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Matthew Finston
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I approach investing as a social theorist and a cultural historian. As a result, I am a contrarian. Studying the history of financialization, I have to agree with value investors like Seth Klarman, George Soros, and John Quiggin that markets are ultimately inefficient. However, I am not an... More
  • Night Culture's Q2 Results Justifies Going Long 15 comments
    Aug 18, 2014 5:10 AM | about stocks: SFXE, NGHT

    Night Culture Q2 Results

    Highlights:

    • Revenues: $1.656m and 31% Q/Q
    • Operation profit: $174k up from -$23k Y/Y & -$197k Q/Q
    • Gross Margin: 47%
    • Operating profit margin: 10.51%; compare -1.80% Y/Y and -15.57% Q/Q
    • Cash: $220k up 318% Y/Y and 104% Q/Q
    • Gross Profit: $774k; up 62% Y/Y and 40% Q/Q
    • Total assets increased 19% Y/Y and 23% Q/Q
    • Liabilities also decreased -19%
    • EPS: 0.01
    • Revenues per share TTM: 0.095

    In 2014 Q2, NGHT produced 63 events netting $1.656m in revenues. Comparatively, 2013 Q2 NGHT produced 43 events (one of which was MDF) and netted $1.280m in revenues. NGHT has already produced 111 events YTD, which has brought in $2.921m in revenues, an increase of 27% Y/Y.

    To say the least, this was an extremely impressive quarter for NGHT.

    Forward Guidance Estimates for 2014 Y/E

    • Sales of $8m to $10.5m (increased from previous estimate of $7.6m)
    • Operational income $846k to $1.5m

    Operating growth

    The company Night Culture (OTCQB:NGHT) operates within the unique live entertainment industry. Specifically, it's business operations focuses solely on the Electronic Dance Music ("EDM") market. The EDM market currently only has two publicly traded players, NGHT and SFX Entertainment (NASDAQ:SFXE). The EDM sector is currently estimated to be worth about $15 billion. Some have even estimated that the worldwide EDM market is valued at $20 billion.

    Business Model

    NGHT produces events solely within the Midwest. Currently, it puts on weekly events within four cities in Texas: San Antonio, Houston, Dallas, and Austin. There are three types of events: local events that have a maximum of 2,200 persons attendance; mid-size festivals with a maximum of 11,000 persons attendance; and large festivals that have 20,000+ persons attendance. This year, NGHT is expected to produce 231 local events, six mid-sized festivals, and one large festival.

    The bulk of their events are co-produced with Disco Donnie Presents ("DDP") a subsidiary of SFXE. NGHT's source of revenues is primarily from ticket and beverages sales at these events, but also profits from selling artists' merchandise.

    Since NGHT does not provide a detailed breakdown of how much each event brings in, this article gives rough estimates. These estimates are derived from counting the total events and adjusting for any anomalies.

    • In my estimation, each local event currently averages about $22.5k to $26k.
    • The mid-sized festivals are broken down into two types: the wholly owned branded festivals like Meltdown Dallas Festival ("MDF"), which brought in roughly $346k in revenues last year and SFXE's branded festivals like Life in Color ("LIC") and Beach Blanket Disco ("BBD") bring in $37k.
    • NGHT's most profitable and largest event is its Something Wicked Festival ("SWF"). Last year, this 1-day festival netted NGHT approximately $1.042m in revenues. This year NGHT has added an extra day to SWF, which will most likely double NGHT's revenues for that sole event.

    Local Events

    In 2013, NGHT put on 161 local events, earning roughly $3.645m to $4.169m in revenues. This year NGHT is on track to produce between 220 to 240 local events, which would net roughly $5.5593 to $6.102m in revenues, representing a low estimate of 34%-46% increase Y/Y to a high estimate of 53%-67% Y/Y.

    (click to enlarge)

    Even with 240 local events, NGHT will have yet to fully maximize its opportunity in these four cities. Ideally, each week NGHT will produce 2 events per city Friday, and Saturday night. At full capacity, NGHT would produce 104 events per city. If maximized, it would produce 468 events in the four cities that it currently operates in for $16m to $17m in revenues.

    Investors should also expect NGHT to expand into other large metropolitan cities within the Midwest.

