Water Now (WTNW) – Liquidation – 40% Upside (very risky)

Current Price: $0.089

Liquidation Value: $0.125

Upside: 40%

Expiration date: early 2021

Proxy

This idea was hinted by Vincent.

 

This is a very risky liquidation play. There is uncertainty regarding the eventual liquidation expenses and the credibility of the pending transaction itself. The whole situation as well as the business of Water Now looks very suspicious.

Water Now is in the process of selling all of its assets and intends to liquidate shortly after the sale is completed. Management expects $0.125/share of liquidating distributions to shareholders (34% upside). Both the asset sale and liquidation of the company have to be approved by shareholders. The meeting date is set for the 25th of November and liquidation is expected to be completed within a maximum of 60 days after the shareholder meeting. The share price before the announcement was $0.0525, so the $0.125 distribution estimate is 150% higher, which should be enough to secure shareholder vote.

However, there are few major risks here:

• This company is a one-man show, with David King acting as CEO, CFO, and the only director of the company. Hard to believe he would suddenly be willing to award minority shareholders with $10m payout. Mr. King owns 12% and it is not clear where the rest of his stake disappeared as he had much larger ownership (33% of current shares outstanding) at the time of the company merged into a bankrupt shell. He also continued to receive share-based compensation.
• The business itself seems very suspicious with purchases of oil/water separation equipment from a single company in South Africa – African Horizon Technologies. All links in Google for this company are press releases related to WaterNow, links to its own website and company register in South Africa. No other press releases whatsoever. These equipment purchases were financed by undisclosed lenders in exchange for revenue sharing agreements (with pre-agreed minimum pay-out guarantees and large interest payments). Even-though the company failed to generate any material amounts of revenues from the already deployed equipment, these lenders nevertheless continued to finance the transactions.
• Management has a track record of shareholder value destruction and overall and this liquidation looks like a cash-out for the single insider. The main risk is that management has underestimated the expenses (either intentionally or not) and the eventual distributions will turn out to be much lower. If the eventual expenses end up 13% higher, the upside will be eliminated. On the other hand, a quick analysis of the calculations shared by management (table below) shows that estimations shouldn’t be that far off from reality.
• The asset sale has a high risk of failing. The company had no other interested parties in the sale and the credibility of the current buyer is also uncertain (information is very limited). $30m price tag looks very suspicious given total assets of the company on the balance sheet as of June are only $4m, and the main assets seem to be the above-mentioned oil/water separation equipment. The meeting date to approve the sale and liquidation already got delayed by two months without any explanation (from 30th Sept to 25th Nov).

In other words, WTNW itself and the proposed transaction look very shady. Also for a $7m market cap company (or what used to be $4m before the transaction announcement), the trading volume looks suspiciously high raising concerns whether Water Now is just a stock trading vehicle.

 

Expected Distributions

Gross proceeds from the asset sale are expected to be around $30m. The anticipated payouts form these proceeds are provided in the proxy:

So after all costs, the company expects to return roughly $9.9m to shareholders, which based on 77,746,368 outstanding shares translates into $0.125/share.

Liquidation expenses (cash for a wind-down) are estimated at $50,000, which seems way too low. Using a more conservative $1m for both expenses (wind down at $550k) results in the final distribution of $0.12/share (28% upside).

Total costs from the asset sale are estimated at $450,000, which is only 1.5% of the value of the to be sold assets. And while this seems to be on the low end, this transaction is a result of an unsolicited offer by the buyer with no investment bankers involved in the process, additionally, some of the transaction related expenses most probably have already been deducted as ongoing SG&A.

Debt, vendors, and revenue sharing agreements payment has the biggest influence on the profitability of this idea. So far, management did not explain the actual cut for the three expenses, however, as of Q2, the debt stood at $5.5m, vendorliabilities at $250k, and the revenue sharing liabilities (guarantees) – $5.6m. Combined this still leaves about $1.6m headspace till the management’s $13m estimate, part of which ($1m) might be accounted by pending payments on yet unshipped equipment (based on Q2 disclosures $1m liability not yet recorded on the balance sheet) and any expected interest payments on revenue sharing agreements and notes before the transaction closes. So overall, the $13m estimate seems really tight.

Also, the table above seems to be missing the expense on the ongoing cashburn. During H1’20 the company made an operating cash loss of $0.7m. Going forward expenses are likely to be much lower as the company seems to have fired most of its employees (only 4 full-timers remaining as of May’20, not clear if they were rehired). Part of the expected cash burn might already be included in the other lines of the distribution proceeds.

 

Asset sale

On the 3rd of August WTNW announced a sale of all its assets to Rigmax for $30m. Initially, the meeting date was set for the 30th of September, however, a day before the meeting the date got adjourned to the 25th of November. No explanation for the delay was provided.

Rigmax is a private company operating in the oil & gas services (upstream, mid and downstream services, project management, consulting). Their website is not very elaborate and not much background can be found on the management. No history of previously made acquisitions is available either. The proxy statement doesn’t say anything about the financing of the transaction, while press releases are extremely concise as well. It is not clear if the buyer has the funds to finance the acquisition.

Although from a high level it is possible to see some kind of strategic rationale here (O&G firm acquiring water purification products assembler/oil recovery systems distributor), it is not clear why would the buyer would be interested in overpaying so much for the assets of the company ($4m value on the balance sheet), when it acquire the same equipment directly from the supplier African Horizon Technologies.

 

Water Now

WTWN was incorporated in 2016 (by merging into a bankrupt entity) and commenced trading on the OTC exchange in Aug’18. The company has two reportable segments: water purification products and oil recovery systems. It assembles and distributes 3 water purification products while regarding the oil systems, the company acts as a distributor only (has an exclusive sales agreement with the manufacturer). Over the years, despite numerous press releases with new contracts, partnerships, and positive outlooks, their revenue remained negligible ($233k in 2019), while substantial operating losses only increased ($4.8m in 2019 vs $4m in 2018). In light of this poor performance, the company continued raising debt ($100k in 2016 to $5.4m in 2020), equity (share count increased almost 3x since 2016), and going into revenue share agreements (the company borrows money from the lender to buy oil system products and then promises to shares the revenue 50/50 and guarantees minimum pay-outs by certain dates).

This has resulted in a very material shareholder value destruction – prior to the asset sale announcement the stock was down to $0.05/share from the $0.87/share in Aug’18.

At the same time management has been cashing a decent compensation and current liquidation also leaves them with a substantial golden parachute – CEO will get $2 million + what is left from the escrow amount (up to $1m).

CEO David King was previously founder and CEO of Robust, a small energy drink company. Mr. King sold 51% of the company to RCI Hospitality (ticker RICK) in 2014 (for about $2.5m in cash and stock).