Why We Bought about 15 Million Shares of Phorm in One Image

pform table 10 8 2014

Disclaimer: Michael Bigger and related entities own about 15 million shares of Phorm. Phorm is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. In other words, the probability of losing all your investment in this situation is very high. Phorm has generated no revenues for most of its 10+ years of existence. Take our opinions with a grain of salt and do your homework. None of Bigger’s entities individually or in aggregate have an obligation to file its position with the SEC or any other foreign regulatory entities at the time this article was published. The table contains forward looking metrics that are highly speculative. This post is not a recommendation to buy or sell the stock.

The Latest

  • COSI: This Turnaround is Fully Baked
    Posted by on September 12th, 2014 at 10:39 am

    We first wrote about $COSI back in June after the first quarter earnings call.  In that post, we described the situation, our small trading position, and our desire to investigate the situation further.

    At that time we decided to go to Boston to meet the Cosi team. We wanted to feel how the Cosi experience in Boston differs from what we are experiencing in New York. We wanted to determine if the concept is exportable outside of Boston. In addition, we wanted to determine how much capital the company needs to be funded to success.

    We had already determine that if we were satisfied with our investigation we would approach the company to invest $1M directly into the company if it raised an additional $4M.

    Unfortunately, our visit was delayed because a member of our team broke her leg. We rescheduled the meeting to August 20th.

    On August 19th, the company announced that Janus and a then current shareholder invested $4.5M in the company directly at a price of $1.15 a share. We are happy for the company but bummed out for not having a chance to invest on the same terms…Especially after getting more comfortable that the company meets our criteria for a situation worthy of an investment.

    We met RJ Dourney, CEO of Cosi, and many members of his executive team at the Cosi office in Boston on August 20th. Overall we were very impressed with RJ, his team, and the Boston Cosi locations we visited.

    RJ joined Cosi as CEO back in March of this year. Prior to that, he was the most successful Cosi franchisee. He owns the rights to the Boston area and approximately 15 locations.  It is now clear to us that RJ has a formula for success in the fast casual arena. His locations are clean, efficient, and profitable. A hedge fund manager told us that he met RJ a few years ago, when RJ was an independent Cosi franchise operator.  He was so impressed by RJ’s franchise business in Boston that he offered to invest directly into RJ’s corporate entity, Heartstone. RJ declined. Now that RJ manages Cosi corporate, the opportunity to make an investment in his leadership is available to all of us.

    In his few months as CEO of Cosi, RJ has taken aggressive action to move the company towards profitability. He replaced almost the entire executive team, and moved the corporate office from the suburbs of Chicago to downtown Boston.

    RJ’s formula for success in Cosi involves cleaning up the stores, increasing labor efficiency, and making the brand more current in line with the Boston model.  Making these improvements costs money, and the most recent financing round goes a long way toward meeting that goal.  In addition, the capital infusion from Janus made it clear to us that RJ and new CFO Scott Carlock can raise capital to fund this turnaround.

    Overall, Cosi is in a great space for two reasons.  First, fast casual is a growing area filling the void between low-quality fast food and higher quality restaurants that require a full hour for lunch.  At Cosi (and competitors Panera and Chipolte, to name a few), customers can get a delicious lunch in just a few minutes. Second, Americans are moving toward high-quality, healthy food. Cosi makes all its bread in-store, which means the bread contains simple ingredients and tastes fresh.  Most people could eat at Cosi almost 5 days a week due to the large variety of healthy menu options (I don’t think the same could be said for CMG).  Check out this video to see what we mean: youtu.be/-A0eG0s2x9Q

    Anecdotally, Cosi recently rolled out a more high-quality chicken product along with with a price increase to cover the cost. RJ said that not one single customer complained about the higher price.  They noticed it, but are more than willing to pay for the uptick in quality.  So clearly there is a need for high quality, fast, healthy food.

    So, we establish that Cosi has a great brand with a great management team in place and a business model that is proven in Boston.

    Currently there are 113 restaurants.  66 of them are company-owned, or 58%.  The balance, 47 restaurants are franchises.  Here is a breakdown of revenues and costs for the company-owned stores during the first half of 2014:

    COSI 1H2014:


    % of revenues



    Food Costs









    Gross Profit



    Compare that to Chipotle and Panera 1H2014:




    % of revenues


    % of revenues




    Food Costs















    Gross Profit





    A quick glance of the numbers shows you that Cosi’s Labor and Occupancy costs are significantly above that of the competition, while food costs are significantly below.  RJ and team are focused on increasing labor efficiency as a critical piece of their turnaround strategy.  If they can get labor costs down to 35% (slightly below the current 38% but a bit closer to PNRA’s 22% and CMG’s 27%), the picture looks like this:

    COSI Target Labor Costs:


    % of revenues



    Food Costs









    Gross Profit



    Now let’s talk about Occupancy costs.  COSI is spending 35% of revenues on occupancy costs, this should be closer to 25%.  Now, occupancy costs are at least partially a fixed cost, so the problem can be broken out into (a) revenues per restaurant are too low, and (b) lease costs are too high.  RJ and team are clearly aware of both issues.  Let’s start with revenues.  Each company-owned store is currently generating about $1.1mm to $1.25mm per year in revenues.  RJ’s Boston franchise stores are doing about twice that, closer to $2.25 or 2.5mm.  If company-owned store revenues can increase by around 30% to about $1.5mm / store (so a significant increase but still pretty far away from the Boston stores), we get to $100mm annualized in top-line revenues.

    Now, to address (b), they hired a real estate workout company to help them terminate and / or renegotiate some leases and there is likely some wiggle room.  Between increasing revenues per store and renegotiating leases, management believes a long-term run rate for occupancy cost should be closer to 25% of revenues:

    COSI Target Occupancy Costs


    % of revenues



    Food Costs









    Gross Profit



    That puts gross profits a little closer to the competition, with about 10% additional room to improve even from there.

