’re up 81.9% on a relative basis.

We started following KONA because it was an undervalued asset situation with a potential acquirer – Mill Road Capital – raising its stake in the company through November last year. We’ve closed our position for two reasons:

  1. KONA’s stock price has now risen to our estimate of its liquidating value of $14.8M or $2.47 per share. When we opened the position at $1.31 KONA had a market capitalization of just $7.9M, which meant it was trading at almost a 50% discount to its liquidating value. The discount is now gone, and that’s a good enough reason to close the position.
  2. KONA has entered into an agreement to issue stock to the CEO’s father at a $1.19 per share. The price is a substantial discount to the market price for KONA stock at the time of the agreement, the price KONA solicited from Mill Road Capital and the current market price. Behaviour like this – issuing stock at a discount to liquidation value when competing offers are available – raises red flags for us about KONA management’s lack of regard for KONA stockholders.

Our holding period for KONA was 18 days, which was unexpectedly short, and ended before Mill Road Capital was able to persuade KONA to undertake some catalytic event. We mentioned in our About Greenbackd page that the market would occasionally spontaneously recognize the underlying asset value and remove the discount, and that seems to have happened here. By any measure, an 88% return over 18 days is an excellent return, but we caution that it was a happy accident and is unlikely to be repeated.

Read Full Post »

Mill Road Capital has filed an amended 13D attaching a letter sent to Kona Grill Inc (NASDAQ:KONA). In the letter Mill Road Capital raises some concerns about the issuance of KONA stock to the CEO’s father at a substantial discount to the then current market price and the price that KONA solicited from Mill Road Capital in a December meeting. Mill Road Capital’s letter to KONA is set out below:

Marcus Jundt
Chairman & CEO
Kona Grill, Inc.
7150 East Camelback Road
Suite 220
Scottsdale, AZ 85251
Dear Marcus:

I am writing as a follow-up to our meeting on December 17, 2008. In that meeting which Rick Hauser attended, you outlined the following proposal:

•Mill Road Capital (“Mill Road”) would make a personal loan to Hauser and you for $6 million. This loan would be secured by Hauser’s and your personal assets including the stock in Kona Grill, Inc. (“Kona” or the “Company”).

•Hauser and you would use the $6 million to purchase 4 million newly issued shares of Kona at $1.50 per share.

•As compensation for making the loan, Mill Road would be allowed to buy 2 million newly issued shares of Kona at $1.50 per share, and Mill Road would be given one seat on the Board of Directors.

In that meeting, we rejected your proposal on two grounds. First, we believed it violated the Sarbanes-Oxley amendments to the Securities Exchange Act of 1934 prohibiting the Company from directly or indirectly arranging loans to management. We further rejected the proposal because it was not part of a competitive process that would ensure the highest value to the Company and all of its shareholders.

At the end of the meeting, we indicated that we would be willing to take part in any competitive process that the Company initiated in order to either raise funds or sell the Company. You noted that no such transactions would be completed before year end.

I note that in the 8-K filed by the Company yesterday, the Company said it had entered into a subscription agreement to sell shares to your father at $1.19 per share, a substantial discount to both the price of $1.50 per share that you solicited from us and the current market price of $1.57.

Mill Road Capital is the 2nd largest shareholder in the Company. We remain committed to seeing the Company undertake a fair and competitive capital raising process that would ensure the highest long-term value to all shareholders.

Is it your plan to subject that proposed transaction to the fully competitive process that we requested in the meeting on December 17th?

Sincerely,

Thomas Lynch
Senior Managing Director
Mill Road Capital L.P.

It seems that rather than undertake a fair and competitive capital raising process, KONA has issued stock to the CEO’s father, which is a disappointing outcome for KONA’s stockholders. The fact that the issuance was undertaken at such a discount to the prevailing market price for KONA stock raises a red flag for us.

Read Full Post »

Kona Grill Inc (NASDAQ:KONA) is an undervalued asset situation with a potential acquirer raising its stake in the company through November. Mill Road Capital made a cash offer in March to acquire KONA for $10.75 when the stock was trading at around $8.76. Since the offer was rebuffed by KONA in April the stock has slumped 85% to close yesterday at $1.31. Mill Road Capital has continued to buy stock, raising its stake to 10% in November from 8.2% in June. At $1.31, KONA has a market capitalization of just $7.9M. We estimate that its assets in liquidation are worth around $14.8M or $2.47 per share. With KONA trading at a discount of nearly 50% to its liquidating value and Mill Road Capital continuing to buy stock, we believe it is an attractive opportunity.

About KONA

KONA owns and operates 18 restaurants located in 12 states in the United States. The restaurants feature a selection of mainstream American dishes, as well as a range of appetizers and entrees with an international influence, including a selection of sushi. The menu items also incorporate over 40 signature sauces and dressings that Kona Grill makes from scratch, creating appeal for the lifestyle and taste trends of a diverse group of guests. The menu offerings are complemented by a full service bar offering an assortment of wines, specialty drinks and beers. Effective September 14, 2008, the Company closed its restaurant in Naples, Florida. KONA’s investor relations website is here.