    Current Active Markets by Target Population*

    • Dallas, TX: 711,788
    • Houston, TX: 667,900
    • Austin, TX: 287,456
    • San Antonio, TX:433,913

    Total Active Target Market: 2,101,057

    Inactive Market

    • Oklahoma City, OK: 166,626

    Night Culture's Current Estimated Total Market: 2,267,683 persons

    Potential Target Cities for Operations: Target Demographic*

    Texas: 6,186,442

    • San Marcos, TX:21,799
    • College Station, TX:47,840
    • El Paso, TX: 228,800***
    • McAllen, TX:37,117

    Louisiana: 1,102,964

    • Baton Rouge, LA: 129,487
    • New Orleans, LA:100,306

    Oklahoma: 887,941

    • Tulsa, OK: 145,988

    Missouri: 1,364,731

    • Kansas City, MO: 161,426
    • St. Louis, MO:208,323***

    Tennessee: 1,430,361

    • Memphis, TN: 224,174***
    • Nashville, TN: 186,696

    Other Cities

    • Albuquerque, NM: 164,971
    • Birmingham, AL: 158,008
    • Atlanta, GA: 251,842***
    • Charlotte, NC: 242,672***
    • Phoenix, AZ: 429,313***
    • Charleston, SC: 98,618
    • Wichita, KS: 110,833

    Potential Midwestern Market: 3,390,820 persons

    *Data from U.S. Census Bureau & SuburbanStats.org

    **Target Demographic: 15-35

    ***Total of Top 6 Cities for Expansion: 1,585,124

    As a producer of local events, there appears to be huge growth opportunity for NGHT. NGHT currently actively serves 2.1m Texan millennials and has the opportunity to increase that to 5.7m. Ideally, NGHT would maximize its exposure in its current markets and expand operations in cities like El Paso, TX (228,800), Phoenix, AZ (429,313), and Memphis TN (224,174).

    Just like NGHT purchased the Dallas Market through acquiring Full Access, the company can also acquire existing promotional companies like Steve Levine Entertainment, which operates within Scottsdale, Arizona.

    Targeting cities with growing millennial population will be key for NGHT's future success in becoming a staple as a destination source for entertainment in the Midwestern market.

    Mid to Large Sized Festivals

    Thus far, NGHT is on track to produce as many mid-sized festivals in 2014 as it did in the previous year. It has scheduled 3 LIC events and 1 BBD event. This would bring in roughly an additional $150k.

    Meltdown Dallas Festival

    Although NGHT has not announced the date for its Dallas event, MDF, it is expected that they will do so for the 4th quarter. Last year, MDF was not profitable for NGHT so the company plans to reschedule the event for a date that would be more lucrative for shareholders. A more conducive date should bring in a minimum of $350k but potentially $1m in revenues.

    One opportunity for growth for NGHT will be to increase ticket sales for MDF. It could do this by both increasing attendance and adding additional days like it has done for SWF. If MDF can increase in popularity, this will be a no-brainer.

    Another opportunity for growth will be creating additional mid-sized branded festivals like DDP's LIC. The company currently hosts a popular "Electric Foam" event at its Houston venue, Stereo Live. I see this as a potential festival branding opportunity. A mid-sized festival foam party would be an ideal attraction for concertgoers that could be a counterpart to LIC's paint party.

    Upcoming Event: Something Wicked Festival

    (click to enlarge)

    As discussed earlier, its Houston SWF event has been NGHT's big money maker. The company has already taken great strides to make this branded festival more profitable for shareholders by adding an additional day. In a press release, the company announced its plan to turn SWF into a weeklong destination event. If successful this could gross $8m to $10m in revenues.

    In three to four years, NGHT could be grossing $12m from its larger sized festivals. Add that to the potential $17m it could gross from its local events, investors could see $30m in annual revenues. With a conservative 5% net profit margin, investors could see $1.5m in annual net income. If achieved I believe that a five year price target of $0.75 or a market cap of $56 million represents a fair valuation for this expanding company. The company is currently valued at $3.2 million.

    Q/Q Analysis and Year End Guidance

    For the first two months of third quarter, the company has already increased the amount of events by 130% Y/Y. NGHT only produced 103 events in 2013 from January to August. Comparatively, the company will have produced 157 events from January to the end of August for 2014, a 52% increase Y/Y.

    I expect NGHT to produce at least 25% more events for Sept-14 as it did for Sept-13. If it does so, NGHT will have produced a total of 70 events for Q3 or 181 F/YTD. If achieved, investors should expect NGHT to bring in $1.839m in revenues for 2014-Q3 and $4.761m F/YTD. In contrast, 2013-Q3 only netted the company $1.145m and $3.442m respectively for nine months ending in September 2013.

    2014-Q4: Expect Impressive Results

    The company already has already scheduled its big event, SWF for Q4. This event alone should bring at least $2m-$3.6m in revenues. If MDF is also produced in Q4, that could add an additional $350k+. If NGHT produces only 25%+ local events for Q4 Y/Y that would be a mere 58 events, for an additional $1.52m in revenues. I estimate that investors should expect Q4 results of $3.78m to $5.479m in revenues, an increase of 70% to 148% increase Y/Y.

    Forward guidance for 2014 suggests the company will gross roughly $8.541m to $10.183m in revenues, a 51% to 80% increase Y/Y.

