Yet Another Value Podcast - A $GOED investment thesis that WARRANTs a look with Thomas Braziel

Episode Date: August 26, 2021

Thomas Braziel, President of 507 Capital, discusses his investment in $GOED. Key topics include addressing the (many) red flags around the investment, how Thomas found the company and why he likes the set up so much, and why investing in stocks with some hair on them can deliver serious alpha.Thomas's twitter: https://twitter.com/ThomasBraziel My notes on GOED: https://twitter.com/AndrewRangeley/status/1430382893692506112?s=20Chapters0:00 Intro1:20 Thomas's legendary Ethenex trade3:10 $GOED overview8:00 Background to the set up / how the warrants came publicly traded11:00 $GOED merger / financing background14:00 The massive stock offering discussion17:00 Do you believe $GOED's claims that they have sourcing and distribution advantages?20:25 Why was AC the seller instead of the buyer?24:30 Do you worry about $GOED auditor switch / financial statements?27:30 Why did GOED keep recutting the deal to give AC more cash?31:20 GOED's rebate accounting34:20 Capital allocation going forward37:25 General discussion of why buying stocks with hair is riskier but carries huge potential rewards38:30 GOED management's alignment40:05 GOED's activist potential43:10 Quickly painting a reasonable bull / valuation case48:05 General discussion of swinging hard when you find a good pitch49:30 How capital light will GOED be?52:10 Quick Tesla discussion53:25 Thomas's closing thoughts (and a quick ICLTF mention!)

all right hello and welcome to the yet another value podcast i'm your host andrew walker and with me today i'm happy to have my friend thomas brazil thomas is the el presidente of 507 capital thomas how's it going good andrew how are you man it's been too long i'm doing good i'm doing great because you and i were just talking and laughing for five minutes before this podcast started but let me start this podcast the way i do every podcast uh first a disclaimer nothing on this podcast in investing advice. And I've mentioned this a couple of times recently, but that's particularly relevant for the stock we're going to talk about today. You know, there are some real red flags on it. I think the upside's really interesting. It's an interesting story, but this is a microcap.

We'll probably talk about the warrants, which warrants are particularly risky. Microcaps are risky. You can look at my notes in the show links to see some of the red flags I identified here. So just everybody remember, please do your own research. Nothing on here is investing advice. And then the second way I started every podcast is with a pitch for you, my guess, you know, I've known Thomas for years. He's one of the sharpest investors I know. He's got a real eye for quirky microcrops and distressed investment opportunities. He's done some crazy stuff with bankruptcy. I mean, you can Google. It was Ethenex. Ethenex was the company. Yeah, how did we meet? I think Ethenex. And did you just refer to them as microcrops? You should coin that. I said microcaps,

but I might steal that from you and steal microcups. Yeah, his ethenex trade. You know what? I'm just going to give some background. And Thomas, you can tell me from wrong. You went to a former director of this company. The company was bankrupt. The shares were trading for a penny. And you went and said, I'll buy all your shares for a penny. And he said, son, I can't sell you that stock. That's worthless. You're going to come back and sue me. And you signed a big boy letter that said, I, I, no, no big boy letter. No, he was, he was a chairman of the board. He had it in a safety deposit box. He didn't think it was worth anything. And he said, look, I don't think this is worth anything. If you're serious, send me a cashier's check. I'll sign this thing over to you and I wish you the best of luck and I didn't I wasn't one penny it was I paid four cents for it I probably could have got it cheaper I think I offered him three he wanted five we settled on four and then we got 92 and a half cents out of the state so that was like a $22,000 purchase and I guess I made like 23 times of money but of course I was broke so you know I kept telling people this story and how grave is going to be and I think everybody around not everybody but a lot of people

Like my wife, he was like, is this for real? Is this, this, you keep talking about this. Because, you know, you think, oh, two and a half years is in a long time. That's how long my investment took. But, you know, when you're broke, two and a half years is a long time. Yep. I think you were at Columbia at the time, right? Yeah, I was a student.

Yeah, I'm sure it was. Hey, a lot of people say, oh, my student loans went to drinking or something. It was Thomas's student loans went to buying this bankrupt company and praying to God. I was very fortunate. I was fortunate. I didn't have a student loans. Go ahead. But anyway, Thomas is super sharp investor, but I just want everyone to remember, you know, this is a man who will go buy securities that the chairman of the board thinks is worthless.

So if he's right, he's right big, but everybody's just got to remember that risk, nothing in investment advice. That's the way, let's turn to this talk we're going to talk about. It's, I only know it by the ticker. It's G-O-E-D. Goodricks is the company. I think it's technically 1847 holdings or something is technically the company name, but G-O-E-D, Goodricks.

I'll turn it over to you, Thomas. why is GOED or good? Why is it such a good idea? Yeah, Goad. Why is Goad such a good idea? I don't know, man. So I am sort of a more of a believer in setups than I am about, you know, trying to prognosticate about, you know, or I should say going super deep on, you know, whether I can ascertain if this company is really going to perform. Now, I understand people that do work around competitive advantage. and, you know, border-to-sify forces and thinking about, like, why this is a great flywheel, like a Carvana or whatever. And I don't know a lot about Carvana. So I'm using this example, and maybe I shouldn't because maybe some people would poke holes at their business models. But sometimes companies are just in the right place at the right time, and you can get a security

like a warrant that's particularly levered to that. And, you know, warrants aren't like, you know, options. I mean, options suck because they, you know, you have like a mismatch between the thesis and the exploration. And so I suppose you could roll them, but I don't think that really works. Like the implied ball that you'd be paying is pretty astronomical.

