Tuesday, August 9, 2022

LMP Automotive: Quick Update, Liquidation

A quick update on one of the few ideas that worked for me this year, LMP Automotive (LMPX) ($80MM market cap) announced on Monday that they have sold most of their dealerships and will be asking shareholders to approve a plan of liquidation.  In the press release (oddly, no 8-K was filed), management put out an estimate of $115-$126MM, which on ~11 million shares outstanding equates to $10.49-$11.49 per share in distributions (liquidation estimates are typically conservative).  The asset sale is scheduled to close in October, yet as of today shares trade for just $7.50/share.  Following the asset sale, by my count, LMPX will have only one new car dealership (Bachman-Benard Chevrolet-Buick-GMC-Cadillac in TN, LMPX paid $7.5MM for it in 2021) plus less than a handful of unbranded used car dealerships remaining to sell, which should be a small part of the total enterprise value.  If approved, I'm guessing a large distribution could be made before year end that would return most if not all the current share price, leaving a stub that may take time to wind down.

There are still a number of red flags around LMPX, the company is restating earnings and behind on their financials, they recently fired their CFO, and they seem to have limited oversight (whether it be truly independent board members or strong shareholders) of CEO Sam Tawfik (who is also now the interim CFO).  On the other hand, Tawfik does own 35% of the shares and has been repeatedly emphasizing via business update press releases (here and also here) that the share price doesn't reflect the private market value of the company's assets.  Getting approval for the liquidation shouldn't be an issue, since Tawfik owns 35%, getting over the 50% mark shouldn't be a problem even with a largely retail shareholder base.  The major remaining risk is the asset sale closing, we don't have much disclosure about the buyer at this point, but going back to the original thesis, car dealerships are rather fungible and if the buyer falls through, I'm sure there's one behind them willing to transact at near similar terms.

Disclosure: I own shares of LMPX

47 comments:

  1. How are you getting that share count and is it fully diluted? Thanks.

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    1. Please check my math, but they had 10.9 million shares as of 11/16 and then issued another 55k shares with the White Plains dealership acquisition.

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    2. Not material but I also added 195k in the money and vested stock options

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  2. How do you account for any tax implications here?

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    1. Not a tax accountant, but I believe any corporate level taxes would be accounted for in the estimated range and then on an individual level, usually it would be a return of capital and then any gains above your own cost basis. Happy to be corrected here, or if it is a big concern, own it in a tax-deferred account.

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  3. 8-K filed:

    https://www.sec.gov/ix?doc=/Archives/edgar/data/1731727/000121390022046376/ea163877-8k_lmpauto.htm

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    1. Thanks. $133MM asset sale. Only thing that concerns me a bit is the line the sale "constitutes a sale of substantially all of the Company's assets to the Buyer" -- where I thought they had a few more dealerships to sell.

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    2. How does that triangulate to the $115-$126 million from the press release? Do they barely have any net debt?

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    3. The previously sold their White Plains dealership for $15.8MM. In their 7/15 press release announcing that sale, they estimated 6/30 cash was $36MM, debt was $77.5MM and they also have a convertible note that's $7MM. I need to go through the edgar filing closer, but I thought they had at least one more new car dealership that wasn't in this sale and three standalone used car dealerships. Plus they could have some cash build during this quarter, maybe some working capital or inventory, that makes up the difference to get to $115-$126MM.

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  4. Great idea. What do you make of the CEO selling 9k chunks of stock as low as $3.80? Did he disclose why?

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    1. He stopped in May, it looks like a 10-b5 plan, don't really know, maybe he was buying a house or something else, hard to say. But I think actions since sort of make it a non-issue, if he was a crook or some other pump and dumper, he wouldn't be liquidating and returning cash to shareholders.

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  5. Also - what do you make of the contracts to sell the assets? they seem very weak to me (at least relative to "standard" LBO contracts. very little time to 10/31 out date (only 30 day auto extension) and no specific performance / small reverse term fee. do you know if getting manufacturer approvals for the sales would take long?

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    1. I don't have much of an opinion here, I guess I don't have much familiarity with standard LBO docs. I'll just go back to dealerships are pretty liquid assets that change hands regularly, so hopefully these are rather standard docs for dealership transactions. They do need to get OEM approval, it is worth nothing that the buyer did have trouble with Kia previously.

      https://www.pilotonline.com/inside-business/vp-ib-kia-lawsuit-1012-20201015-ffkxvepu5jhu5j2utb45gn5vzm-story.html

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  6. So what does the delisting mean for shareholders? Seems like they would’ve been kicked off the nasdaq anyway for failing to file. And now they save on public company costs. Voluntary delisting is rare, but seems like no brainer, right?

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    1. It means that we won't see an updated balance sheet to shine a light on some of the questions around how they got to their estimated distribution range. That's kind of a bummer. I want to think it is a no brainer, but don't have clarity into what assets they hold and where the cash/debt levels are today to square the numbers.

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  7. What about actual debt levels? They have not filed two quarters of financials.....

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    1. Right, that's what I meant above by cash/debt levels. In their 7/15 press release, they disclosed their debt was $78MM.

