Evercel Inc. (EVRC) : A Restructured, Overlooked Holding Company Trading at 4x Normalized EBITDA – With Some Serious Strings Attached

Stock Write-up by LUKE ELLIOTT (NOT Geoff Gannon)

Evercel Inc. (EVRC) is a straight forward, overlooked holding company that’s gone through a significant transformation over the past few years.

First, let’s look at the composition of the assets, then we’ll go one by one and look at how we got to present day.

Evercel is comprised of 1) 80% ownership of Printronix 2) SharpSpring (NASDAQ: SHSP) Investment and 3) Cash + Notes Receivable

1) Printronix is the global leader in Line-Matrix printing solutions, with over 90% global market share. The printing business has been on secular decline for quite some time as companies continue to adopt paperless solutions. Line-Matrix printing has experienced even more of a decline due to laser printing becoming main stream. Even so, Printronix has put in substantial effort over the last decade to stabilize their customer base, consolidate the industry, and differentiate their Line-Matrix technology so that it holds appeal and value to certain industry groups. These niches are mostly sectors where the printer application is heavy usage/high volume and in a harsher environment. They target customers who are especially cost conscious (i.e. facilities in developing countries) since Line-Matrix printers have a lifespan of 7-10 years (vs 3 for laser) and are about 6x cheaper per page.  The company reports that several global distribution and manufacturing centers of large Fortune 500 companies use their printer solutions.

Here are some footnotes of Printronix’s history:

– Printronix traded on NASDAQ as a public company from 1976 to 2008, when they were acquired by PE firm Vector Capital for $108M in cash.
– In 2009, Printronix acquired the U.S. assets of TallyGenicom during bankruptcy proceedings (previously one of their largest Line-Matrix competitors).
– In 2013, Evercel Inc. and Corona Park Investment Partners (Corona Park) acquired Printronix. Evercel paid $18.3M for an 80% stake. In connection with this transaction, Dan Allen, the Principal and Owner of Corona Park, became Evercel’s CEO.
– In 2016, Evercel sold one of Printronix’s two business units, the Thermal Division (which had low single-digit market share), for $18.3M cash. This left the Line-Matrix division for the remainCo.
– In 2016, Evercel sold Printronix’s Singapore factory for $4M and paid off all remaining debt. Directly following the sale of the Thermal Division and Singapore facility, Evercel made the announcement that they would consolidate all Printronix manufacturing operations (Singapore, China, and Mexico) to a new facility in Malaysia. 
– From 2016-2018, the Malaysian facility was built, and operations were consolidated. In addition to the manufacturing operations, the company cut costs by reducing headcount, relocating their warehouse, and leasing out the portion of their headquarters that wasn’t being utilized.
– In 2017, Printronix and Evercel announced they would transition audit certifications from AICPA auditing standards (used for private companies) to PCAOB auditing standards (required by SEC reporting companies). They chose Squar Milner as their new auditor.  

I don’t interpret this to mean that the company will start reporting to the SEC. I believe it’s more of a best-practices decision. Still, it gives them optionality.

As you can see from the above, Printronix has had several moving parts ever since Evercel & Corona Park took over in 2013. The radical transformation reminds me of a house-flip. The management team saw that Printronix had good “bones,” came in, gutted the whole thing, remodeled it from head-to-toe, and sold the adjacent, unused lot for the original purchase price of the entire home. Operationally, based on 2018 results where they were able to stabilize decreasing sales, increase margins, and generate record-high FCF. The turnaround seems quite remarkable. However, with such a small sample size, it’s difficult to determine if this was a strong, one-off year, or whether the company will be able to predictably and consistently generate similar cash flow in years to come.  

One strong suit that accompanies Printronix is their recurring consumables sales. Selling printers obviously follows the razor-razor-blade model, where customers purchase printers and then habitually reorder the consumables as they run out or on a predetermined schedule. Consumables made up 40% of Printronix’s 2018 revenues but contributed to 50% of gross profit. These products require minimal resources/support, are high margin, and make the business less economically sensitive.

Printronix’s contribution for 2018 was as follows:

Revenue: $61M
Gross Profit: $32.7M (including $1M of one-time expenses related to manufacturing ramp up in Malaysia)
Adjusted EBITDA: $14.4M
EBIT: $11.8M
Net Income: $7.5M
Net Income adjusted for one-time tax reform impact: $10.6M  

2) SharpSpring (SHSP) is a publicly traded SaaS (Software as a Service) business that provides marketing automation software.

In 2018, Evecel invested $2.1M in SHSP common stock at an average price of $3.97, equating to 529K shares. Subsequently, Evercel also invested $8.0M in a 5-year convertible note with an annual 5% payment-in-kind (PIK) interest payment. The note is convertible into shares of common stock at a price of $7.50 per share. SharpSpring can force conversion at 175% of conversion price after 120 consecutive days of trading, which is approximately $13.13. Dan Allen was also subsequently elected to SHSP’s BoD.

SharpSpring’s current share price is $16. If/when Evercel converts, they’ll own around 1.1M shares from the note and .53M shares from the equity investment; totaling around 1.63M shares.

SharpSpring currently has 9.39M shares outstanding, so Evercel’s stake will be around 15% (1.63/11). It could be less if SharpSpring dilutes.  

SHSP current market cap is around $150M. 15% x 150= $22.5M, so Evercel’s investment is worth about $20M.

Remember how I said there are strings attached?  Well here’s string number one.

The SharpSpring investment was “co-sourced” with Corona Park and the deal was structured such that Evercel receives 100% of profits up to the initial $10.1M investment, but after the $10.1M, Corona Park receives a 20% carry.

This is the CEO slicing off 1/5 of the pie for himself (after 100% ROI is achieved). Plain and simple. Some investors consider this malicious and a clear red flag. They won’t even consider investing in EVRC because of it. Others aren’t bothered by the CEO taking a large chunk off the top if it the remaining 80% leaves them with enough value. I fall somewhere between the two. While I’ve seen similar situations work out just fine for shareholders in the past, I must admit, it’s not an easy pill to swallow.  

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