And so the problem with options, even though they can be great if you have a real thesis with a catalyst that's within the window is usually the time or the thesis duration is longer than the actual liability. And I was actually talking with Bill Brewster

about this. talking about. He thinks a lot of investment mistakes are basically around asset liability mismatch. And I think he's right, maybe in some sense, which is, you know, the thesis doesn't match, you know, your own time horizon. Like, you're thinking about, you know, how my portfolio for me on three months and everything in your portfolio has a five-year thesis. So, well, that's not, that's a great way to get, not in trouble, but just to feel a lot of personal pain. So for me, I'm really more about the setup. There are a lot of red flags, I guess people point out. for myself, then we can go through them individually, but just as a high level,

someone's just joining us quickly and wants the five-minute pitch. You have a stock that trades for five, six times EV, but, you know, Comps in Europe trade for whatever. Some triple that, double that. And then if you want to call it an e-commerce, if they can pull off e-commerce, you know, something that, something, you know, well north of what it's trading for. So you have a lot of sizzle in the background. And I'm a big, I actually really like the remodeling, uh, housing,

starts, you know, for longer sort of playbook. And I think there are a lot of guys that are putting on positions in that. And I think they'll probably all be right, whether it's, I don't know, tile shop or, I can't remember the one that is either Andrew Whiden or the Sosin guy was in home goods. I think the, I think it was like a home. At home. That just got tough. At home.

Yep. Right. And then there was like, you know, people played Tuesday morning, bankruptcy and post-reargue equity, those are all probably going to do well. I just think these warrants are a particularly attractive way to play it. Maybe some people say, like, hey, I want to go up market. Thomas is playing down market in a very levered way because he's in these warrants. If I size it correctly, then it should be fine. And I would, that's what, that's what my push would be for people is cheat stock, some red flags, maybe a B management team. But sometimes it's just about

being in the right place, the right time, getting a good story and good valuation, and just sizing inappropriately. So if you like the story, but you're not sure about it, it shouldn't mess. I think there's a, I think there's a, there's like people talk about Bitcoin. You sort of have a thesis for not being, getting off zero. So it doesn't mean it needs to be 100% of your portfolio or 50% of your portfolio or even 10%. But if it's 3% and you like the warrant, you think they're cheap. There's a story here. I think at the valuation, and I'm glad the valuations come down some because I don't want to pitch a stock that's like, you know, just up, up, up. You know, I bought things very cheap. You know, I also have issues around like, oh, how much do I trim if it goes up for

tax consequences? I'm a taxpayer. And so you have to think about that as well. But I still like it. I still like it here. You know, the stock under four bucks, under six bucks, I think is very, very interesting. And, you know, it'll be a show me story. So I don't know. I mean, that's how I would frame it. I don't know if that's like a pitch or not. That was great. You know, I think, and I tweeted this out, as I was looking at it, I was of two minds. I was like, I see what Thomas is seeing here, right? This setup is absolutely incredible. It's one of the best setups from an event situation I have ever seen. But then on the other hand, I was like, my God, the red flags. You know, like, I was talking to our mutual friend, friend of the podcast, Jeremy Raper, right when this came out.

And one of the things he told me when we were kind of looking at it, he was like, Thomas really brought up in him, but my God, there's some hair here. But let's back up. Yeah, let's unpack a few of them. Go for it. Yeah. So I think, I think actually a really good way to get this is the setup here, right? Like how these warrants came to be, how the deal came to because that is so instrumental to the setup here. So do you want to kind of give the history of the merger and how these warrants came out and everything? I'll do my best. And I'll get my own personal way of how I even came across this idea because that'd be great. I had a friend who was looking at this idea that works at a large hedge fund. And he said, hey, have you looked at this?

It's like a, you know, remod housing starts to play. They're growing like crazy. And he said, but, you know, I don't think what their business practices are super sustainable. This is pre, you know, appliance connection transaction. What basically what they did when they did this deal is they took Gettikers. You said it wrong, Andrew. I'm going to correct you. No, who even knows? See, that's terrible, right? Branding people don't even know the name. You know, I've only read the transcripts and read the filings, and this is an issue I always have. If you only read something, you never know how to pronounce it. So my wife makes fun of me because I read a lot and I'll, I mispronounce everything. You know, when Chris and I did

the podcast, I always say Yahoo, and apparently that's not how you say it. Yeah. Hammer me for that. So, but please continue. I know you say the Bitcoin. I've heard you on the on saying the Bitcoin. No, I'm joking. No, I say Bitcoin. Come on. I'm crypto-friendly. I'm just mess with you. But they took two businesses and sort of smashing them together to potentially create the largest e-commerce appliance, you know, direct to D2C, direct consumer company. And so what you want to are in the States. And so how did the transaction come around? So a friend of mine was looking at it. He said, look at it, I looked at the company. This is pre that they actually priced a deal. And I was like,

like, dude, no offense. Like, this company is shaky. I mean, they've got a really shaky balance sheet. They just did an offering basically to stay afloat. You don't see it because it looks like they're holding a lot of cash, but a lot of the cash is restricted that if you read the notes, it shows that they're being held back by the credit card companies. And, I mean, I only know this because of the distress deal we did about six months ago.