    The mean valuation of companies within the Movie & Entertainment sub-industry is valued at price to sales ("p/s") of 3. At current valuation, NGHT would be trading at a p/s of .37. I believe investors are grossly undervaluing NGHT and that NGHT deserves as least a p/s valuation of 1 or higher. That suggests that a more reasonable current valuation for NGHT would be a minimum of $0.095 a share. If NGHT were to be valued at the sub-industry p/s average of 3, the stock would be trading at more bullish $0.285 a share. At $0.043 a share that suggests a 120% to 564% upside at current valuation.

    (click to enlarge)

    Quarterly growth:

    (click to enlarge)

    For the past three years, revenue per share growth was 81.70% per year.

    Conclusions

    Valuation at $0.043 a share

    • Price to Sales TTM: 0.44
    • Price to Earnings TTM: 4
    • Price to Cash Flow TTM: 2.9
    • Enterprise Value to EBITDA TTM: 2.74
    • Enterprise Values to Sales TTM: 0.436

    I believe that the best buying opportunity for NGHT is at current valuation. It is estimated that NGHT will grow 70% F/2014. Investors should expect similar growth for 2015. NGHT is one of the few stocks that trades on OTC-Link that demonstrates all the qualities of a realistic investment. Because there are no financial requirements to be listed on OTC Market exchange, NGHT unfortunately gets grouped in with the tens of thousands of dead tickers that have no assets, no business operations, and no revenues. It is easy to overlook NGHT as "just another penny stock." In the same vein, being grouped in as "just another penny stock" is what makes NGHT a great long-term value investment for the contrarian investor.

    Disclosure: The author is long NGHT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

    Stocks: SFXE, NGHT
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Comments (15)
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  • Derek Capo
    , contributor
    Comments (318) | Send Message
     
    For all of this work I have to ask. How many shares do you own?
    18 Aug 2014, 06:00 AM Reply Like
  • Matthew Finston
    , contributor
    Comments (969) | Send Message
     
    Author’s reply » Well, what do you think about the company? I guess what I mean to say is, you have read and commented on my earlier piece that discussed their quarterly results. I argued there that the results were positive and misunderstand and that more importantly the company would continue to grow. The fact that they have added an additional day to their October festival alone could boost their year end revenues by 18% Y/Y.

     

    I this company has a strong story and the quarterly reports demonstrate that.
    18 Aug 2014, 06:14 AM Reply Like
  • Derek Capo
    , contributor
    Comments (318) | Send Message
     
    The company diluted themselves to a tune of 3 million shares to reduce the debt. Their revenue growth is impressive but they still have a way to go to become profitable at 97 million shares outstanding and it will take a while to justify the valuation. For example, in my eyes the quarterly operating profit was false since they have so many back wages and advances to pay...you didn't answer my question though...how many shares do you own to do all of this work?
    18 Aug 2014, 06:31 AM Reply Like
  • Matthew Finston
    , contributor
    Comments (969) | Send Message
     
    Author’s reply » What do you mean they have so much in back wages to pay? According to their report, included in the OPEX was the $431,754 they paid for the 6 months ending in June for consulting and salaries?

     

    According to the books, there are "95" million shares diluted due to the 25 million warrants outstanding. However, those warrants do expire and may or may not be exercised. In the past, there has been a 5:1 cashless exchange of the warrants. I still think the stock is cheap if all the warrants are exercised.

     

    But what you are saying is that the company has debt. What company doesn't have debt? Businesses take on debt to grow the business, correct?
    18 Aug 2014, 06:45 AM Reply Like
  • Derek Capo
    , contributor
    Comments (318) | Send Message
     
    The warrants are basically at a strike price of 2.4 cents..they will be exercised the owner of those would be foolish not to so we have to assume they are. As for the debt the fact that these debt holders are taking shares is positive...300k took 3mm...one guy even forgave 40k in debt for...$10? I guess it is the same person...I don't know it doesn't say...

     

    I don't have a problem with debt I have a problem with the fact there are probably a lot of unreported cash transactions that would make this company more sound than it is....have you ever owned or partly owned a club? If you did you would know how the whole game works...

