Wednesday 13 September 2017

Talks Between Urban FT And Digiliti Continue: My Guess Is A Reverse Takeover

An 8-K filed by Digiliti (DGLT) last week showed that the company came to an official agreement with Urban FT's financing wing UFT Equities for a Secured Promissory Note. People have asked my opinion on it so here it is. Why have I decided to post this on my personal blog instead of Seeking Alpha? Seeking Alpha qualified my first write up on DGLT as an article. That means I get paid for it. My next two write ups didn't qualify for whatever reason and I had to post them as blogs. Seeking Alpha puts ads up on blog posts but doesn't pay out for them so I figure instead of giving the site content and traffic for free I might as well offer readers an ad free experience and expand the reach for my personal blog. Here are some of my recent Canadian small cap picks if interested:

Mission Ready Services Signs $400 Million Deal The Military
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In addition to the 8-K, there was an attachment disclosing the details of the note. It's long and filled with legalese, but the main takeaway that shareholders will want to know from this is:

"If a definitive agreement with respect to the Proposed Merger is not entered into on or prior to September 30, 2017 or such later date as agreed upon by the parties in writing, the obligations of the Noteholder to make future advances pursuant to this Note shall terminate with immediate effect."

As in other words, if there is no deal made by the end of September, DGLT is in major trouble. But the hurt would be much larger for insiders and management who own a heap of shares compared to us retail investors who bought up shares the few days leading up to the halt. Urban FT has also gone on public record practically salivating over DGLT's client base and business (not so much the business model itself which is what has led DGLT down this path to destruction).  So I believe that both sides are working hard to get a deal done. Ideally September 30th would be a hard deadline, but it wouldn't surprise me if talks continued beyond that. Just by looking at Urban FT's news page on its website tells you all you need to know about the company's mindset.

So what do I think will happen? The language in the 8-K has me leaning to a reverse takeover as my best guess. It makes sense as Urban FT has been trying to increase its public profile recently. A reverse merger by definition means that Urban FT interests would come away with the bulk of the shares. My experience has been that reverse takeover deals result between 50% to 90% of the newly created float going to the new owner. That would mean DGLT would have a minimum of 20 million shares and up to 100 million shares outstanding post-merger. However, the float itself would remain unchanged as Urban FT would own all of the newly formed shares and there would presumably be a lock-up period or some kind of disincentive to immediately dumping millions of shares.

Another article about the deal released today has Urban FT CEO Richard Steggall reiterating that the closing price of DGLT's stock of $1.05 represents a "fair market value". So a reverse takeover would likely value Urban FT around $1.05 for hypothetical "UFT" stock. There isn't a lot of information surrounding Urban FT available, but the company did complete a $3 million seed round at an undisclosed valuation in 2012 as well as two follow up rounds of undisclosed amounts.

Urban FT acquired Wipit in 2015 and iParse in 2017. Wipit is a mobile payments solution provider for the underbanked. It has an active partnership with Sprint (see website, as well read the fine print at the bottom of the page referencing Urban FT as the operator of this program) and has signed a deal with H&R Block back in 2012, but I haven't seen anything that suggests it's particularly active or lucrative. The iParse acquisition seems to have been mostly for its technology, allowing Urban FT to white label its mobile banking solution to all banks and credit unions, regardless of size. The article I am referencing from mid-July made note that the plug-in made possible by the iParse acquisition would be deployed in 60 days - or right around now as the DGLT deal looks to get done.

Richard Steggall and Urban FT's President Kasey Kaplan are the two faces of the company. They disseminate and promote Urban FT's activity in the FinTech space as well as opine on various trends in the industry. Both have active social media profiles. They have made missteps yapping about the DGLT offer too early and often which greatly impacted the stock price before it was halted on 8/16, but seem to have learned their lessons from the mistake and have acted more responsibly since then. Both of these men would make pretty good stewards for a publicly traded company, able to disclose Urban FT's business in a functional but not overly promotional way. This would serve well in, for instance, analyst conference calls.

What I am trying to get to is that on the surface, Urban FT looks to be at an ideal time to go public. It has enough interesting deals going on like the one with Sprint and this new iParse offering in addition to whatever synergies it may pick up from merging with DGLT. The management team appears capable. The FinTech space is hot. So no matter what valuation this proposed reverse takeover may entail, the stock has a significant chance of going higher as the market may love this deal. 

Short interest as of 8/31 was 845,643 which is actually less than what I originally guessed, but is still a high enough amount on a stock with 10 million shares outstanding and is currently halted pending some kind of deal. This is ripe for a short squeeze if/when it opens.

While my patience has been wearing thin, what I can say as a long is that I am much more confident about my position once it opens than what those 800,000+ shares short should be. Today's article mentioned the following about the possible timing of DGLT re-opening for trading:

"Once DGLT appoints new auditors and they complete an audit review of 2016 and 2017 earnings to date, Steggall anticipates that the stock will resume trading. He expects a new firm will be appointed later this week."

So perhaps if the new firm is hired by the end of this week and is immediately deployed to review the books, could we see the halt lifted as well as news of the M&A deal by the end of this month?

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