Those credit card companies, when they start holding back chargebacks, like, you know, credit card runs, it's a business. has a house of pain because they can really strangle your liquidity. So the company was incredibly bad liquidity shape. And I think, you know, frankly, this is real speculation, but I think that they could have ended up filing if they didn't get the deal done, filing for bankruptcy, I should say. So that was the lens of which I was approached this. And I was like, I don't think they're going to get these deal done because I'm talking to the bankers. And I don't know if they're going to be able to get it done at the price or talking about what

the company's stock trades at. Can I just back? Can I just thank you. So the deal Thomas is referring to is in, I think it was in November of 2020, Goodeckers, which, you know, it was a, it's a 35 million market cap company or something at the time, announces a $200 million acquisition with appliance connections, AC, I think you referred to them as, which is a competitor, online appliance retailer. And they announced the deal. And I think when they announced the deal, it was about 40 million of the 200 million they owned. They were going to pay the AC owners in stock. But the other 160 million, they were going to pay in cash. And they did not have financing committed. So, you know, from November until where Thomas is leading up to, until this stock deal

is announced in May or something, there's this huge overhang of on this $30 million company. Hey, how are you guys going to raise $160 million of cash? So just to make sure everybody's back over and I'll flip it over to you. Yeah. And essentially, yeah. So that's how I approached it because I was like, hey, I don't think they're going to be the deal done. I'll say this to my friend. I said, but, you know, we do all credit and stress credit. Like, I'll call the company up and see if we can help them out and be a little catalyst because, like, I like the idea of these two companies combining it. I mean, especially if a client's connection is such a jewel of a business, which is my friend who is actually quite deep in this space, whether it comes to, like, the manufacturers.

And I even told him, I said, like, you should really go on the pot and, like, pitch this company. And he was like, there's no way, like, my boss would not allow that kind of thing. It's such a friendly podcast, though. I can't believe this. It's old, you know what it is. It's old world versus new world sort of. like, you know, Finner, you know, like, yeah, like, so, so, you know, it's in there big successful hedge funds, so they don't need to, well, I shouldn't say they don't need, but you know what I mean? I can see where there'd be like, no, this is for our clients. Anyway, so, so, so I try to reach out the company about financing, they said, you know,

everything's fine, we're going to be able to do it. And I was like, fine. So then I try to call the bankers to see if I could get in on the deal because I'm like, hey, if they can actually pull this off and the valuation is good, I'll try to do it. So think equity or the guys that did the deal. And so I called them up and tried to get on their list. And I not really do these things very often. I'm really just focused around bankruptcies and distress.

And I do the special stuff on the side with my own personal money. And so I called the banker. They told me how the deal works or whatever. I don't understand how the pricing works. I mean, the pricing literally so dynamic, they price it all the way up to like the last minute. And when I saw the pricing come across the bow, I was like, well, that is incredible. relatively dilutive and I feel really bad for the pre-deal shareholders, but can I curse? Holy moly, holy moly. This is like amazing. Look at the, look at where the stock prices and look

where the warrants are. Like, the forrants are trading for 40 cents out of the box. And so I went a little crazy and bought a lot of them. So I bought a lot at 40. And I actually bought stock and warrants. What were you going to ask for it? No, I was just going to add. So what Thomas is referring to is the day before, and I've got to quote somewhere out here, the day before the stock is at six or seven in May, the day before they announced, and they announced, hey, we're a $40 million company, we're going to finance this deal with $160 million of a stock offering. And our stocks at six, the stock offering is one unit. The unit is struck at 225 and a unit consists of one share of stock at 225 and a warrant to buy the stock at 225. It is a mind-boggling price,

deal. It's just absolutely crazy. That's what attracts you to it. I've never seen that. Scooping up the warrants, scooping up the stock. Yeah. So I was, I didn't actually think about it. At first, I was buying both stock and warrants. And then I was then like the next day, I was like, sell all the stock, just buy all the warrants. I want every single warrant you can buy. And, you know, my broker was like, we're moving the price. I was like, it doesn't matter. Just buy it. I was like, really on. I was like, it doesn't matter. Just buy everything you can because that's a crazy. The implied ball is incredibly low. in the valuation I thought was very low.

And, you know, I feel like, I've had a bunch of these in my career, I feel like, and you, I'm sure you have as well, Andrew, which is like, it's almost just like moving fast on them. So that was the original trade for myself. And then, you know, as you start digesting some of the, I don't know, sort of red flags, I guess you want to say, or issues potentially longer term around the company. You know, I think some of them are real. I think most of them are manageable.

or I should say manageable, fixable. So some things are fixable, some things aren't. You know, fill rates, customer reviews, better branding, C-suite issues, all fixable. And actually, I think they're in a real sweet spot between, you know, the, you know, Lowe's Home Depot sort of folks, which really want to move a lot of volume and really turn inventory. And yet, like, the higher-in brands don't really just want to sell the big boxes who are going to totally squeeze them on margin. and the mom and pops, which maybe they offer good service. I don't know.

I bet the services all over the shop when it comes to those mom and pop shops. And they clearly don't have a lot of scale and, you know, with even Delta variant. But just in general, where the, where the market's moving, people are becoming more and more comfortable buying things online. And so I like all the tail ones on the business. I want to dive in there, but I want to make sure we, I think we covered the situation. in the event that initially attracted you to it. And, you know, it's still out there, right? The warrants are, as I look, the stock's probably 260 and the warrants are $1.20. They're almost five-year warrants at this point to buy the stock at $2.25.

So you're not paying a huge ball or any of the warrants, though, I'll remind everyone everything's risky. But have we covered the event here? Or can I ask you some of the kind of business questions that were lingering on my mind? Ask me the business questions. I don't know. There are another event. I don't know about another. No, no. I was just making sure we would cover it. So what you said there was interesting to me, right? The company had a quote on their call where they said, hey, you know, we've got all the products. We can source things that Amazon, Wayfair, Lowe's, Home Depot, these big box stores have trouble doing. And I heard that.