     

    They do a lot of back wages and they keep putting cash into the business and I would love to see a real breakdown of that salary and consulting wages if possible...maybe you can since you have met with him.
    18 Aug 2014, 06:54 AM Reply Like
  • Derek Capo
    , contributor
    Comments (318) | Send Message
     
    Did you notice the huge amount of "consulting and salaries" paid this quarter? That doesn't make you wonder where the money is going?
    18 Aug 2014, 06:34 AM Reply Like
  • Derek Capo
    , contributor
    Comments (318) | Send Message
     
    Also did you notice they didn't provide a cash flow statement for the quarter...they just provided one for the last 6 months...i would have wanted to see where all of that money went during the quarter but now I can't...i have to go to Q1 and then go through each line to see what happened where...
    18 Aug 2014, 06:37 AM Reply Like
  • Derek Capo
    , contributor
    Comments (318) | Send Message
     
    Finally...that cash and cash equivalents isn't cash in the bank....if it was then it wouldn't have had an increase in "Advances received from related parties" as well as "Accrued salaries to related parties"....that derivative is basically causing the "cash" to be that much...the company is basically broke and how the guy keeps on advancing and not collecting on its backdates salary shows that there are a lot of things that aren't being reported or a lot of cash transactions that the CEO and others are skimming from the company. You really have to understand how this business and people in this business work...it is all about flash and showing off...they aren't value investors or good operators who care about shareholders....maybe i am too pessimistic given my experience with Miami club owners but I think they end up being all the same...different city...same habits.
    18 Aug 2014, 06:45 AM Reply Like
  • Matthew Finston
    , contributor
    Comments (969) | Send Message
     
    Author’s reply » I think you present valid concerns. But let's be real. Companies only create value for shareholders because they themselves are shareholders. They aren't acting altruistically. Mike and Surrain own about 40m shares between them. They haven't sold a single share in 3 years and I'm pretty sure they eventually do plan on cashing in on their shares.

     

    I can see the pessimistic point of view. But this isn't Miami. This is Houston. Mike puts on free events because he wants to maintain the night culture brand. I follow their twitter, Facebook, instagram accounts. The feedback is very positive and the customers feel almost a familial connection to the company.

     

    I believe these guys have integrity. I do think outsiders may question the business acumen of the company due to odd things on their balance sheet like their derivative liability and the warrants. But I feel that the company is interested in growing the business, hence improving operating margin, growing revenues, expansion into new cities, expanding branded festivals.

     

    It also might be different in Houston than it is in Miami. Different culture, different market.
    18 Aug 2014, 07:00 AM Reply Like
  • Derek Capo
    , contributor
    Comments (318) | Send Message
     
    Quick question for you....this operating income...how much of it is real cash vs. the derivative fluctuations?

     

    "Operational income $846k to $1.5m" would it be safe to assume that the owners would take their back in salaries and advanced that were put into the company? if so they will not be profitable this year on an operating profit basis..
    18 Aug 2014, 07:00 AM Reply Like
  • Matthew Finston
    , contributor
    Comments (969) | Send Message
     
    Author’s reply » I specify operational income because if I discuss "net income" then I have to go into the derivative liability.

     

    When UBS put out its report on SFXE, it explained that large 2 day festivals had a higher net margin than say a 1-day or small festival. The fact that they extended something wicked into a 2-day event (last year attended by over 20,000 people), which gave the company its net operating profits for the year leads me to believe that they will have a higher net for that event this year.

     

    It is possible they may pay off debts. But I don't think they plan on shutting down after this year. Most likely they'll reinvest the operational income back into the company. That's why I discuss their options for further growth: expand to new cities and/or maximize presence in current cities.
    18 Aug 2014, 07:07 AM Reply Like
  • Derek Capo
    , contributor
    Comments (318) | Send Message
     
    Given the revenue growth rate I don't see them shutting down any time soon, you are right in that regard. So, don't you think think that SFXE will just buy them one day? And if and when they do how would they value the business? EV/SALES?
    18 Aug 2014, 07:25 AM Reply Like
  • Matthew Finston
    , contributor
    Comments (969) | Send Message
     
    Author’s reply » Check out SFXE's subsidiary Disco Donnie Presents' website.

     

    http://bit.ly/1oU6kSl

     

    There's a tab that says "past events" click that. then click on promoters. Who are DDP's most active promoters? Night culture and full access, both owned by NGHT.

     

    I have briefly spoken with the CEO about his company. this was before they announced something wicked was going to be a 2-day festival. He didn't tell me at the time that's what they were planning on doing but he indicated that he felt something wicked could be their EDC. He's a dreamer for sure and very passionate about the company. I don't think he would let his company get bought out for very cheap. (that's why I don't think he's sold shares, he doesn't want a hostile takeover).

     

    NGHT was a publicly traded company before SFXE was. I get the sense that Mike has a long-term vision for his company and would like to be the one executing it.
    18 Aug 2014, 08:08 AM Reply Like
  • biffpincus
    , contributor
    Comments (51) | Send Message
     
    Bill, that made me laugh : )
    Knocking on wood for both companies that good news is coming!
    18 Aug 2014, 02:07 PM Reply Like
  • Timujin
    , contributor
    Comments (9) | Send Message
     
    Festival sounds epic!
    19 Aug 2014, 11:19 AM Reply Like
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