Live Oak Endeavors, LLC 2016 Annual Report
Live Oak Endeavors, LLC (LO) was formed in 2015 for the purpose of investing in various companies believed to have the potential to make significant returns for investors over time. Because of its unique structure, Live Oak has the ability to acquire and hold interest in companies for an extended period. The management of Live Oak has extensive experience with both private and public companies and intends use its expertise to build long-term value for the shareholders of Live Oak.
To build long-term value, management needs to increase the net worth of the company consistently. The net worth of a company is calculated by subtracting liabilities from assets. This is a worthy measure that should grow over time if management accomplishes its goals. But it is not the only measure applicable to Live Oak.
Because Live Oak holds and will continue to acquire interest in both private and public companies, it is important to understand how both are valued for accounting purposes. Marketable securities, like public stock, are carried on the books at their current market prices. But accounting requires that unlisted securities, like private stock, be shown at cost or lower. So, private stock that Live Oak purchased will be recorded at cost when calculating the net worth of Live Oak despite the fact the stock may be able to fetch a higher price. If the underlying investments in unlisted securities we purchase perform, the net worth of the company may vary substantially from the actual market value at times. Therefore, we will publish the fair market value per share in addition to net worth each year in our report.
Fair market value is our good faith estimate of the current value of all assets in Live Oak. Given there is no daily trading price for unlisted securities, we take a number of factors into consideration when valuing private companies. Those include recent purchase prices of company stock in the private markets as well as fundamental measures like sales and earnings figures. We believe the combination of measures we use gives us keen insight into the fair market value of private companies. When we can acquire assets at a price well below the fair market value we will likely do such. When we can acquire companies below their net worth we will most certainly do so.
While all of these terms are a bit confusing the true results of our efforts will be clear over time. Investments we make should eventually produce cash payments back to Live Oak, be it from the sale of businesses we own at prices higher than we paid or cash flow distributed to stock holders of a company. (I much more favor the latter. But any stock we own is available for purchase at the right price.) Cash distributions made to Live Oak are calculated in the net worth per share figure and over time I expect the net worth of Live Oak to increase dramatically.
Live Oak made two significant investments in private companies in 2015. The first was in Rate Reset, www.ratereset.com, provides loan acquisition and retention software for financial institutions. Their software allows consumers to reset their interest rates on home mortgages, car loans and credit cards as interest rates change without having to reapply for a new loan. Financial institutions have come to realize that they make more money by maintaining their book of loan business when rates change even if that rate is lower than when the loan originally started. Acquiring loans is an expensive undertaking given the marketing and necessary office support. Financial firms are more profitable when they keep their existing loans and Rate Reset is unparalleled in its ability to deliver loan retention.
The second investment was in Sweetgreen, www.sweetgreen.com, a rapidly growing eatery chain that is a destination for simple, seasonal, health salads and grain bowls. Sweetgreen opened its first store on the streets of Georgetown in Washington, D.C., in 2007. It has since grown as a sizable player with over 40 locations in seven states. Their authentic food and ability to continue to connect with patrons is evident in their fundamental financial returns, which far outweigh their competitors in both 4-wall earnings and same store sales growth.
Fair Market Value
I’m pleased to report that our two private holdings delivered substantial financial results in 2015. On average sales growth for our holdings increased 98.5% for the year. That massive increase in revenue is a testament to the unique business models of the companies Live Oak owns and it gives them the ability to achieve even more growth in 2016. That said, price-to-earnings ratios and other valuation models are inadequate in valuing both companies as all excess cash flow is dedicated to growing the sales of the companies as quickly as possible. However, we can put a value of on the companies given the measurements we use. This allows us to determine the fair market value for each share of Live Oak, which ended the year at $11.
Live Oak purposely did a very small amount of fundraising in 2015 as we deemed the number of investment opportunities to be very limited last year. That was mostly because of valuation, which was high on almost all assets. We have no interest in over paying for any investment and we will remain disciplined in our approach. The landscape is gradually changing though as various stocks, bonds and other assets have been in decline for many months. Overall, valuation is now reasonable again, and in some cases it has become quite attractive. Given such, Live Oak will likely soon raise capital to acquire more unique investments. All capital raises will be done at the fair market price of $11 per share until further notice.
It was a remarkable first year for Live Oak as the company was founded, conducted a capital raise and prudently deployed funds. That said, this is just the start as I believe we are building something truly exceptional. My goal is to construct a company that consistently increases value irrespective of market turmoil or economic developments. We have the foundation in place and a few blocks have been erected. Now we just have to increase our presence.
I appreciate the continued trust and confidence.
Joseph Warren CEO Live Oak Endeavors, LLC