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    2. I guess let’s hope the $115-$126mm is still good. If so, this is still $10++

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  8. or they go dark and take all the proceeds for themselves over time.....

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    1. That's pretty tin foil hat. They've already said they're going to solicit a vote to approve a plan of liquidation and distribute the proceeds to investors. That's not the action of someone who is looking to "take all the proceeds for themselves".

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    2. If he is bailing because he doesn't want to be public why give 60% of cash to no-name shareholders, when he can go dark and create new preferred shares for himself to pay out over time? Tawkify and his team were already rich with trophy wives and liked hot cars so he made a go in auto...now he's done onto the next....his IPO investor money got paid out in past rallies.....

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    3. Have you seen instances of this happening? Seems unlikely, just a lawsuit waiting to happen, no?

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    4. I've seen companies go dark and then increase management compensation and drain cash, yes

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  9. Pretty incredible 1.5 year return on the Kia dealerships. I guess they benefitted from purchasing assets on a TTM number that included COVID / pre COVID numbers. They also presumably benefitted from a buyer who is willing to bet on a continued structural shift in operating margins at dealerships. Most of the public dealership operating margins are 1.75x what they were pre-COVID. If the below table doesn't come through, they made $21m / 60% on the Goodwill / FF&E and $11.6m / 35% on the real estate from purchase to liquidation.

    Kia Dealerships Acquisition Value Liquidiation Value $ Change % Change
    Goodwill, Franchise Rights, PP&E $36,001,064 $56,849,920 $20,848,856 57.9%
    Real Estate $33,100,000 $44,700,000 $11,600,000 35.0%
    Total $69,101,064 $101,549,920 $32,448,856 47.0%

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  10. I can wrap my head around the increase in value at the opco (luck and timing), but the RE value is harder. Rates were much lower at the time of purchase than they are now. Presumably cap rates went up as well? What makes the real estate 35% more valuable 1.5 years later? Would the buyer want to allocate more of the purchase price to real estate for tax purposes since it can be depreciated? This would mean that the goodwill value is even higher. Hard to play games on the allocation of purchase price to working capital. All of this is a moot point. Again, good call here. Just wondering how I could have been less skeptical on this one.

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    1. You sound far more knowledgeable about the sector than me, maybe my naivete helped me here as I was looking more at the setup/situation. Still hoping their liquidation distribution is right, but I'm thinking it might be a little short of that range based on my calcs, hard to fully know though without current financials.

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  11. Great outcome. $SMIT deal looks interesting although it’s only preliminary. Another Michael Zapata special (a la communication systems and PEGY). Stock trading unchanged despite getting a free 5% of a somewhat speculative but interesting helium and carbon sequestration company.

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    1. Thanks, this does have a lot of similarities to JCS/PEGY, knew a bit about the SMIT backstory but didn't realize they were going down this path, thanks.

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  12. $SRG liquidation looks more interesting after the settlement agreement. They’ll pay $35m to settle fraudulent conveyance claims (some of which could come from insurers) with Lampert and others making payments as well.

    $17.85-28.5 in estimated liquidating payments after subtracting the legal settlement payments. With the first payments coming sometime next year.

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    1. Thanks, I have been spending some time on SRG. Right now my current thought is whether it might be a better idea further down the road when the path is simpler, even if the IRR isn't as great then. But it is an interesting idea that I'm considering.

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    2. Down the road when the path is simpler as in they've covered the debt?

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    3. Maybe? Just not sure there's a rush, might change my mind tomorrow and buy, but I think with these there tend to be a few bites at the apple along the way.

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  13. Any idea why PFSW has been bleeding out?

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    1. Similar setup to ADES, might be some fears they pull something similar and are a buyer and not a seller.

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    2. Take a look at USAK, small logistics co that was taken out at a >100% premium, expecting same for PFSW remainco

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    3. Will do thanks, I've said a few times, but I do think there are many more buyers of PFSW's remainco than ADES's remainco, so that should help, but possibly it is selling off for similar fears, or could just be completely random.

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  14. LMP Automotive Holdings, Inc. Announces its Affiliates Entered into All-Cash Sale Agreements for its Remaining Dealership and its Associated Real Estate

    https://www.globenewswire.com/en/news-release/2022/09/14/2515741/0/en/LMP-Automotive-Holdings-Inc-Announces-its-Affiliates-Entered-into-All-Cash-Sale-Agreements-for-its-Remaining-Dealership-and-its-Associated-Real-Estate.html

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    1. Thanks - Good to see this, I thought there was the TN dealership remaining to be sold and even though we didn't get details, from the sounds of the PR, it likely closes the gap to the estimated liquidation proceeds.

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  15. Anyone know why not trading today? At Etrade, they are showing bid and ask of $0.00

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    1. It is expert market now. Unfortunately, I can't buy more even if I wanted to, but if you do have access to the expert market, probably a good buy.

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    2. Ah, so can’t sell either, I guess.

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    3. Generally, brokers will let you sell, just not buy. Need a brokerage account that allows for expert market trades to do that.

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  16. What do you think of this recent sale - are still on track for $10, $11...?

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    1. The press release makes it sound like the original liquidation proceeds guidance is on track, $10.50 to $11.50.