And I was like, really, this little $200 million company post-merger can source products that Amazon can't do. And they said another thing. They said, our distribution strategy is Amazon and Wayfair aren't set up to distribute appliances, but our distribution strategy, which right now they have two distribution. centers, one in St. Louis, one in trend in New Jersey. They said, our distribution is much better there. And both of those struck me as really strange. I was like, I'm pretty sure. Like, I get the luxury brands might want to protect a little bit. You know, you're not going to find Nike in a Walmart or something. But it was just strange to me that they said, we've got all these scale

advantages over some of the biggest companies the world has ever seen. So just what do you, what would you say to that? I think heavy load logistics are a real thing. Like, it's not just, You know, I mean, when you start, you know, adding, you know, real weight and I'm not even talking about computers, even if you buy an Apple computer, it's still only, I don't know, like, I don't know, a third, a quarter of what an appliance is going to weigh, is a real skill. You can't just, you can't just, you know, drop ship it in the same way that you can with, like, Amazon logistics and things we've got. I also think they're probably, I mean, every company pitches itself. was like, oh, you need competitive vangers and blah, blah, blah. I think this market is, in my mind, big enough to matter for a stock of 200 million, 300 million, but small enough to not really matter for, like, Amazon's like, yeah, sure,

we'd love to sell appliances, but, like, if we can't get the big brands to work with us, we want to create our own brands. And, you know, I think the jig is up on Amazon sort of like trying to partner with, like, niche brands, you know, like, I don't know, like, there was a whole Amazon series on CNBC where like the guys that sold like niche paintball equipment like had you know them just like come in basically then and like within two years like mimic their their product and things like that. There was a really cool one. I can't remember the brand, but it was a fanny pack or backpacker. I think it was a fanny pack where they had designed this thing perfectly, right? They put

great materials into it. They spent a lot of time thinking the fanny pack like all these little nukes and things that you don't really think about, but kind of like Apple, right? Where not only does it just work, but there's all these things in there that you didn't know, like maybe a, you know, a special pocket for your cell phone or that type of thing. And then Amazon came a built in eyeglass shammy. Hey, that's what you need. But Amazon came and launched one and the company put out this great advertisement that was like, you can go buy the Amazon one for $5 less, but you know, they're not using environmentally friendly things and they showed how Amazon stuff was. And you know, Amazon basically ripped us off. And it was a really good mockumentary. But okay, let me turn to my next question. I think

that was a nice description of every. The biggest worry I think I have here is the AC appliance guys are coming in. And it is undoubtable to me, AC was a better business than Godeckers. How did you pronounce it? I want to, it's Goose Decker's. I want to feed you fake names. No, Go Decker's. They're going to read brand, but go ahead. It's undoubted to me that AC was a better business them, right? Their margins were better. Their fill rates were better. Like, everything said they were better. They were a much bigger company. And I believe AC's owner has come over as the president, but he is not the CEO. Maybe he's driving decisions. I don't know. The Gudecker's CEO was really driving all the conversation. But my question is, A, why was he not, you know, the CEO? Why,

why was AC not the company to buy Gudeckers instead of the other way around? And B, you know, he took out about 160 million in cash as part of this deal. And yes, he got, you know, that's probably worth 10 or 15 million at current prices and stuff. And yes, he's on the board and he's the president. But he took out 160 million and his stocks were, you know, a fraction of that. So I look at that and I say he didn't get the top job. He got a lot of cash. Isn't this guy, is he on a beach somewhere? Like, is he really committed to this? I think I saw him in the beach today. No. I mean, look, I think it's a fair question. I think two thoughts. And I don't mean because I think all these concerns are legitimate.

And I don't want people to think, like, because I never really dig my heels in on position. Like, I'm someone who's very like, oh, I don't know. Like, when I add it all up, I still like it, but I appreciate it. So, like, I think long term, the competitive advantages issue, I think is what you're bringing up. I think in the shorter term, it's, there's an opening, some open field for them to run to. Longer term, yes, they're legitimate concerns around like competitive advantage. And, you know, I assume your margins and things like that. On this question, I have seen.

so many people with a domain experience sell out for cash because they're like, oh my God, this buyer is insane. Can you believe they're paying X dollars for this business? And then the next five or 10 years of that business, the business 10x. And I mean, you can think of any family business where they basically sold out to a private equity firm. And I've just seen it a ton to the point where I tried to think too much into it because if that guy started from zero or started from $5 million and made $150 million, like maybe it even makes sense for him to sell, like just for his own personal portfolio. I mean, who was saying, maybe someone on your pot or maybe it was Bill Bruce or someone,

no, it was someone else I was talking to and he was saying like, if you make $40 million on trade, like you need to sell that no matter what. And I was like, I don't know about that, but I can understand where he's coming from because it's like really I have to get rich ones. So if this guy is of that mind, then good on him. And I've seen, like, I remember seeing, you're, you probably follow Equinex. Am I saying it right? Which is the big data center.

Have you ever heard the founder talk about, uh, why he sold out? Like, it was pretty amazing. I, you know, I, I think I read there, there's a book that covered Equinex slot, but yeah, I read a couple years ago. Oh, man. Well, send me the title of the book. I want to read it. But it was quite interesting because he basically sold out because he was like, oh,

we used to make like 50% returns on domestic capital and things like that. He didn't say that, but he was like the payback was like two months. And so when these guys showed up, like the returns were all gone. It was like, yeah, but you kind of missed the point. Like the whole thing was maturing. There was no dead. Like there was going to be continuous sort of growth in the area. So I've just seen a lot of that.

I try not to, you know, people sell for a million reasons and you buy for one. You know, so I try not to read too much into it. But I think it's definitely like, not a, I wouldn't say that. To me, that's not a red flag. It's like a yellow flag. It's like, okay, like this guy sold out. You know, why is Doug in the seat and not Albert? I mean, because he raised the money and he was on the team that bought the company.

