I started following Intermap Technologies (OTCPK:ITMSF) when it was brought to my attention by a fellow investor over a year ago. After a cursory review, it was quickly decided the company was an extremely poor investment. But the debt structure was intriguing. In particular, the company had a tranche of debt that included a royalty feature that paid the debt holder 17.5% of net revenues in perpetuity. You don't see that every day. What was more surprising was investors weren't paying any attention to it. It was as if they were all looking so intently up at the heavens they couldn't see the mountain peak in their path.
My first article was titled "Intermap Technologies: Anatomy Of A Bad Investment". The article highlighted the aforementioned royalty arrangement along with a brief summation of the company's history of poor operating performance and the travails of obtaining financing for a P3 contract in a third-world country. The contract in question was the heavenly object-attracting everyone's attention and the third-world country was the Democratic Republic of the Congo [DRC].
But that was a year ago and there's been considerable change in the company and its prospects since then. During the course of the year, my original piece was followed by two additional articles. Both were highly critical of the investment.
This is typically how vulture investing works. You look at an investment and hate it at first but you're intrigued enough to keep it on your radar. Over time, you develop an intimate knowledge and understanding of the unfolding story. Usually the company crashes and burns for all the reasons identified during the initial due diligence. Occasionally, however, as the story continues to play out, a minor but meaningful development occurs and the prospects improve.
A Bear Turns Bullish
That is the case with Intermap. What has changed? First, there's been a substantial decline in the share price and market cap of the company as reflected below.
In investing, price is everything. Before the initial article, the stock price was 50 cents a share. 10 times higher than the most recent price. The market cap has been reduced to a mere $5 million. Intermap is priced for bankruptcy and that's where the opportunities lay.
It takes more than price to change a Bear to a Bull. It's easy to be enticed into catching a falling knife. For Intermap, price is only part of the equation.
As previously reported, the debt is held by a large Canadian hedge fund, Vertex One, which also maintains an equity position in the company. On August 2nd, Intermap announced a change to the board. Patrick Blott was elected chairman of the board and Michael Hoehn was elected as chairman of the audit committee. Blott was placed on the board by Vertex. At the same time, John Curlander resigned as a director of the company. This was a clear sign Vertex was starting to take control of Intermap.
As his bio states, Mr. Blott was a hedge fund manager specializing in investments to support growth and special situations companies similar to Intermap. Mr. Hoehn was previously vice president at Morgan Stanley Principal Strategies.
Then on August 25th, Intermap announced further changes to the board. A board member, Cary Ludtke resigned from the board and became a strategic advisor for the company. As part of the announcement, the chairman indicated further changes were forthcoming.
On September 19th, the company announced Vertex had provided an additional $2 million to the company. The funds were to be used for general corporate purposes and to restructure operating expenses (code for layoffs). Intermap was finally going to right-size the company until revenue growth could support the operation.
Additionally, Andrew Hines and Michael Zapata were appointed to the company's Board of Directors. With the new directors, Vertex's control was now complete. Hines and Zapata also brought to the company strong industry experience and leadership.
Lastly, and most importantly, Vertex agreed to the following:
- Cash sweep requirements under the First Note, Second Note, Third Note and Consolidated Note amending agreement have been waived and suspended through March 31, 2017.
- Royalty payment requirements under the Royalty Agreement have been waived and suspended through March 31, 2017.
It was a clear sign that Vertex would do whatever it took for Intermap to return to cash flow positive, including waiving the royalty payment. If Vertex was just interested in revenue, however, it would have deferred payment. But payment was waived in its entirety - a subtle but meaningful signal that Vertex values and is ready to support stock appreciation. This is key for retail investors and was a turning point in my views on Intermap as a Bear.
It didn't take long after Vertex took complete control of Intermap for the CEO and the CFO to be shown the door.
A Long Thesis
There are two aspects of stock price movement; long-term appreciation (or depreciation) and short-term volatility. An astute investor can benefit from both. With the delays in the contract and upheaval at the company, the stock price has continued to decline as highlighted earlier. With a market cap at a little over $5 million, it can't go much lower, particularly since Vertex appears willing to prop up the company by restructuring and waiving debt/royalty payments.
Intermap, at this juncture, could be viewed as an option play with a number of ways to play it. If the company doesn't achieve reasonable growth, it will continue to bounce off the bottom as Vertex strives to get repaid over an extended period of time. In this scenario, trading the volatility should work nicely.
Alternatively, the company could meet its stated objective of turning into a growth company. In this case, investors should benefit from gradual long-term appreciation in the stock price.
The best-case scenario, of course, is that the company is awarded multiple large, SDI contracts or the DRC contract finally obtains financing, in which case, stock appreciation will be abrupt and substantial, literally overnight.
In any of these scenarios, the risk/return equation looks positive for investors who have recently entered a position or decided to enhance an existing position at a lower price point.
Status of the SDI Contact With The DRC
As most know who have been following the developments in the DRC, the political instability is extreme even by third-world standards. Without stability, it will be difficult for Intermap's lucrative P3 contract to move forward due primarily to challenges associated with obtaining project financing.
Intermap is once removed from the contract between the Prime and the government and details of its contract haven't been fully disclosed. However, we do know something about the Prime's contract since the DRC is required by law to publish all government contracts.
The SDI contract with the DRC allows for the P3 to bill different ministries of the government for services rendered. If the revenue from the ministries is less than $10 million per quarter, the Ministry of Finance will backstop the contract based on the minimum requirement. In other words, the Prime is guaranteed $40 million a year for the life of the 12-year contract but could achieve much higher revenue depending on the amount billed to and paid by the various ministries. It appears designed to siphon as much money from the DRC government as possible over an extended period of time.
We know a little something about the parties involved as well. The contract was signed by an individual who is a director of a television network and is one of its original founders. The network was the first privatized TV station in the DRC and is strongly pro Kabila, the president trying to remain in power. In other words, principals involved are highly connected.
A deal like this, with extremely powerful and wealthy people involved, doesn't just go away once the deal is signed, as is the case with Intermap.
Three pieces of sculptured art in my office remind me every day of my investment philosophy. On one side of a Mahogany credenza stands a brass bull, forever frozen in that familiar Merrill Lynch stance. On the other side is the skeletal head of a Bovidae affixed atop a medal plate. The skull picked bare to the bone. And, on the corner of my desk, a sculptured hand protrudes from a mounted chessboard, fingertips gripping a black Queen frozen in motion as it swipes the opponent's King off the board. Checkmate!
Investing is a chess match with Bears on one side and a blend of Bull and Buzzard on the other. Intermap Technologies is in play and the board's just been flipped. The Bear is now the Bull. This company has been bleeding to death for most of its life. But there's still some meat left on the bone.
With Vertex in control, Intermap should live on in perpetuity just like that intriguing royalty arrangement that initially piqued my interest. And, with time comes opportunity. This is the art of vulture investing.
Disclaimer: This article represents the opinion of the author, who is not a licensed financial advisor. The article is intended for informational and educational purposes only, and should not be construed as investment advice to any particular individual. Readers should perform their own due diligence before making any investment decisions.
Disclosure: I am/we are long ITMSF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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