Live Oak Endeavors, LLC 2018 Annual Report
We are pleased to present our estimate of Live Oak’s annual Fair Market Value (FMV) pricing and change below:
Equity by definition is a claim on a corporation’s earnings and assets. I remind investors of this definition often and many seem think the stock market is a guessing game with no rhyme or reason. In the short term, that may be true. But over time the claim becomes obvious as companies that earn more money go up in value. Management at Live Oak seeks to acquire interests in companies that have the ability to produce significant operating margins as we seek the earnings those margins produce.
Determining which companies can produce significant operating earnings is a fairly simple formula. We look for businesses with significant gross margins, meaning the gap between what the company pays for the goods it sells to its customer is large. So, if a company pays $1.45 for a head of romaine lettuce that it sells to customers at $9 that company generates an 84% gross margin on every head of lettuce sold. Having significant gross margins leaves the company lots of room to pay operation costs like payroll, marketing, rent etc. We like to consider for investment companies with at least 40% gross margins and 20% net margins. These two high hurdle rates leave us very few opportunities to consider. In 2018, Live Oak acquired interests in two companies with characteristics that we expect to meet our requirements: Stash Storage, Inc., and AmplfiedAg, Inc.
Holdings
AmplifiedAg, Inc. ---https://www.amplifiedaginc.com/
Live Oak acquired 720,721 shares (approx. 2%) of AmplifiedAg in November 2018. Their business model is straight forward and can produce substantial margins. AmplifiedAg retrofits boxcars to grow leafy greens aeroponically and hydroponically. It has three different units: Tiger Corner Farms, which retrofits the boxcars; Boxcar Central, which provides the software to optimize the indoor farming process; and Vertical Roots, which sells the leafy greens to restaurants, distributors, and grocery chains. What enticed us about AmplifiedAg is the yield it can produce with each boxcar. Four cars can produce the same yield as 12 acres of land. However, its product grows in a few weeks, hence producing as much as 15 crops a year from each boxcar. The implications for this concept are vast. Sales are on pace to grow significantly this year and next. As volume increases, the company should be able to generate net operating margins of more than 20%.
CheyTac USA, LLC --- www.cheytac.com
CheyTac USA (CT) continues to be one of the leaders in the firearms industry in long range accuracy. The M200 Intervention, with CheyTac .408 and .375 ammunition, is known as one of the greatest long-range rifle systems in the world. CheyTac has added two new rifles to the family: the Paladin and the Perses. These rifles allow customers to enter the brand at a lower price point.
The main goal in 2018 was to build a team comprised of experts who brought needed skills and knowledge to the company. Ellison Cribb (Executive Vice President) and Ike Yeager (Gunsmith) were hired to help solidify production and build connections in the industry. The team was able to build strong vendor relationships that resulted in a reduction in costs of goods and a shorter lead time.
In January 2018, CheyTac had a backlog of 20 plus rifles and a lead time of 4-6 months. As of today, the company has rifles in stock that are ready to ship in less than a week. While much was accomplished internally, the company struggled financially and ended the year with a sizable loss. To combat that in 2019, the company intends to expand its manufacturing capability beyond the CheyTac brand to generate more consistent revenue. Live Oak invested additional capital into CheyTac to help stabilize the company and ended the year owning approximately 30% of CheyTac.
Custom Label, LLC
Custom Label did not perform as anticipated and the remaining assets of the company are being sold. The business model was to provide superior sparkling and flat water to established restaurants and hotels in a proprietary glass bottle. The product was intended to replace brands like Fiji and Pellegrino. However, those brands had pricing power that Custom Label could not compete against as they would price their bottles at cost or lower just to keep the business. I did not expect such aggressive pricing which led to Custom Label’s demise.
Mortgage Harmony dba as Rate Reset --- www.ratereset.com
Rate Reset has nearly 50 credit unions across the country using its suite of products. The company now offers loan retention and acquisition software across mortgages, credit cards, and auto loans. The product line not only includes reset solutions but also digital pre-approvals and loan generation software. As the company has morphed into new areas, its fees have blossomed, increasing by 62% in 2018. Rate Reset recently signed two of the five largest banks in the country. The company is currently conducting a share transaction at a 260% premium to our cost. Live Oak holds 40,695 shares (approximately 4%) of Rate Reset.
Stash Storage Holdings, Inc --- www.stashstorage.com
Stash Storage is still in its developmental stage. The company has attracted 175 monthly paying clients and filled about 80% of its initial Charleston storage facility. The company nonetheless still faces many hurdles, one of which is logistics. Determining pick up and drop off routes along with pricing is a challenge and the company is still figuring out this part of the business. In whole, Stash disappointed in 2018 as sales were well below estimates. Stash management’s response to this performance has been to launch in several other markets in the next 24 months. It also is exploring a large equity raise. We will continue to push the company this year to improve its performance. Live Oak holds a significant stake of 452,309 shares (approx. 7%).
Sweetgreen --- www.sweetgreen.com
Sweetgreen (SG) spent 2018 focusing on profitable sales growth. Sales growth since inception has been truly remarkable for SG. But, as is common with rapidly growing companies, profitability has been a challenge. In 2016, the company beefed up its management to handle rapid store expansion and that paid off in 2018. SG grew sales by 25% while increasing its store level margin to nearly 20%, which allowed the company to produce over $1 million per month in gross profit, by far its highest level ever. It now operates over 100 locations in Chicago, Los Angeles, New York, Boston, Washington, D.C., and Austin. Late last year SG received a $200 million equity injection led by Fidelity Investments at $1.1 billion valuation. This represents a 62% premium to the 0.1% ownership Live Oak holds in Sweetgreen via our 75,260 shares.
Liquidity
Some investors have asked about liquidity and the ability to see cash returns on their investments in the near term. These are legitimate requests and we take them seriously. Because most of our holdings remain private, daily liquidity is not available. However, I anticipate we will see one public offering for a company we hold in the coming quarters, and the possibility of selling shares in at least one other. I also hope that we will see distributions from our various companies as they grow. As this liquidity occurs, we will likely distribute money to our members.
Fair Market Value
Fair market value (FMV) is the price, in cash or equivalent, that a buyer could reasonably be expected to pay, and a seller could reasonably be expected to accept, if the underlying asset were exposed for sale on the open market for a reasonable period of time. Management uses several metrics to determine the FMV, including price to sales ratios and discounted cash flow. Given the fact that many companies currently owned by Live Oak are private, management applies a lack of liquidity discount in calculating FMV.
FMV ended 2018 at $17.27 per share. The portfolio of holdings was weighted as follows:
AmplifiedAg 14%
CheyTac 31%
Rate Reset 16%
Sweetgreen 18%
Stash Storage 19%
Cash and Public Stock 2%
In Summary
2018 was a complex year. I was very pleased we were able to acquire shares of AmplifiedAg as I think that will be one of our best investments. I was also happy to see the growth of Sweetgreen and substantial increase in the net income for Rate Reset. However, CheyTac and Stash Storage didn’t perform to my expectation. I expect improvements in those operations, and we are closely monitoring them.
Live Oak as a whole grew quite nicely, however. We doubled our capital base with the addition of four new investment partners. Total sales for the private companies in which Live Oak has ownership grew from $181 to $228 million. We have one more small acquisition we are targeting and we are looking to make a few investments in the public markets. Again, our focus remains on acquiring unique businesses that can produce high operating margins. To date we’ve had some exceptional investments, some whose performance is still to be determined and one failure. But the winners are far outpacing the losers and that’s great news for your Live Oak investment.
As always, I appreciate your continued trust and confidence.
Joseph Warren
Manager
Live Oak Management, LLC