And why did they sell to the public company? Because probably they wanted to help them monetize. And there's no way you could raise that kind of money for a business. I mean, I don't think so. There's no way he raises this sort of money in the private market. That's what's great about the public markets. I mean, that's why. I didn't think they could raise it in the public market.

I mean, wow. I agree with you. That's more of a yellow flag to me. That's more like, hey, does the seller, is he really invested here and stuff? So I agree with you that's yellow flag. Let me go to a red flag. As we said, this is a fish swallows the whale type transaction. They bought somebody who was probably five X bigger than them. And right as they do it, you know, a year or a month or two after they announced the deal, they switch auditors. And then two months later, they put out a, you can't rely on our financial

statements, 8K. And I can't remember what the reasons for not relying on, but, you know, saying, hey, we're going to do this massive deal. We don't have committed financing, but we'll figure it out, and then firing the auditor and then saying can't rely on financial statements, that's just red flags. Pre-deal, pre-deal. Yeah, pre-deal, yeah. So I don't want to, like, yeah, disparage anybody. So I'm just going to keep it really, I mean, just anyone can go back and look at the history

of the company and things like that. And I think that to say there's no hair and that's real hair, would be a misstatement. So I would say that, you know, there's shades of gray in here. And it doesn't bother me if at the end of the day, like, something is not as material. Maybe it was material pre-deal. Maybe it was material before, like, you know, they owned Appliance Connection. And, you know, maybe some of the guys are involved in this company, pre-deal,

aren't the savories of people that you want to be doing deals with or don't have the best track record. And, you know, but for me, I've missed a ton of deals being a little too caught up in things that are, I wouldn't say, I don't want to like dismiss it. Again, it's like, this is the real thing you're bringing up. But things that are not the top three to five things that I'm worried about for this investment. Um, you know, I remember I passed on WWE because Vince McMahon made $14 million. And I was like, I can't own a stock for Vincent Mann makes $14 million a year. And this is insane. Like I, you know, I don't know him. But, you know, I don't know him. But, you know, I grew up, you know, watching wrestling and craft like that. And, uh, and that's, that's, you know, and also, like, if you look at the proxy, it's just like the corporate jet usage for like Vince and his wife or whatever, you know, you're just like, oh, my gosh. It's an empire. It's a real empire. But it's an empire. I mean, look at what Vince built. That is a, I love the. Oh, no. I should have, you know, what's the holier than now. You know, I don't need to be so holier than now. No, no. It's, but I guess what I was saying is Vince built an empire, culturally relevant, you know,

It's sustained for 40 years, geodeckers or whatever it is. Oh, yeah, no, no, no. I'm not saying that. I'm saying there are things that I've come across that, you know, I say, hey, that's a red flag. And I think that is a red flag. I just don't think that it's relevant now. And I don't think it's important to the outcome of whether the stocks are going to go up or not.

I think it's going to be relevant is whether they execute or I should say execute. And maybe that's a good way to leading the management. But whether they, whether the remod housing. start continues and that they can, you know, put out decent numbers, if not great numbers. Let me give two more red flags, which admittedly are in the past. So the answer could be there in the past, but they just came to on one is related to a risk. You kind of did address already, but I thought it was curious. You know, they announced this deal in November. At the time, I think it was $42 million in cash, $168 million, $468 million of cash, right? And they did not have

financing for the cash. And then in December, they quietly restructured the deal to take the cash component from $168 million to $180 million. And that just strikes me as weird. And again, it comes back to the thing we talked about and you kind of address already, but the sellers are taking all this cash out. And the companies agreeing to give them more cash when they don't even have financing. It was just very strange and kind of related. So I'll just throw it in here.

In March, they raised $2 million of cash while they're still trying to figure out how to do this big deal. But they raised $2 million of cash to go buy extra inventory. And they did it at like 10% interest. rates plus warrant coverage. And again, it just struck me as weird. Like, raising $2 million at 10% to buy extra inventory while at the same time you're trying to finance $160 million deal. And they said, oh, I believe a direct quote was, we didn't want to spend the time shopping for a better interest rate because we just wanted to do this and get it behind us, but we'll do better in the future. You know, it all was just adding up to more and more red flags. And red flags kind of

compound on each other when you see them. So I'll flip it over you. Okay. Yeah, so I would say that, again, it's a similar answer. Not about it being in the past so much as pre-dealed. There are definitely some red flags to consider and even around the deal. I would say in terms of the cash component being increased, I'm sure that the seller was like, hey, this is taking longer than you said it was going to take. And, you know, we're like gangbusters over here growing. And we're thinking of like considering what our clauses to walk are. I don't know, to me, it doesn't, it just happens all the time with deals. Like, you know, people are, a company dying or a company's growing and somebody wants more money. And, you know, ways of dealing with that are, of course, maybe paying more cash or, you know, in the instance of like the rebate, like giving the rebate to the seller as like a way of basically giving them more cash without recutting a deal. So, so it doesn't surprise me. and you didn't really ask this question, but maybe we're going to ask it later because me that was the biggest red flag that I spent a lot of time on was whether these rebates were

real or not. And, you know, all of the due diligence I've done talking to people in the channel is, yeah, I mean, these are actually quite standard. What don't you describe the rebates just so people who haven't kind of dug through the financial statements, everything that you're talking about? Yeah, I mean, so when you buy, you know, a bunch of appliances like sort of wholesale to sell retail you're normally given like a big rebate by the manufacturer and a lot of times that like constitutes an enormous part of your profit you know so and so the question I think people have raised legitimate legitimate question red flag in my mind is whether these rebates because they sort of

disappeared like with with appliance connection whether they were real or not like whether these were really their margins pre-deal and that was a big one for me because it's like because that's not right. I mean, this business is like, what are you buying? Like, the jewel isn't a jewel. So I did a bunch of due diligence around that question and spoke to people at, you know, big manufacturers like, you know, the world pulls of the world. And, you know, they explained the transactions and, and that these rebates are quite standard. And then they're not, you know, they don't know anything about, you know, Goetheckers and appliance connections transaction, but that these are quite standard and it's not weird for them to be built up on a balance sheet.