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  17. Any thoughts on whether their purchase agreement has a force majeure clause? Haven't been staying up to date on this, but I assume the two FL-based Kia dealerships that comprise most of the value are going to suffer big inventory write-downs. Presumably covered by insurance and the deal moves forward as expected. But I guess the buyer (do we know who, yet) could use it as a way to walk or recut the deal.

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    1. I didn't go thru every purchase agreement but I believe they're largely the same. From the Coral Gables RE purchase agreement my read is that the purchaser can terminate until 10/3/22 due to weather damage. Even if no weather damage my read is purchaser can walk away by just forfeiting the deposit -

      3.5 Termination of Agreement. At any time during the Inspection Period, Purchaser shall be permitted, in Purchasers sole discretion, to give Seller written notice in accordance with the notice provisions of this Agreement terminating this Agreement if Purchaser is dissatisfied with its physical inspection of the Property as part of its condition, development, usage, zoning, survey, title and environmental due diligence activities. Purchaser shall have no obligation to give a reason for such termination. If Purchaser delivers such a notice, then this Agreement shall terminate, Purchaser shall receive a refund of the Deposits (under this Agreement and under the Asset Purchase Agreement), and both parties shall be relieved from any further liability hereunder, except for those matters which, by their terms, survive the termination of this Agreement (the “Surviving Obligations”). The sixty (60) day period following the Effective Date is herein referred to as the “Inspection Period.” Purchaser may at its option waive its right to terminate this Agreement pursuant to this Section 3.5 by written notice delivered to Seller. Notwithstanding anything contained herein to the contrary, following the expiration of the Inspection Period, the Escrow Deposit (as defined in the Asset Agreement) shall become non-refundable except as otherwise expressly set forth in Section 11 of the Asset Purchase Agreement.

      11. CASUALTY DAMAGE. In the event that the Real Property is damaged by fire or other material casualty prior to Closing, Seller shall promptly give Purchaser written notice of such occurrence. In the event the damage creates a hazardous or otherwise dangerous environment, as determined by Purchaser in its reasonable discretion, Purchaser may elect to terminate this Agreement upon notice to Seller within fifteen (15) days after Purchaser’s receipt of Seller’s notice of such casualty, in which event the parties shall be relieved of any further obligations hereunder except for the Surviving Obligations. In the event Purchaser elects not to terminate, the parties shall proceed to the Closing and Seller shall deliver and/or assign to Purchaser all insurance proceeds collectible for such loss or damage and provide a credit against the Purchase Price equal to the applicable deductible.

      13. REMEDIES.



      13.1 Buyer’s Default. If Purchaser shall breach this Agreement at or prior to the Closing, or if the Closing fails to occur by reason of Purchaser’s failure or refusal to perform its obligations hereunder or by reason of Purchaser’s inability to perform its obligations under this Agreement, then Seller shall so notify Purchaser in writing specifying the nature of the breach. Purchaser shall have ten (10) days from the date of such notice to cure the breach. If Purchaser fails to cure said breach within said ten (10) day period or otherwise resolve the matter to Seller’s reasonable satisfaction, then Seller’s sole right and exclusive remedy will be to terminate this Agreement by giving written notice thereof to Buyer and then Seller may take the Deposits (under this Agreement and the Asset Purchase Agreement) as liquidated damages in full settlement of all claims, remedies or causes of actions against Buyer under this Agreement, including the remedy of specific performance and other forms of equitable relief. It is impossible to estimate more precisely the damages which might be suffered by Seller upon Buyer’s default. Seller’s retention of the Deposit is intended not as a penalty, but as full liquidated damages.

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    2. i think the dealership purchase agreements are equally weak. the MAC clause doesn't carve out natural disaster/hurricanes so if there is significant damage to the inventory/property I think that's a MAC. and the closing of the RE purchase agreements is a condition to the closing of the dealership purchase agreements so if the buyer can get out of the RE purchase agreement they can get out of the dealership purchase agreement. And like the RE purchase agreements there is no specific performance and the damages are limited to the deposit

      (j) Adverse Change. Since the Effective Date, no Material Adverse Change shall have occurred. “Material Adverse Change” means any change, event or occurrence that individually or in the aggregate (taking into account all other such changes, events or occurrences) has had, or would be reasonably likely to have, a material adverse effect upon the assets, business, operations, financial condition or prospects of Seller, but shall not include any event or circumstance or change arising out of or attributable to general economic or political conditions, conditions generally affecting the motor vehicle industry (including supply chain problems), or the COVID-19 pandemic.

      (b) Buyer’s Default. If prior to Closing Buyer breaches this Agreement and fails to cure as provided above, then Seller’s sole right and exclusive remedy will be to terminate this Agreement by giving written notice thereof to Buyer and then Seller may take the Deposit as liquidated damages in full settlement of all claims, remedies or causes of actions against Buyer under this Agreement, including the remedy of specific performance and other forms of equitable relief. It is impossible to estimate more precisely the damages which might be suffered by Seller upon Buyer’s default. Seller’s retention of the Deposit is intended not as a penalty, but as full liquidated damages.

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