    Given that the current market cap is $25mm, It seems like a tremendous opportunity to invest in a company with potential gross profit of $15mm from company stores + another $3mm of franchise revenues = $18mm.  And that is on the same store count, before we even consider growing store count.

    Now let’s talk about growing store count.  Now, the first priority for RJ and team is to get the current store base in order.  But in the long-term, there is huge potential for growth.  Cosi has 113 stores currently with a mix of 60% company-owned / 40% franchise.  Panera has 1810 locations with a mix of 50% company-owned stores and 50% franchise locations as of July 2014.  RJ believes there are about 2000 potential locations nationwide.  So long-term, with a profitable operating model at the store level, Cosi could expand to rival Panera’s size in terms of number of locations.  Even with 10 x = 1130 total stores and the current 60/40 split between company-owned and franchise, the potential is huge:


    % of revenues



    Food Costs









    Gross Profit



    $150mm in gross profit from company-owned stores + $30mm in franchise revenues (10x current $3mm) is $180mm in total gross profit.  Even if net profit is half that, so $90mm, at a P/E of 10x (PNRA is at 20x), the company could be worth $900mm in the long-term.  That is about 30x the current market cap.  It is going to take time and reinvestment capital to get there, but the team is already laying the groundwork for this type of success. We think the Cosi team will focus on implementing the Boston processes throughout the organization over the next year. Once all of Cosi is ready to serve an amazing experience, we believe RJ will press the pedal to the metal from a public relations standpoint. It might take a year or two to bring revenues closer to its potential. At that point, we think Cosi will start expanding aggressively. This is a five years story at a minimum before the full bloom.

    As you can see, we believe there is tremendous opportunity in COSI if RJ and team can right the ship and get it headed in the correct direction.  Based on our meetings, we feel confident in their ability to do so. Unfortunately, we are not the only ones confident in RJ and team based on the >100% run-up in the stock from $1.12 when we first started buying to above $1.80.  We plan to build our position over time at the right prices through open-market acquisitions and / or participation in a secondary offering if the opportunity arises.

    Do you think Cosi’s turnaround is fully baked?

    Disclaimer: Bigger Capital and related entities own a small trading position in COSI which we plan to build. COSI is a highly distressed situation and a microcap stock, and therefore it is not suitable for the majority of investors. The likely outcome of this type of investment is a loss of principal. In other words, the probability of losing your entire investment in this situation is very high.

    Written by Jennifer Galperin.  Follow me on Twitter and Stocktwits.

  • Phorm Investment Thesis
    Posted by on August 22nd, 2014 at 12:05 pm

    • On August 21, 2014 we bought 13,244,444 shares of Phorm, an Internet personalization technology company (Press Release).
    • Phorm is listed on the AIM Exchange in London under the ticker $PHRM and the stock is currently trading at 9 pence a share.  At a market capitalization of $100M we believe PHRM represents a unique situation for extremely aggressive investors operating in the micro-cap growth space.
    • Our investment thesis is based on our expectation that Phorm is about to experience explosive sales growth at large scale this fall as its platform throughput converges toward critical mass in Turkey, Russia and China.
    • As a growth company, PHRM’s value is not obvious in the current financials. All its value is in the explosive potential for the future.


    Phorm is an Internet personalization technology (ad-tech) company that partners with leading Internet Service Providers (ISPs) to provide a platform for highly targeted advertising. Phorm installs its hardware/software solution at its ISP partners’ locations and inspects the Internet traffic packets of opted-in customers going through its platform at the center of the network. Phorm’s software then interprets this information to deliver market-leading advertising conversion results.

    The company is operational with test and small-scale campaigns in Turkey, China and Russia. It plans on expanding to larger campaigns and growing its global footprint in 2015.


    Founder and Chief Executive Officer Kent Ertugrul has been a member of Phorm’s Board of Directors since the company began in 2004. Kent has built up a number of businesses in finance and technology over the past 20 years. Kent attended St Paul’s School in London and holds a Bachelor’s degree in Politics from Princeton University. He started his career in investment banking, working at JP Morgan, Credit Suisse and Morgan Stanley before going into business on his own.

    His early ventures included Migs Etc, which offered tourists flights on Mig aircraft as the Soviet Union embraced market economics. Additionally, as director and Chief Financial Officer, he oversaw the growth of Compass Technology into a leading PC-based voice mail company. In 1991 Compass merged with California based Octel Communications, which in turn was acquired by Lucent Technology. Prior to starting Phorm, Kent founded Life.com, a desktop software and online interactive diary, and Voxster, a company enabling instant messaging from email.

    Kent has worked for more than 17 years with the same technology team specializing in creating and developing technology to enhance social interaction. Phorm was publicly listed on the London Stock Exchanges AIM market in 2004. (Source Company)

    Mr. Andrew James Croxson, also known as Andy, serves as the group’s Chief Operating Officer, Chief Financial Officer and Secretary of Phorm Corporation Limited (formerly Phorm Inc.). Mr. Croxson serves as Interim Global Chief Financial Officer of Phorm, Inc. since December 2008. He has deep experience of advising brand leading media and technology companies and strategic insights into building and scaling global operations. He was employed at Technology, Media and Telecommunications (TMT) specialists Ingenious Consulting. He served as a Partner at Spectrum Strategy Consultants. He serves as Director of Phorm China Limited. He served as a Director of Phorm Corporation Limited from June 19, 2012 to April 30, 2013. He is an ACA qualified chartered accountant and has a Masters Degree from both Oxford and Cambridge Universities. (Source: Bloomberg)

    I met with management a month ago and I am very impressed by their vision for the company.

