About Ominto (NASDAQ:OMNT)
Contributed by FG Alpha Management for GeoInvesting, LLC
This article is currently being held for further review.
- Ominto, Inc. (OMNT) has entered into two highly questionable transactions including acquiring a Danish entity with revenue under $1M and an excessive valuation of 30X revenue
- One of the largest shareholders of the acquired Danish company is also a shareholder of OMNT, and has a questionable past
- He was previously sentenced to 4 months in jail in Denmark for fraud, has been involved with several failed publicly traded US stocks and is alleged to have participated in insider trading
- His affiliation with one of the acquired companies has not been disclosed by OMNT to the SEC, but is shown on Danish business websites
- We suspect these transactions were intended to increase OMNT’s book value through booking worthless intangible assets, helping the company attain a NASDAQ listing in March 2017 that triggered equity and cash awards for the CEO, currently worth $5M and $2M, respectively, compared to the company’s quarterly loss of $4M in Q2 2017
- OMNT is up over 174% over the last year, but we believe the equity is worthless: OMNT has negative tangible equity, no obvious signs of future profitability, and will probably have to issue equity soon to fund operations
OMNT is a company that was able to fulfill NASDAQ listing requirements by acquiring two businesses with newly issued shares and booking intangible assets to bolster the company’s book value. These two acquisitions were made just ~3 months prior to OMNT’s NASDAQ listing on March 7, 2017. We question the economic and strategic rational of these acquisitions and believe the resulting company is bound to lose money for a considerable amount of time and that its equity is worthless.
More importantly, we don’t think investors or regulators are aware that Ole Abildgaard, a shareholder of one of the two acquisitions, is an individual convicted of fraud. He is also alleged to have participated in insider trading and is coincidently a shareholder of OMNT. It is our belief, based on our contact with NASDAQ, that this shareholder’s relationship to OMNT should have been disclosed in conjunction with the company’s recent uplisting.
Our experience has taught us that related party transactions uncover some of the biggest clues that give the market a reason to be skeptical. Our concern is heightened when the name(s) of related parties are not disclosed in U.S. filings after U.S. companies acquire overseas firms. Our concern in this case was further heightened after we spoke to officials at NASDAQ who confirmed our suspicions that these relationships should have been disclosed prior to uplisting.
OMNT participated in questionable related party acquisitions of two companies: Lani Pixels A/S (“Lani” or “Lani Pixels”) and Quant Systems (or “Quant”). In the case of Lani Pixels, the “related party” is an OMNT shareholder who is apparently also an investor in Lani Pixels. Of particular note is that this investor was previously found guilty of fraud and sentenced to a term of 4 months in Denmark. Even as of now, he is alleged to have participated in insider trading.
Ominto’s acquisition of a non-controlling interest in IT consulting firm Quant Systems is notable because the company has had previous business dealings with Ominto, as disclosed in its 10-K. We find the lack of disclosure regarding the transaction and Quant Systems extremely troubling.
We believe the company participated in these related party acquisitions at inflated prices solely to uplist to the NASDAQ. We simply can’t fathom why an unprofitable entity like OMNT would acquire an additional unprofitable entity for “growth” purposes. One of the acquired businesses generated less than $700,000 in revenue, and incurred $340,000 in operating losses over the last year. The other entity doesn’t even disclose financials.
Your next question might be, “What value was assigned to a business generating $700,000 in revenue and incurring $340,000 in losses?” You might be surprised to learn that the answer is a whopping $23.57 million. On top of that, it’s not clear how the acquired businesses fit into the legacy business. Lani produces computer generated animated films and Quant deals with undifferentiated IT consulting, both lacking obvious strategic ties to OMNT’s current online multi-level marketing cash-back business.
It looks like OMNT gamed the system by using intangible assets to inflate its book value/shareholder’s equity to gain a listing on NASDAQ and trigger an equity bonus for the CEO. The company booked intangible assets because of these two acquisitions that our analysis tells us it egregiously overpaid for. From our perspective, we think management was getting desperate to get their stock up since the “streamlining” moves put in place in early 2016 didn’t seem to be working.
“Beginning in January 2016, we implemented a series of changes to streamline our organization and reduce monthly operating expenses. Our efforts focused on reducing staffing costs, transferring certain functions to lower cost locations, consolidating our operations to fewer locations, and reducing our efforts on activities not related to our core operations.”
The company’s loss of $4.0 million as of Q2 2017, compared to Q4 2015, has doubled. OMNT has never made money and has racked up an accumulated deficit of $66 million. However, that has not stopped the CEO from cashing in on a nice pay day.
While shareholders now have two newly acquired companies that don’t seem to make any sense as part and parcel with OMNT’s business, the CEO received a lofty 500,000 share equity award for OMNT’s uplisting to NASDAQ as part of an amended employment agreement filed months prior to the acquisition binge. Furthermore, the company’s recently filed Q2 10-Q disclosed a $2,000,000 ad hoc cash compensation for the CEO, which he then invested in OMNT shares in a private placement. We understand this compensation to be additional to the share equity award and approved ad hoc by the board.
As we have seen in the case of many “grow by acquisition” companies that have blown up, intangible assets like goodwill can be close to worthless and often do little to nothing to add real value to a company.
Because of transactions that we believe destroy value for shareholders and enrich management, we urge NASDAQ to take a long hard look at OMNT’s listing and we urge shareholders and analysts to scrutinize these transactions at least as closely as we have.
Recent Acquisition Comes With Character Convicted Of Fraud
In December 2016, the Company acquired a controlling interest in Lani Pixels. In total, OMNT paid 2,428,571 shares valued at $4.00 per share for an economic interest of 40.02% in the new company. That implies an equity valuation of $23.57 million, net of cash acquired.
Lani is an animation production company focused on feature-length films and digital marketing content. Lani Pixels is based in Billund, Denmark and has offices in Denmark and Dubai, U.A.E.
As a result of the transaction, the Company owns 40.02% of the outstanding common shares and controls 50.02% of the voting rights of Lani Pixels through the execution of a voting rights agreement with another Lani Pixels shareholder, who is also a shareholder of Ominto. The Company exercises control over the operations of Lani Pixels and Ominto claims that Lani Pixels will act as its strategic content partner in the future. 20% of the overall stake was acquired directly from one of Lani’s shareholders, named Kim Pagel.
Lani generated less than $700,000 in revenue and incurred $340,000 in operating losses in 2016. The payment for the transaction was made 100% by share issuance. Ominto acquired an unprofitable company with no obvious strategic synergies for a revenue multiple of over 33x. We think this is outrageous!
But, what we find equally troubling is the checkered past of Lani shareholder, Ole Abildgaard.
Meet Ole Abildgaard
Ole Abildgaard, a shareholder of OMNT and also a shareholder of Lani Pixel, was sentenced to 4 months in jail in Denmark over falsifying documents of the now failed Samson Bank in the 90s.
According to his Wikipedia Page, Ole, together with long term business partner Aldo Peterson, also helped bring Liqtech public in 2011. Liqtech shares lost roughly 90% of their value since its IPO in 2011. We found serious allegations by “Flash NEWS!”, a notable Danish publication, suspecting insider trading between Aldo Peterson and Ole Abildgaard in Liqtech shares. The article hints at ongoing investigations. Danish magazines allege Ole made millions in Liqtech stock, while the stock failed to consistently trade higher than its IPO price.
Another US listed company Ole Abildgaard and his affiliates are involved with is DanDrit Biotech USA. Dandrit shares have declined roughly 75% since the company’s IPO in 2015.
It is noteworthy that Ole Abildgaard is a shareholder in OMNT via a holding companies Paseco ApS and Ominto Invest ApS, as disclosed in the notes of the company’s latest 10-K.
Ole Abildgaard is apparently also an investor in Lani Pixel via investment vehicle Lani Pixels X ApS. While this relationship has not been disclosed directly by the company, Danish business registration sites list Mr. Abildgaard as a manager of the company.
To be fair, Ominto does disclose that it entered into a share purchase agreement with a 10% shareholder of Lani Pixels, who is also a shareholder of Ominto, Paseco ApS (“Paseco”) to purchase an additional .02% of the issued and outstanding shares of Lani Pixels. However, this disclosure was buried in an SEC filing and certainly not mentioned in the press release issued explaining the acquisition. While Mr. Abildgaard is not mentioned by name, we suspect him to be the unnamed shareholder.
More Ties Between OMNT and Lani
Aside from Mr. Abildgaard being a shareholder of OMNT, we find it interesting that OMNT’s CEO Michael Hansen, COO Ms. Sorensen (who apparently is in a relationship with Mr. Hansen), and Lani Pixels’ CEO Kim Pagel, have a history of working with, or at, the Lego Group during the same periods in the 1990s, as indicated by their LinkedIn profiles and OMNT’s 10-K.
Ominto’s latest 10-K talks about the COO’s previous work history:
Ms. Sorenson was employed in a Danish marketing firm and spent two years with Modulex, a division of LEGO where she worked in the accounting and logistics department.
Michael Hansen’s LinkedIn profile shows that he was also at LEGO in the 1990’s:
As does Kim Pagel’s profile:
The work history shows that Hansen and Pagel probably knew each other some years back, prior to OMNT acquisition of Lani Pixel.
How Did OMNT Qualify for a NASDAQ Listing?
Ominto Inc calls itself an e-commerce and network marketing company. It operates an online shopping portal, through which its customers search for and purchase products offered by various online stores, including consumer products, travel related-products & services. The online cash back shopping deals are provided through ominto.com and dubli.com, which both carry the same content.
The fact that the acquisitions of Lani and Quant Systems consummated just three months before OMNT got listed on the NASDAQ can only be described as baffling, based on what OMNT paid for them. We are extremely suspicious.
- Lani was acquired in December 2016
- Quant was acquired in December 2016
The incentive for the company to achieve a listing on NASDAQ would be fairly obvious from the eyes of the company’s CEO: a NASDAQ listing triggers the release of 500,000 shares in bonus compensation for CEO Michael Hansen. His employment contract was set up November 17th 2016. This bonus would come on top of Mr. Hansen’s compensation for 2016 and 2015, which combined was approximately $6 million. This seems extremely excessive to us, considering the company’s size and horrendous financial performance. Mr. Hansen’s contract reads:
“Effective November 17, 2016, the Company entered into a new Employment Agreement with Mr. Hansen that supersedes the prior employment agreement between the Company and Mr. Hansen, dated September 14, 2015. Under the new Employment Agreement, Mr. Hansen will serve as the CEO for an initial five (5) year term, after which time, the new Employment Agreement shall continue on a year-to-year basis if not terminated by the parties. Pursuant to the terms of the new Employment Agreement, Mr. Hansen’s base salary is $360,000 per year and Mr. Hansen will be eligible to receive an annual incentive bonus of up to 100% of the base salary, as determined by the Board in its sole discretion. Mr. Hansen shall also receive a grant of 500,000 shares of restricted common stock which shall vest on the later of (i) January 1, 2017; (ii) three (3) business days after the listing of the Company’s common stock on the NASDAQ Capital Market; or (iii) such other date as may be approved by the Board.”
Furthermore, Ominto disclosed in its latest 10-Q a $2,000,000 ad hoc cash bonus for Mr Hansen, which he invested in a private placement in Ominto shares. We understand this bonus to be additional to the equity bonus.
“Additionally, in recognition of Mr. Hansen’s efforts in helping the Company obtain its approval for listing, the Company awarded him a $2,000,000 cash bonus. Mr. Hansen subsequently purchased 300,000 shares of common stock from the Company at the price of $6.90 per share, $2,000,000 of which was paid during the second quarter and $70,000 of which was recorded as a subscription receivable as of March 31, 2017. See Note 16, Subsequent Events.” https://www.sec.gov/Archives/edgar/data/1097792/000121390017005364/f10q0317_omintoinc.htm
Given the company’s operating history, shareholders may find either bonus to be extremely excessive. The necessary financial metric to consummate these bonuses of listing on the NASDAQ seemed so farfetched at first, shareholders may have simply written it off or not taken the time to review the CEO’s new employment agreement. The $2,000,000 extra cash reward was just simply approved ad hoc by the company.
No doubt, ringing the NASDAQ bell on March 20, 2017 will often probably remind CEO Michael Hansen of the sweet pay day he received, when the company that generated less than $14 million in revenue and over $6 million in losses over the last half year paid him bonuses valued around $7 million over the same period.
In order to qualify for a listing on the NASDAQ, a company has to meet certain requirements. The lowest tier that NASDAQ offers is the Nasdaq Capital Market. Here is a table that shows the Nasdaq Capital Markets listing requirements:
We looked at the latest 10-K for the period ending September 31st 2016 to see if the company was meeting these requirements. It was immediately apparent that OMNT did not have enough Stockholder’s Equity to qualify. In fact, book value/shareholder’s equity has been consistently negative throughout the company’s history because of continued losses exacerbated by the substantial accumulated deficit.
As we see it, there are three options to swing a company’s book value/shareholder’s equity to a positive number:
- Earn yourself into positive territory by generating profits
- Issue equity in a secondary or private placement
- Issue equity in an alternate type of transaction
Clearly, the third option can be the quickest and easiest if a company is unable to earn its way out of a deficit or is unable to attract real interest from investors.
The process is simple: attach an insane valuation to an acquired business, and pay them in shares. From a balance sheet perspective, it actually looks like you just added real equity to the business.
This is the practice that we suspect OMNT to be guilty of. Additionally, OMNT supplemented the increase in its book equity by issuing shares to vendors for services, to employees, and in private placements.