or anyway. So, so go ahead. I feel like you're asking a question. Can you tell me if I'm because my understanding and A, I was very impressed because a lot of people, you know, I posted my notes and prep for this transaction. I was impressed because there were lots of questions on the rebates, which indicated people were really digging into financials and paying a lot of attention. So good on them. I love to see that type of work. But I was a little surprised because A, I'm with you. It's not like I'm an operator. I'm an investor and I'm sitting here. I'm pulling an Adam Aaron. Actually, I'm still all my boxers. You can only see my top hat for those on YouTube. So don't worry, we're going to be fine. I've never done anything like this, but I thought rebates were very standard for this type of

heavy equipment. You know, I'd seen them before. And correct me from wrong, but as you mentioned earlier, one of the 8Ks, like in March when the deal was kind of dragging on, they agreed, hey, as you said, probably as a price boost, AC, when we buy it, we'll leave all the rebates with you. So as you collect them, that's like a cash increase. So I thought it was kind of settled, like it was standard and there was a reason the rebates went away. Am I misremembering anything? No, I just think that guys understandably are like, well, you don't even know what this adjusted even number is. Like you guys are just kind of like trusting the company's word on like what that's a good point that margins can be. And so like you're projecting out like EBIT, you know, EBIT dom multiples and you don't even know what the EBIT is.

So I think the rebates don't the rebates don't come in for three months, six months or whatever. And you need to make an assumption on the when they report their numbers, they're making an assumption on how much rebates they're getting and stuff. when they're presenting everything to you. And if they assumed we get a rebate of 7% on the sales and it turns out it was 4% and this is, you know, it's a single digit or low double digit EBITon margin business, that crushes your EBITROM margins. Yeah, it crushes your valuation. Yeah.

And it's a legitimate concern. I think people worry that, you know, potentially, and I, from all the due diligence have done around Appliance Connection, it would seem that it is kind of the crown jeweled the industry. So maybe they paid up for it or maybe they paid a real price for it and the guy won in cash because he's like who knows why again it's like I think it's you can be really careful reading into why people sell things so much as like why they would buy because again you sell for a million reasons and buy for one I don't want to read too much into why the guy wants

cash or why the guy is selling I think that people understandably are incredulous and sort of want proof that that these margins that appliance connection were quote unquote you know, achieving, we're real and not like smoke and mirrors. But then when you take where the margin came from and leave it in the transaction, it makes people feel like, well, hang on now. This is like a little, like, you know, like slide of hand here. You know, you show all these margins, but then you don't really have to have it audited or approved because now it's been shifted back to you as a seller.

So then no one's going to look into that. I think it's a, it's a big accusation to make. But I think it's, but I can understand why people would make it. But the deal just I've done is that these are very commonplace. Let me ask one more risk that I think is different than anyone else's asked. And then I want to ask you a little bit about execution. And then we can go on air else you want to go. On the call, so post-AC deal, this is a $500 to $550 million revenue company, right?

And the CEO has been very clear. My vision is for this to become a billion-dollar revenue company. And I think he's been pretty clear he's going to get there, hopefully through growth, but also he's going to acquire stuff. and a risk in my mind, you know, he just did a, his stock was at six, nine, whatever you want to call it. And he sold the whole company at 225 warrants common. And my worry is, he basically gave the company. Yeah.

And somebody even kind of asked this question. And he is on how could you sell this much stock at this low price? And his response, I thought it was interesting where he basically said, hey, this was all, he didn't say anything about shareholder value, right? It was all about, it was kind of all about transformative. That's what he said? Transforming to buzzwords. I have the quote somewhere. I can't remember.

But it was basically, it was pretty much transforming. It was like it wasn't about the price. It was about getting this deal done and growing and becoming this whole new company. But it didn't seem like shareholder value was of much concern there. So I guess my question and my risk is, and then we're going to talk about, I think the biggest risk once you put the red flags behind you is execution.

But my question is, you know, what's to stop him six months from now? AC is starting to get integrated. Things are going good. He announces another big deal. and, you know, they sell 30% of the company at a dollar with warrants or something because it just doesn't seem like he's super cared about minority investors. I mean, I think he's an operator. He's not like a financial, you know, wizard.

He's not, he's not Warren Buffett. He's basically his background. He ran Sears Appliance when Sears Appliance was a thing, you know, was like one of the largest or not the largest like appliance or distribution companies, you know, within Sears. And so I think he's a lot of the largest. I think he's where operating and he thinks the future of appliances is direct to consumer. And you just doesn't think they're, you know, there's, it's long overdue. We're now the time to be to be doing this.