    Value Proposition

    Phorm’s business model aims to deliver highly targeted quality advertising to internet users. Google ($GOOG) advertising is “search input” driven and therefore limited in scope.  Phorm’s technology looks for patterns in a user’s viewing habits (not just text search) through a safe and anonymous opt-in system. Phorm’s algorithm can then present more relevant advertising compared to what is already present on all pages (including the long tail) its users visit. This advantage results in a higher conversion rate than text search and a higher advertising value proposition at the long tail with more relevant ads.

    All parties involved gain value:

    ISPs are attracted to Phorm’s solution because it enables them to access a substantial portion of the $133bn online advertising market, competing with search engines (Google, Baidu).  Currently, search engines like Google capture the lion’s share of directed advertising through ad-words type of algorithms, where advertisers pay on a per-click basis to appear in a specific search result. Phorm splits the advertising revenues with the partner ISPs.  The ISPs are highly incentivized to adopt Phorm’s platform because the partnership allows the ISP to diversify revenues and participate in the huge and growing online advertising market.

    Customers of the ISPs are incentivized to opt-in with free anti phishing/malware software, promotions, and more relevant advertising.

    Web publishers and advertisers value this service because of Phorm’s higher conversion rate than text search and a higher advertising value proposition at the long tail with more relevant ads and more revenues generating capabilities.

    ISP Providers

    Phorm has been successful in partnering with ISPs in Turkey, Russia, and China.  Right now the majority of revenues are derived from the partnership with TTNET, which has a leading market share in fixed line within Turkey.  With partners in Russia and China, Phorm is currently in the testing phase and expects to begin small-scale commercial campaigns in the next few months.

    To Critical Mass Sales Cycle

    It is our understanding that the “To Critical Mass Sales Cycle”, which is defined as the time from Phorm’s introduction to an ISP to the launch of an initial large scale marketing campaign, ranges from 2 to 4 years under normal conditions.  Obviously, only when a large set of customers have opted-in can Phorm approach Web publishers and advertisers with an appealing value proposition. Upon the closing of a large advertising contract, the business then enters a hyper growth phase of revenues.

    As the company gains traction in its root markets, we expect the length of this cycle to shrink feeding on its successes as it enters new geographies.

    In theory, this is how it is supposed to work.

    The Delay

    phorm chart


    Phorm went public on the London AIM Exchange in 2004. Its stock price increased to 3000 pence in 2008 and has since declined to 9 pence. What went wrong? The disruptive nature of Phorm’s proposition resulted in a significant PR headwind caused by a commercially-driven world-wide smear campaign (Source: Company).  A professional group of anti-Phorm campaigners, posing as ‘grass-roots’ campaigners, were successful in preventing Phorm from reaching commercial scale. After causing some initial delays its impact on its sales cycle is now decreasing significantly. Phorm obtained a Court order against certain protesters which should discourage potential campaigners from going after the company.

    Phorm has not yet experienced a meaningful amount of sales in its history. Losses increased to $63M in 2011 and $47M in 2013. The company has an accumulated deficit of about $280M. The company exited 2013 with a monthly burn rate of about $3M.

    Currently, Phorm is as ugly as you can get and that is keeping investors away. We think this is about to change.


    Here is a snapshot of the 2014 interim results to June 31 (Press Release):

    phorm financials

    In the press release, Kent Ertugrul states:

    In summary, growth rates achieved so far have been very significant and we expect them to accelerate. Comparing H1 2013 to H1 2014, we have seen a 44 fold increase in peak daily unique users, a 42 fold increase in advertising requests and a 18 fold increase in revenues. Simply extrapolating those growth rates moving forward would lead us to highly respectable large scale revenues. However, we believe that, based upon what we currently have in hand and in our pipeline, rates of growth should in fact accelerate further, particularly as current test campaigns convert into full-scale commercial campaigns.

    We believe that Phorm’s revenues, because of the nature of its “To Critical Mass Sales Cycle”, will follow the 44 fold increase in peak daily unique users. Currently, Phorm’s financials are as ugly as you can get, and that is keeping investors away. We think this is about to change.  If in fact the rate of growth accelerates further which we believe will happen this fall, the market’s perception about Phorm is about to change in a dramatic way.

    Why We Invested

    We believe that the latest equity funding will help the company approach cash flow positive. This aggressive statement implies that Phorm will see its revenues explode in the next six months as it completes its initial sales cycle in Turkey, Russia, and China. To reach break-even requires the company to reach more than $40 million in revenues at a minimum. What gives us the confidence that this is about to happen?

    There are three things that are essential for Phorm to reach economic viability.

    1.       The technology must work.

    2.       The company must persuade a very large number of ISP customers to opt-in.

    3.       The company must develop relationships with a large numbers of advertisers and online content publishers.

    During 2013, the company has demonstrated across several case studies in Turkey that the technology works. The technology has delivered highly effective advertising at market leading conversion rates for many of its advertiser customers.

    Although this was enough to prove the business model, it was performed at such a small scale (less than 1M users) that it did not generate significant revenues. But today Phorm is reaching more than 5 million users daily in Turkey.  This allows the company to pursue large scale advertising budgets.

    The Turkey business is ready to see a significant increase in revenues very quickly. The Turkey online advertising market should reach $0.8B market in 2014. In Turkey, Phorm has a partnership with TTNET which controls more than 70% of the broadband market. Phorm is in a great position to capture a significant slice of this market.

    It gets better…

    Phorm has partnered with 6 ISPs in Russia reaching 10.4m users. The business is at the test campaigns stage but it should follow the Turkey business trajectory. The online advertising market in Russia is about $2.6B. Phorm is in a great position to capture a nice slice of this market as well.

    It gets way bigger

    The company expects to have in excess of 50 million opted-in ISP customers in China by the end of the year.  China has 618m Internet users from which 190m are broadband users. Some 53 million China residents logged onto the Web for the first time in 2013 (Source: Investors’ Business Daily) which bodes well for broadband service growth. The online advertising market is $18B currently and should benefit from the strong Internet adoption tailwind.