Simple Accounting Gimmicks Increase Book Value/Shareholder’s Equity
Simple accounting gimmicks can be used to increase a company’s book value/shareholder’s equity. Regardless, if the company was aiming to increase book equity, or if OMNT saw real synergies in acquisitions.
1. Lani Pixel A/S – Lani Acquisition Makes Little Economic and Strategic Sense
OMNT, which has been an unprofitable company for more than four years, appears to ascribe to the notion that acquiring another money losing company is the pathway to shareholder prosperity. We disagree with this move.
For now, we simply fail to understand how Lani Pixels, a business specializing in producing computer generated animated films, adequately fits into OMNT’s legacy business. The short explanation given in the press release is anything but satisfying:
“Ominto plans to continue to develop Lani Pixels as a marketing services company and will use Lani Pixels as a strategic content partner towards this effort. Lani Pixels will not only continue its existing efforts in developing feature length, animated movies but will also assist Ominto through the development of animated marketing content.”
Doubting Lani’s Credibility
Considering that OMNT paid such a high multiple for Lani, we find it odd that there is very little news about Lani on OMNT’s website or anywhere on the web for that matter. Furthermore, records we obtained from Danish auditing firms do nothing to boost Lani’s credibility as a business worth acquiring. According to an audit report, Lani bought DKK 6.5 million in assets and had over DKK 18 million in receivables from affiliated parties by the end of 2016. In our opinion, the 2015 balance sheet from the corresponding audit raises serious doubts about Lani even being a real business, at least in the same form as when it was acquired in 2016.
As you can see, the company had nothing on its balance sheet but DKK 50,000 in liquid assets in the year ended 2015. Sometime between 2015 and its acquisition by OMNT, the company grew its asset base by DKK 28.8 million, or about 57,760%. The timing of the company acquiring these assets before its eventual acquisition leaves us little choice but to be suspicious.
2. Quant Systems
In December 2016, the Company also acquired a non-controlling interest in Quant Systems, Inc., an information technology service company in Irving, Texas. OMNT owns 18.75% of the common shares of Quant and does not exercise control over the company’s operations. Quant received 803,571 shares valued at $4.00 per share in exchange for the equity stake, valuing Quant at roughly $17.14 million.
Quant is privately held and there is little information available about it. The company’s website lists some impressive clients, but a Google search reveals surprisingly little additional information about Quant. The “Testimonials” section of the website is interesting, as one of the quotes is from someone named “John Doe” and we were unable to find a trace of the other two people mentioned.
Quant has previously received payments from OMNT for IT consulting services, as disclosed in quarterly and annual SEC filings. Quant also lists Dubli and Ominto as clients of theirs, but it is our understanding that it is now one and the same with OMNT. Quant apparently recruits a majority of its employees from India, as revealed by a simple LinkedIn search of Quant Systems.
There is no information regarding the management team on Quant’s website. Only a general info email address without any additional type of customer contact information is available. Frankly, the website is embarrassing for an IT company. Google searches on the company also reveal very little, which seems odd for a company that OMNT is valuing at $17 million.
The Result of Two Ridiculous Acquisitions: NASDAQ Requirements Achieved
Regardless of whether or not the acquisitions provided value to shareholders, the result was that as of December 31, 2016, OMNT’s balance sheet showed that the company had passed the required book value/shareholder’s equity threshold.
This was certainly a success for CEO Michael Hansen, who was slated to receive his additional 500,000 shares of equity compensation after the uplisting. It remains extremely questionable as to whether these transactions will ever benefit shareholders.
The company’s “equity” is mostly just hot air. The equity stands at $6.6 million, but the tangible book value of the company is at least negative $30 million. The company lists $26 million in goodwill and about $7 million in capitalized expenses as “assets” on the balance sheet.
Accordingly the liquidity section in the last 10-Q cautiously reads:
“Current assets include deferred costs of $13.4 million which are being amortized over a twelve-month period and represent about $1.1 million of expense per month. Excluding deferred costs from current assets and deferred subscription fee revenue and deferred advertising revenue from current liabilities, we had a working capital deficit of approximately $42,000 at December 31, 2016.”
Despite the intangible assets and working capital deficit, OMNT continues to be listed on the NASDAQ. This is yet another example why we believe NASDAQ should rethink its listing requirements allowing new company listings without a reviewed approval.
In this specific case, we believe NASDAQ should take a close look at the timing of these transactions and more specifically, how OMNT wound up getting their listing.
OMNT: A Failing Company with Ugly Financials
Ominto calls itself a “pioneer in global Cashback shopping, reaching 100 countries, 15 languages, and thousands of merchants across the world”. OMNT’s legacy business, now called DubLi, utilizes a network marketing model. The network marketing model is often pejoratively synonymous with “pyramid scheme” in the eyes of many consumers and investors.