And I also think that, and I don't, this is speculation. And I say this in front because I really just don't want anybody at a company to ever get upset at me. Like, they had to do this deal. They were going to, they were dead. They didn't do this deal. In my mind, the company was kind of engaging in potentially, unsustainable business practices, hoping that they could raise equity to finance their way out and sort of grow their way out of potentially unsustainable business practices, you know,

with those low fill rates. And then the credit card company sort of putting the hammer on them meant that they had to get this deal done. It was kind of a do it or do it or die kind of deal. And I don't see that as being a deal that they'll need to do in the future. And so it's like, again, it's back to this idea that I think to me, the best idea is always have, some red flags around them and they have to be controversial or they're not going to be interesting because they're not going to be cheap enough. Everybody's going to sing kumbaya and, you know, we're all going to buy Apple. I mean, it's so, and I don't, I don't want to like go there, but, but I would say that that, uh, I just don't see that. I don't see that it's a future

deal. They had to do this deal. I mean, he was dead without it. As you said, one of the riskiest place to invest is heavily shorted stocks. I mean, especially because they can turn into meme stocks now, But, you know, heavily shorted stocks in general that they, they well underperformed the market. But if you find a heavily shorted stock and the short thesis is wrong, you will make a lot of money because heavily shorted stocks where the short thesis proves out wrong go up and they go up screaming. You know, Stamps.com, there was a short thesis on them at what, like 20, 40, they just got bought out for 300. And if you read the proxy, private equity firms were begging to buy them at 100, 120, 100.

150 a couple years ago. So there was a bid there the whole time. Tesla, you know, I don't even know if the short, the shorts were wrong in stock price, but when you look at all the shenanigans that went there, I don't know if the shirts were wrong in story. I don't know. Yeah, who knows. That's a really wild one. But I can tell, so I do agree with you, the controversial ones with hair is where the real money can be made, but I can tell that the company has been getting questions on leadership because I'm looking at their deck right now and they've got six slot, six slides. Yeah, what was that amount? I was like, what the hell is this? And it's kind of funny, because they've got six slides devoted to how aligned the board is. And the first thing is,

the CEO owns 30,000 shares of a stock that's trading for $2. And he makes, you know, a million here. It's like, if you think about that for one second, I don't know how aligned that is, not that he can't be aligned, but yikes. Let's talk, I think the biggest risk, once we put those red flags behind is execution, right? They, they've got to, A, They merge Godeckers and AC together. Next year, I think they'll switch the brand name to something. They'll unify the brand as they call it. They've got to merge it.

They've got to get Godecker's fill rates, which is, you know, if you, if 100 people order a refrigerator from them, shipping a refrigerator and stuff takes time, a fill rate is at 80% that means of the 180 orders come in. That's where Godecker's is. AC was kind of 85%. Godecker's margins, I think there were 22% gross margins. AC is 26. 4% of gross margin points.

a big difference, especially when you're talking about a couple hundred dollar products every time. But, you know, how do you see the execution playing out, the integration, all that type of stuff? Because I think that's where the next big risk is. So, I think, again, right place, right time. You don't need to be a genius to be in the right place the right time. And sometimes that's just luck. And so I think they're in a fantastic spot. I think if they don't execute the stock will stay where it is and you'll have what you're seeing now, which is basically activist. I mean, I've had a. few activists actually call me about the stock.

Really? Yeah, I have. What are they? I've not spoken with Carlo. We're not forming a group. Oh, I forgot, Connell was here. We're not forming a group. We're not pushing activism, but.

Oh, was he on your, was he on your, was he on your pod? Oh, no, you're saying he's here like he's in the stock. Yeah, he has not been, but if he's listening, send me an email. I would love to, because I, he does some really interesting stuff. And I'd love to chat with him either on the podcast or just offline, because I I think I do interest and stuff too. I don't know. But I do. What do you think? His book would be, I would literally just invest in everything he does. Everything stuff is cool. But I don't know. What were you going to ask a question? What was the question wrong? What do you think the

angle for this company would be, right? Because they just did what you think could be a killer deal. Obviously, we could talk capital allocation. It might be a concern going forward. But they just did a killer deal. And it's clear what they have to do. They have to integrate. They have to execute. So what value add is an activist bringing in here? being in the board room and watching monthly operating metrics and execution and leadership from the C-suite and if they're not seeing that to remove said person, whether it's a current CEO or someone in the C-suite that's not delivering, whether it's on merchandising, marketing, you know, whatever, logistics, because that's going to be a big part of the business.

You know, all these things are important to a company. And, you know, I mean, we're talking about a stock. we're talking about special sits but at the end of the day like there's an actual business here and so they're not executing i think it's important for it's silly to call them activists engaged shareholders to uh be able to maybe be in the boardroom i think being in the board room and be watching the shop and being like hey you know this is great like keep going or like hey like who's doing the marketing because like this isn't this isn't like this is not hitting the mark um and i think board members with relevant experience in these channels, whether it's big distribution

businesses or D to C businesses or appliances, I think is important. And I'm sure that's what Carlo and I can't remember the other gentleman's name who's in this, who's in like auto parts.com. I did actually speak to him briefly, but, you know, his message was just like, look, I just want to see like great board members with great experience helping shepherd the company. It's not, it's not an ultimatum. We're not here to like leverage the back. and she put the company up for sale. It's like, this is execution. And he had a very similar,

I think, sort of similar been to me, which he's like, these guys are in the right place. They have the opportunity to be a multi-billion dollar business, but it's going to require execution. And I can't disagree with them. I'm not sure I'll be around for all that if that would occur. I mean, I'm really a special sick guy, but he's not wrong. And I think if they don't execute, stock stays cheap, and you, I want to say the buzzards, but you know, you attract attention from people that will, you know, put you through boot camp. I don't know. Let's real quickly, just so right now, stock around 250, it's not a crazy complex cap structure, but there are warrants, which, you know, as the stock goes up, the warrant and the warrants dilute

and everything, so it can get a little complicated. But let's just quickly talk. We're not talking super bull case where Goodeckers is the next Amazon and, you know, every appliance of the world goes to them and also they've got web services and they're using their they're using their distribution centers not just to deliver furniture but they're going to they're going to deliver me a pizza every day and everything but let's just talk reasonable vocation. Just quickly paint me 550 million in revenue is kind of what they were targeting on the heels of this deal. What is that translated into EBITDA and kind of give me a reasonable multiple and what would that print the stock at?