    Recently, Phorm signed a memorandum of understanding with China Telecom which will speed up the establishment of partnerships with additional regional carriers. The company is now commercially live with eight ISP partners split between Russia and China. We believe that more Chinese ISPs are about to come online.

    The total online opportunity in China, Russia, and Turkey is $22B. In 2015 and beyond Phorm will most likely expand its geographic footprint globally. Over time, we expect the company to tackle the entire $133B global online advertising opportunity. The advantaged nature of the model should help Phorm take a material share of this market. As we said before, success in its current business will help Phorm shrink the “To Critical Mass Sales Cycle” which will add more fuel to its expansion and growth.

    If the current raise is insufficient to bring the company to cash flow positive, we believe that given the growth potential, the company will get additional funding. If this happens, the dilution will be mitigated by the massive growth rate this company should experience in the future.


    Phorm has a market capitalization of $100 million. We believe that this is an amazing value for an advantaged online advertising business. It is true that our analysis focus squarely on the potential for significant revenue expansion without paying much attention to net income. We believe that if revenues come in as expected, Phorm will be rewarded handsomely even if its net profit margins come in at a much lower level than Google’s 21% net after-tax profit margin.  Phorm has about $280M of accumulated deficit to recover before it starts paying taxes.

    This business has the potential to reach more than $1B in revenues within five years. A conservative 10% net profit margin would push the stock to much higher levels than the current stock price. You do the math. If you gave me $280m today I could not build a Phorm. The spent money has not been lost. It is embedded in the value of the platform.

    If our expectation about its revenues doesn’t materialize, the stock is going to zero.

    Disclaimer: Michael Bigger and related entities own more than 13 million shares of Phorm. Phorm is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. In other words, the probability of losing all your investment in this situation is very high. Phorm has generated no revenues for most of its 10+ years of existence. Take our opinions with a grain of salt and do your homework. None of Bigger’s entities individually or in aggregate have an obligation to file its position with the SEC at the time this article was published.

  • The Energy was in the Air at the Plug Power Annual Meeting
    Posted by on July 25th, 2014 at 2:08 pm

    On Wednesday, July 23, Plug Power  ($PLUG) held it’s annual shareholder meeting in New York.  We attended, as well as some other new and long-time shareholders.  During the meeting, Andy Marsh, the CEO, gave a presentation that reaffirmed our bullish view on the long-term prospects of the company.  

    In a nutshell, PLUG is currently in the material handling business (i.e. forklift truck batteries).  Specifically, PLUG built an industry to deliver GenKey and GenDrive, the turnkey solutions that can have a site up and running in a month flat.  PLUG provides the units, a service contract, and a source for hydrogen that makes the sales decision easy for the customer.  Andy gave two anecdotes that speak to the traction PLUG is gaining with customers.  First, $WMT announced earlier this year a 3 year deal to deploy PLUG products to 6 distribution centers.  They just deployed their second in July and have plans to deploy the third, originally slated for 2015, in September, more than 3 months ahead of schedule.  So WMT is moving fast to deploy PLUG products.  Second, Andy indicated that the sales department has started to receive in-bound calls from large competitors to WMT.  So success at WMT is making the sales decision easier for other potential new customers.

    GenKey by itself is a $40Bn business total opportunity worldwide.  Expansion to Europe and Asia will be primarily through JV’s.  In Europe, HyPulsion (JV between PLUG and hydrogen producer Air Liquide) is driving success.  In Asia, PLUG is working with Hyundai to break into that market.

    Beyond offering the GenKey solution, as we have all known for some time, there are other businesses that PLUG has on its horizon.  This year they completed a test run of airport tuggers powered by hydrogen for FedEx.  They are going live in Memphis during the 4th quarter. That is about a $500k to $1Bn market in the US.  A test of Transportation Refrigeration Units (TRU’s) powered by hydrogen is scheduled for the fourth quarter of this year at the Sysco facility located  on Long Island.  That is a $5Bn to $10Bn opportunity in the US.  

    In addition, Andy discussed his blueprint to expand the GenKey offering to a large network of retail stores and small distribution centers.  Under the current model, a site needs about 100 forklift trucks or more to make a PLUG solution economical.  However, leveraging the hydrogen supply and distribution route provided by a nearby hydrogen powered distribution center, PLUG can bring hydrogen to a single truck at the store level.  This opens up the market tremendously within the material handling area.  

    We still believe it is day 1 for the premier global hydrogen system integrator.  

    We are looking forward to the earnings release on August 14.

    Written by Jennifer Galperin.  Follow me on Twitter and StockTwits.

  • Letter to American Apparel’s Discredited Board of Directors
    Posted by on July 17th, 2014 at 9:00 am


    States That All Current Directors Should Be Held Accountable For the Reckless Decisions of the Board

    Demands the Resignations of Both Remaining Incumbents, David Danzinger And Allan Mayer

    New York, NY – July 17, 2014 – Bigger Capital Fund, LP, Bachelier, LLC and the Bigger Family, significant shareholders of American Apparel, Inc. (NYSE: APP) (“American Apparel” or the “Company”), today announced that they have delivered a letter to American Apparel’s Board of Directors.  The full text of the letter is included below:

    July 17, 2014

    Board of Directors

    American Apparel, Inc.

    747 Warehouse Street

    Los Angeles, California 90021

    Dear Members of the Board of American Apparel:

    The Bigger Capital Fund, LP, Bachelier, LLC and the Bigger Family are significant shareholders of American Apparel, Inc. (NYSE: APP) (“American Apparel” or the “Company”).  We have followed the recent developments at American Apparel with a growing sense of puzzlement and concern.  We have become confident that American Apparels entire Board of Directors (the “Discredited Board”) — all seven of its current members — have caused serious damage to the value and reputation of the Company. American Apparel, a household institution with strong business fundamentals and great prospects has been brought to the brink of financial distress and all this, in our view, because of the reckless actions of the set of directors who were responsible for overseeing our business and protecting the value of our investment.

    We are extremely gratified to see that five of the current seven directors will be replaced with new members of the Board under the recently disclosed arrangement dated July 9, 2014 with Standard General L.P. and certain of its affiliates and Dov Charney, now former CEO of American Apparel (collectively, the “Standard General Group”).  However, there can be no justification for the two remaining discredited incumbents, David Danzinger and Allan Mayer, to stay on.  We firmly believe that Messrs. Danzinger and Mayer, who are supposed to remain as directors and Co-Chairmen of the Board, are directly responsible for the value erosion and reputational harm to the Company and as a result have lost the confidence and support of the shareholders and should immediately resign.

    The Discredited Board has taken a number of reckless actions that go directly against the best interest of shareholders.  Most shockingly, this Board engaged in an apparent coup stealthily and abruptly ousting American Apparel’s long-standing CEO and largest shareholder knowing that their actions will cause a near-imminent default under important contractual obligations of the Company and cause it to default on nearly $10 million in loans.  Worse, the Discredited Board kept shareholders entirely in the dark about its plans to change the effective control of our company.  The Discredited Board calculatedly waited until shareholders (including Mr. Charney with his then approximately 23% stake) had cast their votes to reelect them at the annual meeting on June 18 and then quickly reconvened just minutes after the closing of the polls and voted to oust Mr. Charney from his position as a CEO (and imminently under the terms of his employment agreement as a director of the Company, a position to which the shareholders of American Apparel had elected him on June 25, 2013).  Messrs. Danzinger and Mayer had fiduciary duties to do what is best for us, the owners of the Company.  Messrs. Danzinger and Mayer are bound not only by their responsibilities as our fiduciaries, but also by the proxy rules to inform shareholders of all information that shareholders may consider material to their voting decision prior to casting their vote.  It is mindboggling that Messrs. Danzinger and Mayer would not have thought that shareholders would want to know of their plans to uproot the senior leadership of our Company before voting on the election of directors.  In our view, Messrs. Danzinger and Mayer have breached their fiduciary duties to shareholders and withheld material information that should have been disclosed in the Company’s proxy materials for the annual meeting.

    To add injury to insult, on the heels of your unilateral decision to overhaul the Company’s leadership, this Board made another unilateral decision to adopt a shareholder-unfriendly rights plan a/k/a poison pill.  The effect of this shareholder rights plan was to stifle shareholder input by impeding the ability of shareholders to act together in engaging with the Company’s management and the Discredited Board on critical issues regarding the leadership of our business.

    It is unclear to us how the continuity of Messrs. Danzinger and Mayer on the Board is a positive for shareholders.  For example, during Mr. Danzinger’s tenure American Apparel’s stock price has fallen from $1.72 in 2011 to today’s $1.15. Similarly, during Mr. Mayer’s tenure which started in 2007, American Apparel’s shares have lost 92% of their value.  With such poor track record it is hard to see why directors Danzinger and Mayer should continue to act as stewards of the shareholders’ capital. Notably, leading proxy vote advisory firm, Institutional Shareholder Services (ISS) recommended a “withhold” vote last year with respect to the reelection of David Danziger as a result of his service on more than three public boards while serving as a CEO of an outside company.  Under ISS corporate governance guidelines there are serious concerns that Mr. Danziger may have too many board engagements to devote the proper amount of attention to American Apparel.  We share the concern.

    Furthermore, under its agreement with the Standard General Group, the Company has agreed to form a new committee of independent directors of the Board, the Suitability Committee, for the purpose of overseeing the continuing investigation into alleged misconduct by Dov Charney.  Mr. Danziger, one of the directors who made the decision to oust Mr. Charney in the first place, will serve as one of the three members of this committee.  We believe it is a clear disservice to shareholders and the integrity of the investigative process to place this decision partially in Mr. Danziger’s hands once again.  It is clear that Mr. Danziger’s decision has already been made and he never thought it necessary to see the results of a completed investigation before making it.  We firmly believe that any related investigation must be overseen solely by individuals who will have an open-minded, fresh perspective on the matter and will be able to render an impartial decision untainted by their prior involvement in Mr. Charney’s ouster.

    Directors Danzinger and Mayer and their fellow members of the Discredited Board should have informed shareholders of the investigation into Mr. Charney’s conduct from its outset. This is critical information that shareholders had the right to know.  Instead, the Board completely mismanaged the process by concealing the allegations and investigation from the investment public and then choosing to act unilaterally to oust Mr. Charney with no explanation to shareholders until after the fact, all mid-way through the ongoing investigation.

    It is also noteworthy, that this same Board that has felt compelled to oust Mr. Charney even if it means defaulting on close to $10 million in loans, chose to disregard the Company’s poor operating and financial results from 2007 through 2012 and reward Mr. Charney by extending the maturity of the Charney Anti-Dilution Provision which entitled him to up to approximately 20,416,000 shares of the Company’s common stock as anti-dilution protection (decision we criticized publicly at the time, see our letter to the Board available here, http://biggercapital.squarespace.com/biggercapital-investment/2013/10/10/american-apparel-memorandum.html  ).

    In short, Messrs. Danzinger and Mayer have made seemingly arbitrary decisions taking reckless risks with our capital and jeopardizing our business with little regard for shareholder interests or the future of our Company.  All seven current directors must be held accountable for this blatant disregard of shareholder rights and value.  Accordingly, we demand and expect that directors Danziger and Mayer immediately tender their resignations from the Board and all of its committees.

    We look forward to a new chapter for American Apparel under the oversight of a thoroughly new Board uncompromised by the current Board’s disastrous decisions of the recent and far past.



    Michael Bigger

    Bigger Capital Fund, LP

    Bachelier, LLC

  • New CEO Lights a Fire in the Ovens at Cosi
    Posted by on June 17th, 2014 at 2:35 pm

    cosi_storefrontOn May 15, COSI Restaurants ($COSI) announced earnings for the first quarter, which ended on March 31.  In the earnings call, new CEO RJ Dourney enthusiastically described his strategy to improve discipline at the corporate level and return the company to profitability.  He plans to maximize the brand’s capacity, and he has the experience in the industry to do it.  He has worked to grow what he calls “best-in-class” companies Chilli’s from 16 to 890 restaurants domestically, and Applebees from 250 to 1300 restaurants domestically.  RJ was nice enough to give me 30 minutes of his time last Friday, and after speaking with him I am confident he is the right guy to turn around COSI’s fortunes.

    RJ Dourney began his relationship with COSI as a franchisee in 2005.  At that time he chose COSI because he believed there is a unique brand essence, with fresh baked bread and healthy menu options.  He opened 5 stores in Boston and grew to 15 locations by 2014, all operating successfully and profitably.  In March of this year, Mr. Dourney became the new CEO of the company.

    RJ has already started to deploy his successful franchise strategy at the corporate level.  He hired a new VP of HR, an operations expert, and an  IT manager.  He has imported the operating system from the Boston locations.  He has re-started the review of the culinary component and is happy with the results so far.  He moved the corporate office from a 27,000 sqft facility outside of Chicago to a 6,000 sqft facility near Boston.  He hired HILCO to help the company get out of some of it’s bad leases.

    He plans to increase the percentage of franchises compared to company stores in the long-run by partnering with exceptional franchisees that can successfully own and operate multiple locations.  He cited the Applebees model, which consists of primarily franchises (about 80%).

    One of the biggest issues facing turnaround candidate companies is cash flow.  First quarter cash burn was $3.2mm, and cash on the balance sheet was $2.8mm at 3/31.  On May 20, the company placed a $2.5mm note with AB Opportunity Fund and AB Value Partners.  At the current cash burn rate, they have about 1-2 quarters before they will need to raise capital again.  RJ said on the earnings call that he plans to slow the bleed significantly in the second quarter, and he doesn’t believe there will be additional need for financing.

    In order to achieve a successful turnaround we believe the company should seek funding to allow it to execute its plan accordingly. A $5 million raise would give the company the much needed capital for achieving success. Our view on this subject differs from management’s perspective but successful turnarounds usually require more capital than expected. If the company decides to raise more capital, it is something we would be interested in looking at.

    We have a very small position in the company but will build a meaningful position if we can convince ourselves that the success the company is achieving in the Boston area can be exported across the chain. We believe that the company will invest a material amount of effort and money in redesigning corporate policies to improve structure and discipline company-wide.  Management believes it can bring the overall performance of the company on par with Boston franchisee Hearthstone.  If they are right, COSI could join the ranks of best-in-class fast-casual companies like Chipotle ($CMG) or Panera ($PNRA).  COSI’s brand resonates with customers, and we think that if they can get it together at the corporate level with quality customer service and clean restaurants, the customers will return.  There is always execution risk, but we think RJ has the right mix of experience and attitude to get this done if the company is capitalized properly for success.

    Do you think $COSI can survive and prosper?

    Written by Jennifer Galperin and Michael Bigger.

    Disclaimer: Bigger Capital owns a small trading position in COSI. COSI is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. In other words, the probability of losing all your investment in this situation is very high. 

  • The Sycamore Partners Insight
    Posted by on June 13th, 2014 at 11:12 am

    Sycamore Partners has announced that it has bought 9.9% of Express ($EXPR),  a specialty retailer brand of women’s and men’s apparel in the United States. It plans to proceed with due diligence to help it value the company for a buyout offer.

    You can find out more about Sycamore’s investments here. These investments capture the essence of what Sycamore Partners is trying to accomplish. It is building a vertically integrated apparel company with many verticals. You can think about it being a system composed of multiple customers facing brands such as Express supported by MGF Sourcing, the manufacturing logistics arm of Sycamore.

    In a world in which information is becoming near perfect and free, retailers gain a huge advantage from the ability to analyze and disseminate all customer and product information as quickly as possible.  Each customer purchase, social media mention, or interaction is valuable information for the company to make decisions along the value chain that will impact the product, marketing strategy, manufacturing processes, and so forth. Clayton Reed brought to our attention the importance of information speed in retailing in the context of $APP, $GIL, Zara, and Uniqlo.

    A vertically integrated retail company has more control over the dissemination of information to its customer touch points.  This means better control over the brand and the image which is a key source of value for a retailer.  Zara is a great example of a company that has optimized its system for better flowing information, resulting in great benefits.

    There are very few vertically integrated retailing assets and we believe that they will continue to benefit from advances in information technology for many years to come.

    If you come across such a vertically integrated retailer trading at a cheap price you might want to build a position and ride it for a very long time. In addition, we believe that a retailer focused on selling into specific vertical markets might become an acquisition target for firms operating vertically integrated systems especially if its stock becomes cheap.


  • Marcum Microcap Notes
    Posted by on June 9th, 2014 at 11:21 am

    This year we attended the Marcum Microcap conference for the second year in a row.  The conference was well attended by both companies and investors.  There were a lot of interesting investment opportunities.  Here is a summary of the few presentations we attended that we plan to keep on our radar screen over the next few months.

    Jennifer Galperin:

    $MNGA:  MagnaGas: makes hydrogen gas for industrial applications. Their gas has some favorable properties relative to competing products, burns cleaner and at a higher temp. The company is in talks with some big clients such as US Navy for a contract to sell gas to power a torch to demolish a submarine. Working with a large coal plant to test their gas in combination with existing coal. Claim is that it burns cleaner with less emissions and costs less than a scrubber or other environmentally friendly addition to the plant. Expect results of this test 2Q – 3Q 2014. Current cash on hand should fund 18 months of operations. Will keep it on the radar for the fall.