The value proposition

According to the most recent 10Q, KONA has been consistently generating positive cash flow from operating activities. In the year ending December 31, 2007, the company generated $5.7M and has continued to generate positive operating cash flow each quarter for the last year. The company continues to consume cash, however, as it invests in new restaurants. While we believe that KONA has value as a going concern, our analysis demonstrates that the market is pricing its stock  at a substantial discount to its liquidating value (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):

kona-summaryKONA’s value lies in its restaurants, carried on the balance sheet in its $53.7M in net property, plant and equipment. Discounting that figure by a third to $36M equates to $5.99 per share in value. Deducting all liabilities from the discounted assets leaves a liquidating value of around $14.8M or $2.47 per share.

The catalyst

Mill Road Capital is seeking to take KONA private. This 13D filing details Mill Road Capital’s investment thesis for KONA:

[Mill Road Capital] acquired shares of the Common Stock based on their belief that the Common Stock represents an attractive investment opportunity. [Mill Road Capital] further believe that [KONA] would be better able to realize its full value as a private entity.

On March 28, 2008, Mill Road Capital sent to Kona a non-binding offer to acquire all of KONA at a cash price of $10.75 per share:

Re: Notice of Acquisition Proposal

Ladies and Gentlemen:

Mill Road Capital, L.P. (“Mill Road”) is a substantial shareholder of Kona Grill, Inc. (“Kona” or the “Company”), currently owning approximately 325,000 shares or 4.9% of the Company. Mill Road has closely followed Kona since 2006, and we are extremely impressed with management and the Company. We believe that the public market does not adequately value small companies such as Kona, and by staying public, the Company will continue to be subject to undue regulatory burdens and pressure to maximize short-term results at the expense of long-term performance. We believe Kona will be better able to realize its full potential value as a private entity and are, therefore, making an offer to acquire all of the outstanding shares of the Company.

Mill Road is pleased to submit a non-binding offer to acquire all shares of the Company’s stock at a cash price of $10.75 per share. This represents a 23% premium to the closing price of $8.76 as of March 27, 2008. We would anticipate that the transaction would be accomplished through a merger of a company organized by Mill Road with and into the Company, as a result of which all stockholders of the Company would be entitled to this cash consideration.

Mill Road is a Greenwich, Connecticut based investment firm with approximately $250 million of committed equity capital. Our limited partners include a prominent and highly respected group of state pension funds, foundations, endowments and insurance companies. The investment professionals of Mill Road are a core group of former Blackstone professionals who have successfully completed more than 20 control transactions in which more than $600 million of equity capital was deployed with total transaction value of several billion dollars. Additionally, we have significant industry experience as a substantial investor in many public restaurant companies and through my position on the Board of Directors of Panera Bread Co. (NASDAQ: PNRA) from 2003 to 2006.

Our industry and transaction experience will allow us to quickly complete due diligence and definitive documentation. Considering the amount of our investable capital, Mill Road can readily fund the entire transaction contemplated by this acquisition proposal.

We are prepared to commence negotiations immediately with respect to this acquisition proposal and wish to close this transaction as soon as possible. We look forward to the opportunity to discuss our proposal in more detail with the Board of Directors and management. It would be our pleasure to meet in person at a location of your choice.

You may contact me directly at (203) 987-3501. I look forward to discussing our proposal at your earliest convenience.

Sincerely,
Mill Road Capital L.P.

By: Mill Road Capital GP LLC
Its General Partner

By:

Thomas Lynch
Senior Managing Director

KONA responded to Mill Road Capital on April 18, 2008 indicating that the letter had been distributed to KONA’s board for discussion at its next board meeting. On May 1, 2008, KONA told Mill Road Capital that it was not interested in pursuing the transaction.

Mill Road Capital has continued to purchase KONA stock, paying between $1.85 and $6.91 according to the latest amendment to their earlier 13D. As of November 14, 2008, Mill Road Capital controlled 10% of KONA.

Conclusion

KONA is an undervalued asset situation with a catalyst in the form of a potential takeover from Mill Road Capital. Given the deterioration in KONA’s stock price since the rejection of Mill Road Capital’s initial bid, we would not expect Mill Road Capital to offer $10.75 again. We do believe, however, that any bid would be at a premium to the current stock price. If we are wrong and a bid does not materialize from Mill Road Capital or some other acquirer, the down side should be limited because KONA is already trading at a substantial discount to its value in a liquidation.

KONA closed Friday at $1.31.

The S&P 500 closed Friday at 879.73.

[Disclosure: We do not presently hold KONA.  This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

Read Full Post »

%d bloggers like this: