2017 Annual Report




Live Oak Endeavors, LLC 2017 Annual Report


Annual Percentage Change

12/31/2017



Next time you’re watching the world turn with your best friend, ask him or her to cite the government agency that issues dollar bills, bet them $20 and have them pull that money from their wallet. Once they say the U.S. Treasury and you confirm that it’s actually the Federal Reserve as noted on the front of the $20 bill, collect that $20 and text me a photo. The point is to illustrate how dollars and other currencies like euros and yen, come into creation.


Central banks like the Federal Reserve and the Bank of Japan control money supply and issue currency. For many years the spigots were fully open and central banks printed forcefully. But before that currency can enter the money supply, central banks must purchase securities and those turned out to be bonds. Massive bond purchases brought interest rates to lows and negative in a few parts of the world. When rates are paltry, investors are compelled to buy equity, which is why the S&P 500 hit an all-time high in 2017. The unprecedented expansion of money supply also plowed into private equity over the years as the trading value of many private corporations skyrocketed. As the CEO of Live Oak and the steward of my investment partners’ money, price is the denominator of every investment and the higher the price paid the lower the earnings yield. Given the loft, Live Oak elected not to purchase any private equity in 2017 as we couldn’t justify pricing. Instead, we focused on cultivating the assets in our portfolio.


In 2017, the change in net worth/share was 7.32% and in fair market value/share was 5.26%. While lower than 2016, management of Live Oak has discipline and we don’t deviate from our fundamental approach no matter how “sexy” the story. If too expensive we pass as we know we can invest in our current holdings and create shareholder value. That’s exactly what occurred in 2017 and why Live Oak posted respectable gains.

Holdings


CheyTac USA ---- www.cheytac.com

In November 2016, Live Oak and another LLC managed by our team acquired 100% interest of CheyTac USA, LLC. While the transaction was challenging, the reason for the purchase is simple; CheyTac is the owner and exclusive manufacturer of the legendary M200 Intervention Firearm. The rifle system along with its brother, the M300 Intervention, are the most accurate and farthest-reaching anti-material firearms in the world, which is now validated.


In May 2017, a British SAS sniper using an M200 Intervention shot dead an Islamic State terrorist from 1.5 miles away. The shot ended up saving the lives of many soldiers in the city of Mosul and is registered as one of the most difficult kills in history. (www.cheytac.com) News outlets like DailyMail, Maxim, Daily Star, Tribunist, and Bro Bible published articles detailing the events and the world took notice.


2017 was all about building a solid production line. Major technological advancements were made and management focused on building supplier and vendor relationships. The results were a reduction in costs of goods and an ever more capable system. Given such, prices were raised on both firearms and ammunition and the order sheet is expanding.

Management is also pleased to announce that ammunition will be head-stamped with “CheyTac” on the cartridge for the first time ever, which is a monumental accomplishment given where the company was before the takeover. All of this was due to the talented team at CheyTac: Parker Allen (CFO), Gerard and Elmarie Shultz (chief engineers), and Isaiah Yennie (gunsmith). As the CEO of Live Oak, I am grateful for their efforts.


Custom Label ---- www.customlabelbottle.com

2017 was a tumultuous year for Custom Label LLC (CL). Much was accomplished on the operational side as the company’s water source, Virginia Artesian Bottling Company in Mechanicsville, VA, solidified the line and brought production to capacity. In the Charleston, S.C., market, CL negotiated a partnership with a very well-known, influential chef, Bob Waggoner. Chef Waggoner earned many culinary awards and has continued to introduce CL to many other influential chefs around town. But the acquisition of new clients has been slower than anticipated. The concept has been well received by multiple parties, but the signing of new clients has been below my expectations. Given such, CL will be looking into partnerships and other affiliations in 2018 to solidify the business. Live Oak owns 81% of Custom Label.


Mortgage Harmony dba as Rate Reset --- www.ratereset.com

Rate Reset (RR) now has over 50 credit unions across the nation using its suite of products. While the company originally focused on loan retention for its credit union customers who implemented the reset feature, RR branched into loan acquisition in 2017 through its LoanGen product. Lenders can now screen their current members to see what loans they hold away from them. Once the lender identifies a loan a member has elsewhere that they’d like to acquire, they can tailor a better offer and text or email that offer to their member. The member can then click a link on their phone and move their loan to the lender with a few taps. The reality is that consumers have loans in multiple locations. Rate Reset lender clients want to add loans to their books and they can now mine their members for a multitude of new business.


Collectively, the retention and acquisition software performed well in 2017 as revenue climbed 55% on those products. The total value of reset mortgages eclisped $1 billion for the first time ever, a significant milestone. But competition has emerged and it will be a bit of a race in 2018. The good news is that lending rates are rising and consumers are becoming antsy about their debt. Reset software is the answer in a rising rate environment. Live Oak holds 40,695 shares of Rate Reset and we estimate the intrinsic value of those shares has increased 135% since acquired.

Sweetgreen ---- www.sweetgreen.com

Sweetgreen (SG) went national in 2017. Along with new locations in east coast markets like DC and NYC, Los Angeles and Chicago markets were established. SG has over 100 locations nationwide and I expect another 30 locations will open in the next 12 months. While thrilled with their level of expansion, there are also the metrics for evaluation.

Several fast-casual chains are trying to blanket the country. Determining which one will be most successful mandates operating analysis. SG generates over $1,300 of sales per square foot, which is 40% higher than their nearest competitor, Chipotle. In 2017, they had over 3 million unique visitors to their locations while they increased digital sales by 40%. They are testing delivery options this year and managing lunch volume through pre orders. In short, they are operating on all cylinders. Live Oak is pleased to be part of this salad revolution as the company currently holds 75,260 shares.


Recent Events


Stash Storage ---- www.stashstorage.com

In the first quarter of 2018, Live Oak acquired 226,321 shares of Stash Storage. Stash is poised to revolutionize the self-storage market by offering pick-up and delivery of self-storage at no extra cost. Their advantage is that they operate in cubic square feet vs. the standard square foot self-storage model. Because they can “stash” your storage vertically they can out price traditional self-storage while offering pick-up and delivery. When done in mass, the margins become extremely attractive.

Stash opened its first location in Charleston, S.C., and is already looking to expand into strategic markets throughout the southeast. Given the inherit advantage of the model and the veracity of management, I expect Stash will add great value to Live Oak in the very near future.


In Summary


When measuring the performance of corporations, be it public or private, multiple metrics should be employed. Younger companies, which are focused on explosive growth, are often cash flow negative in their early years. Henceforth, price-to-earnings ratios can’t be used as earnings may not exist during the growth phase. But measuring sales growth and margin expansion can be just as effective as evaluating earnings. In the end, earnings power comes from both sales growth and margin improvement. In 2017, the sales of our private equity holdings were $181 million, a $53 million year-over-year increase. Simultaneously, the cost of goods decreased on inside multiple holdings, which will likely continue in 2018. More sales and better margins generate value for equity holders. Live Oak is a considerable owner of those sales and those future earnings. As an investor and owner of Live Oak shares, those earnings flow to you.


Thank you for the continued trust and confidence.


Joseph Warren

Manager

Live Oak Management, LLC

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