    $MMMB: MamaMancinis: food manufacturer based in NJ. They make fresh and frozen meatballs for sale in the frozen, refrigerated, and hot food sections of supermarkets and big box. CEO / founder has a successful background, he was part of a group that sold Alpine Lakes to Land o Lakes. His goal right now is to grow brand awareness among consumers. Current manufacturing facility is operating well under capacity, it has capacity for $70mm in revenues, compared to $9mm in 2013 so plenty of room to grow. Market cap at $80mm seems fairly valued, not sure there is huge upside in the stock.
    $PLSB:  Pulse Beverage: Markets and sells lemonade, coconut water, and a line of “health drinks” that use a Baxter technology (no royalties) to increase vitamin absorption. Currently selling at WAG, KMRT, WFM, and about 150 distributors. They have no debt, $1mm in cash, and expect cash flow positive in the June Q. Management has tons of experience, including growing clearly Canadian from startup to $178mm. Current market cap is $24mm compared to $3mm in annual revenue seems fairly valued, with limited upside compared to current market.  Key will be growth in the brand. Patricia also attended this presentation, and here are her comments:
    Located in Colorado the company produces high quality and healthy drinks (like ROAR). Started with lemonade Natural Cabana. Is in Wholefoods and WINCO on the west coast (says WINCO is fasted growing wholesale store outwest (like costco)). Very lean company – only 21 employees. Highly confident in the product – best taste. Coconut water made in Thailand with Thai coconuts (sweetest) and bottling occuring within 30 min.
    $PROP:  Propel Energy. The company owns the exclusive US license to a plasma pulse technology that can improve productivity of frack wells >100%.  The treatment lasts about 10 months to a year. In 1Q2014 they eliminated converts and debt. Competition includes chemical treatments. Current gross margins are >80% but need to grow scale. Interesting opportunity.
    Patricia Winter:

    DS Healthcare ($DSKX): Daniel Khesin, president, CEO, CFO and Chairman of the company presented. Co makes hair loss prevention products. 1 consumer care ( shampoo etc) 2 treatments (not yet FDA approved in US …process has not been started bc of expense- big market is Mexico) called Spectral DNC-N.

    Very passionate about his product…claims great results with combination of treatments used by propeciaRogaine etc. Early prevention only way…once follicles are gone no way to treat them. Clinical studies are done every 3 months at Miami university hospital ( needs to be confirmed).

    Pointed out change in way big competitors are distributing their products…no longer through hair specialists but main stream drug stores and walmarts. He believes that this is an opportunity as customers need emotional support and hand- holding. Case in point Mexico fastest growing market sells through pharmacies ..which are like French pharmacies. Says that no moth $ have been spent..all growth through word of mouth.

    Revenue $13.6 million. Up 22 percent from previous year but 2011 down 69 percent at $9.6m. (What happened?) Mkt cap 29.6 m share price of $1.84. Neg cash flow w $2.8 m left in bank.

    Some more research might be interesting.

    Par Technology ($PAR): Ron Casciano presented co providing technology solutions: 1 legacy business with govsoftware used in drones to track specifics 2 data and communication alerts management system for large Corp – Wal-Mart, wagman stores?- that helps cut costs by monitoring and controlling such things as temperatures and weather conditions affecting locations and 3 – the earnings engine- Altria a hospitality software system operating in the cloud that allows focus on each individual as a guest (vs paying guest only).

    Want to diversify customer base..go to tier 3 and 4 organisations with 2.

    Excited about Atria.

    $241 m in revenue, mkt cap $72.9 m, share price of $ 4.66.cash flow neg w $10 m in the bank.

    International Commercial Television Inc. ($ICTL): Infomercial co for beauty products.

    Richard ….. presented new business development (to be checked). Recent management change!! Tell old mgmt team….years of expertise;). 37 percent insider ownership. Turnaround story. Main product : Derma Wand…since 06. Derma Brilliance new big thing…skin abrasion with diamond tip…continuous refill sales hoped for.

    Big outsource..low overhead to be able to cut cost if products do not sell.

    Projecting $100 m sales in 2-3 years (corrected via feedback from @IanCassell on twitter) from 41 in 13. Mit cap 14.7m, at 0.64 share price. Slight pos cf, 1.7m in bank.

    Boston Therapeutics ($BTHE): Dr. David Platt PhD is the Chairman, CEO and CFO as well as the source of all IP and scientific research. The company develops drugs based on carbohydrate chemistry. 1) BTI3 20 is a chewable tablet that decreases the amount of glucose the digestive system could gain from food to help decrease the insulin needed. The target market is Type 2 diabetes patients. 2) OXYFEX is an anti-necrosis drug that enables oxygen supply to trauma caused areas (fex shut down of blood supply to limb in diabetic patients or severe injuries). Both drugs are in early stages of FDA approvals. Name drop: former president of the diabetic society joined board of directors and is blown away by the results.

    $323,400 in revenue, mkt cap $21.4 m, share price of $ 0.57.cash flow neg w $3.4 m in the bank.

    Hopto ($HPTO): Jean-Louis Casabonne (CFO) presented as the CEO’s wife was having a baby. New to the company, that was originally founded in 98 and changed into its current form in 2010, he attempted to present the company’s new generation hopto software. He could not make the demonstration work bc of lack of bandwidth (he believed)! The idea is a “personal cloud” whereby you can access a variety of hosts, sources and programs from any one of your mobile devices without downloading data (security aspect). The release of the early stage of hopto is expected in Q4 14. He also pointed out that in his opinion the market cap of the company in no way reflects the value of the patent portfolio held by the company – 100 invention patents alone that could be monetized.