Public scrutiny on the network marketing model is arguably at, or near, all-time highs. Having this business model as the “legacy” business to fall back on furthers OMNT’s precarious position as a company. While a larger company with a sizable cash position like Herbalife has so far been able to survive, albeit maimed, we believe OMNT would cripple under similar fines and sanctions from regulators.
The company even points out the risky nature of this model in its 10-K:
Our DubLi Network marketing program is subject to a number of federal and state regulations administered by the Federal Trade Commission, or FTC, and various state agencies in the United States, as well as regulations on direct selling in foreign markets administered by foreign agencies. We are subject to the risk that, in one or more markets, our network marketing program could be found not to comply with applicable law or regulations. Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive schemes, often referred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately are made to consumers and that advancement within an organization is based on sales of the organization’s products rather than investments in the organization or other non-retail sales-related criteria. The regulatory requirements concerning network marketing programs do not include “bright line” rules and are inherently fact-based, and thus, even in jurisdictions where we believe that our network marketing program is in full compliance with applicable laws or regulations governing network marketing systems, we are subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and regulations by governmental agencies or courts can change. The failure of our network marketing program to comply with current or newly adopted regulations could negatively impact our business in a particular market or in general.
Ominto and Dubli are barely listed among the top twenty cash back sites in consumer reviews and we found a number of consumers to be very frustrated with the service.
From an economic point of view, OMNT is simply a disaster. Revenues are volatile, and the business has been continuously generating losses.
OMNT’s Quarterly Revenue and Income Breakdown
For the trailing twelve-month period, total revenues were $22.0 million and the company’s loss was negative $11.7 million. EBITDA was negative $11.7 million.
The current valuation implies a P/S of roughly 13.0x and an EV/S in the same range. This valuation is not rational, especially since we believe the company will continue losing money and will need to raise equity for the foreseeable future.
Excluding the change in working capital, the company burned roughly $8 million over the last twelve months. With no credit facility to draw on, an equity raise seems imminent. Although the company shows almost $12 million in cash on its balance sheet as of December 31, 2016, it deferred costs of about $6 million in the three months leading up to this quarter. We suspect OMNT’s cash balance to have shrunk substantially since December 31 as it continuously loses cash from operations.
Luckily for the cash burning company, it had the luxury of increasing its authorized share count from 14 million to 200 million in October 2016. The stock has also seen a strong runup lately, which we think makes it perfectly priced for a devastating equity raise.
Other Red Flags
1. Significant Turnover at the CFO Position
The company has a high board and executive turnover, and it is especially notable that the company seems to be unable to find a CFO who is willing to stay for an extended period of time. Former CFO Thomas Virgin’s tenure at the company lasted less than 10 months. Since 2013, a span of 4 years, the company has had three CFOs:
Eric Nelson – Eric Nelson came in as Chief Financial Officer in February 2013 with an initial term of five years. Mr. Nelson ceased serving as the Company’s Chief Financial Officer as of May 5, 2015.
Thomas Virgin – Effective May 5, 2015, Mr. Virgin entered into an employment agreement with the Company to serve as Chief Financial Officer for an initial term of five years, renewable for each successive one-year period. Mr. Virgin ceased serving as Chief Financial Officer in January 2016.
Raoul Quijada – Raoul Quijada took over as CFO from Thomas Virgin.
2. No Major US Registered Investors
The stock has been trading in the United States for over 10 years, generates a majority of its revenues from the U.S., and has the core of its operations in the U.S. Only just recently has OMNT branched out internationally, when it acquired Lani, a Danish-based entity.
Despite the majority of its business centralized around the U.S., there are no major U.S. stockholders of record. The top five holders of OMNT from largest to least are in Dubai, Hong Kong, Lebanon, Denmark, and Lebanon (again). While this is not necessarily a negative sign in and of itself, we find this to be surprising for a company with a long history of operations in the U.S.
OMNT is a company that was able to fulfill NASDAQ listing requirements by acquiring businesses with newly issued shares and booking intangible assets to give the appearance of tangible equity. We question the economic feasibility of the transactions and the credibility of the acquired businesses themselves. The strategic rationale for acquiring these businesses, which operate in completely unrelated areas, escapes us, and the company offers no meaningful explanation. OMNT is consistently losing money and we anticipate an equity raise to be coming soon.
As public investors with an interest in preserving the credibility of the microcap space and U.S. equity markets, we urge NASDAQ to look at the red flags we have pointed out in this report.
Disclosure: Short OMNT
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