    $6 m in revenue, mkt cap $19.9 m, share price of $ 0.17.cash flow neg w $4.3 m in the bank.

    Silversun Technologies ($SSNT): Charismatic president, chairman and CEO Mark Meller (Rangers Fan) presented surrounded by a fan club of people (from company, maybe Marcum and others). The company has a portfolio of cloud based technology and software solutions for small to medium sized business. Profit margins are at 42%. The license sale is accompanied by a service contract: “a $100K software license is a $250K ticket for us.” The company uses resellers to distribute the products and has a strategy of purchasing resellers in order to acquire customers – “the purchase price is cheaper than the margin paid to the reseller on the sale”. Expects equity raise of $5 million to finance acquisitions. 92% inside ownership. Plans to be on NASDAQ – believes price should be at 2.7 times sales.

    $17.4 m in revenue, mkt cap $17.1 m, share price of $ 0.15.cash flow neg w $763,000 in the bank.

    Michael Bigger:

    Ricebran ($RIBT) : take the stuff around rice. Very nutritious. Do all kind of stuff with that…rice bran derivatives. Play on population growth. Soy is an allergen not rice bran derivatives. Capital intensive… Most likely to raise $ in the future. This is a company worth monitoring.

    The Staffing Group:($TSGL): Staffing company focused on the blue collar staffing market. The company is growing nicely but the barriers to entry in this business are very low.

    Full Circle Capital ($FULL): Another finance company. Not my type of company unless it is very very cheap.

    Trend in Micro Caps Panel: Trends in MicroCaps financing: moderator is from Loeb and Loeb. The 2nd is from Roth. Roth says investment banking was really busy until the Russell index came down hard. Deals from early March are not workin very well. Biotech got kill and it was 75% of their biz. Lull in biotech right now. Lawyer says deals are slower. Other lawyer says same thing. Is the window closing?1000 companies in the pipeline.. So maybe good stuff coming. Lot of choppiness below the surface of large caps. All about liquidity right now.  75℅ of funding was in biotech and investors are hurting. Biotech crept up…so many massive follow on. Investors are extremely worried about bottom and deal not working. All deals were working so why not take a flyer. This is not the case right now. Billion dollar market cap companies sold off by more than 40℅. Investors are more picky. Uptick in renewable. Wearable is livening up. There will be more warrants inclusion for deals that are in the pipeline. People don’t want to get into illiquid name right now.


  • An Investor Asks about Plug Power and American Apparel
    Posted by on June 5th, 2014 at 11:13 am

    Hi, Michael,

    What is your reading of 1Q results of $APP? The revenue seems slowing down especially sss. From your recent writing, they are active in social network such as instagram. It should stimulate online sales theoretically, but they report an obvious slowdown on online sales. Something interesting is that the wholesale sales rise of 7%.That means they are triying to expand their business by traditional distibution channels. I agree with you on the understanding that they are getting closer to customers which will eventually increase sales in the long run.

    Michael responds: To be honest I expected worse for the first quarter given the weather on the east coast. They generated + EBITDA in a very difficult quarter with all the distractions related to the distribution center and the equity offering. All in all we are happy with Q1.

    Reader asks: The good thing is that expenditures are under control and guidance for EBITDA remains unchanged. But, if we are expecting a good return, revenue is the key catalyst which is not clear at this time. What is your opinion?

    Michael: As you said costs are getting under control. In addition, inventory came down significantly and this trend should continue. We think there is about $25 million of incremental annual EBITDA that will be release because of the efficiencies of all the initiatives that were initiated since 2012 and are now complete. I agree with you that the main catalyst here is revenue growth. We are comfortable with management view that the company will generate $1 billion in revenues in 2018. You can read more about our revenue thesis here.

    Reader: I am also curious that you spend quite a time on $APP and $Plug in recent months. It seems that you are unable to allocate enough money on these two companies. What is your other interest? I remember that you mentioned tons of money from Amazon, do you follow any other companies? One more thing, how do you define the special situation companies?

    Michael: We have very large positions in both companies. We buy 1 or 2 stocks every 3 to 5 years in our long term investment portfolio. We are keeping pace with that. Yes, we made a lot of money on Amazon and we are still long Amazon. We look at about five to 10 companies every single day. In a bull market we yawn most days. It will change in a bear market. We invest in distressed companies. Some people label these as “turds”. It is pretty obvious when you spot one. What is less obvious are companies that are labeled as such but have incredible business characteristics behind the facade.

    Reader: I am a starter in the US market and hope you will give me a helping hand.

    Michael: Good luck.

    Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family own more than 3.27 million shares of American Apparel. American Apparel is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. In other words, the probability of losing all your investment in this situation is very high. We have been purchasing American Apparel since May of 2011 and we have nothing to show for it. Take our opinions with a grain of salt and do your homework. None of the Bigger entities individually or in aggregate have an obligation to file its position with the SEC at the time this article was published.


  • Plug Power Notes
    Posted by on June 3rd, 2014 at 9:55 am

    On Thursday June 29, I attended a panel about fuel cells at the Cowen Conference. Andy Marsh, Plug Power CEO, presented.  The other panelists represented Ballard, Fuel Cell Energy, and Hydrogenics.

    Here are the main key points I noted from Andy’s comments:

    1. Total Global Market for $PLUG is $30 billion annually.
    2. The addressable market (now) is $10 billion annually.
    3. $PLUG expects revenues of $500 million in 2018.
    4. It is working on accelerating the full ownership date of Hypulsion.
    5. From what I could gather it appears the company is working with Honda in Europe. Honda could be a new forklift customer.
    6. All of the panelists were extremely bullish on the overall Hydrogen market because it is such a small segment of the energy market currently with so many potential applications.

    Written by Michael Bigger.