Ouch. Okay. That's uh you're going to that Excel spreadsheet Thomas. You're not going to like you're not going to like my answers here. You know, I think that it's achieve, you know, again, I'm like going to draw like a truck through here. I think between, if you look at the different margin analysis and then you look at, I'm sure they're incremental revenue and incremental profits. They can create around a DTC and the appliance vertical. But let's just stick on this vertical. If they execute and the numbers keep, I mean, they really are only slowing down on revenue because they can't get the fills, meaning they can't, they really want to keep their... People are, and you can look, industry-wide, people are, you know, we're all stuck at home.

I've been doing, anyone who's watched the podcast on YouTube, I've done 64 in the same room, but, you know, we're all sick home. People are desperate for refrigerators. Nobody can get parts. Supply chains are awful. So that is not them alone. This is every company is saying it, and that's why they can't hit their fills completely. But, yeah, so I mean, if you can do 550, and you can get somewhere between, you know, margins to put you somewhere between 40 to 60 million and EBITA, and you've got a D to C business model, which I think that's kind of where the puck is going. I don't know why you can't get an attractive multiple on that.

And I don't want to, I would frame it in the way like, you know, I would frame it the way that like, you know, like a really, not a statistician, but I guess like a math, a math person might. It's like, I would say that if you're paying, you know, $250, $300 million for $50,000 to, you know, 40 to 50 million of EBITA, and I mean, I know it doesn't look at free cash flow, but I can't imagine, you know, that isn't somewhat close to free cash flow. I don't know why you can't an inequality. I don't know. To me, that's attractive. You're talking about creating a business for a multiple where if there's growth, you know, the multiple should be high and you're getting a

very low multiple. And, and sorry, go ahead. No, so on their normalized number, I think what you're saying with the stock at 250, you're probably trading maybe six times EBDA, if you assume they can do 550 with about 10% EBITDA margins. And they had a slide, which, you know, I always raise an eyebrow when a $100 billion company compares them to Amazon. But your basic thesis here is, hey, I'm paying five times EBDA. Hopefully it's growing because of the tailwinds and everything we talked about. But I think this business could command in a nice, in a reasonable base case, 10 or 12 times. And, you know, if things get really spicy 15 and, at that point, we're talking about a triple on the stock and the warrants more so because

the warrants are naturally levered because that's how warrants. Yeah, I mean, I don't know. I mean, like if you think about the warrants, again, like five-year warrants, I bet it's a basket if you just bought all these kind of like warrants, not the SPAC warrants because they can be called away, but just like warrants in the market in general, I'll bet on a risk-adjusted basis they do do pretty well. Just because the implied ball is low for, And so that's why I really like him and sort of like I like the backup story. And there are probably other stories where you can buy things for five, six times. And there maybe there's tail ones who goes a thesis there. I mean, there was even I have a friend who's in like a steel spec that's like it went off like two, two and a half times. But people are like, oh, it's high to the market. You can't buy it two times. That's you're, you know, you're going to get your head blown off. And I'm like, okay, but I mean, the implied ball on the warrants, although they are callable. I'm going to, I'm going to guess the friend and the stop. The friend is just. Jeff Moore and the stock is Lego. No, it's not Jeff, although I'm sure Jeff is in it or looked at it.

And it was Tim Bergen, who I'm sure he doesn't mind. Oh, yeah, Tim's come on the pod, love Tim Bergen. He does On Beyond Investing. Great service if anybody's interested. Yeah, I'm a subscriber. By the way, I need to subscribe to yours. I'm sorry. I don't subscribe to yours.

I mean, I... That hurts. That hurts. I should, actually, because I'm always impressed with, like, you're just like, like, idea here, a dogged idea generation. Like, I don't have as many ideas as you do. I can't buy anything. It's quality over-quality, right? No, that's not true. That's not true. I'm a bit lazy. Also, I do a lot of my day job is not distracting, but it takes a lot of my time. One thing I've been really pushing myself, and you are one of the people who has shown me that, I mean, with your Ethenex trade and

this trade from buying at the bottom, you know, when you find something that's really in your wheelhouse and the risk adjusted is really good for you, you need to swing. I go and yeah really gosh darn hard and i think one of the things that has hurt me as an investor i'm trying to get better at it i'm always trying to improve every day is i've had some stuff that have been right in my wheelhouse and i have not swung hard enough at them and it's easy to say that in hindsight when they've gone off the ton or something but yeah looking back on it even at the time like there's there's one company i'll go ahead and say wow which is a cable overbuilder and anybody who's followed me knows i i done tons of work on cable and last year it was at four dollars

per share. And I even put a note, I'll make a pitch for my premium service, though, please. I never want anybody to feel like they need a subscribe or anything. I put out a note that said, wow stock starts with a four. I believe based on asset value, precedent transactions, everything I've done, it should start with a four. It should just have an extra digit in it. And the stock in a year has gone from four to 20. They sold some assets. It's done great. But when I look at that note and I think how much time I spent on the cable sector, I say to myself, how did you not swing harder at this thing, Andrew? Like, this was a, this was a perfect pitch for you, and it's to your detriment. You didn't swing harder. So anyway,

last thing on Godecker is before, now that I'm done, beating myself up and pitching my own service. Last thing on Godeckers, we mentioned EBITDA margins. You mentioned free cashload. It's one thing I wanted to bring up because it's very easy as investors to just get fixed it on EBDA, but DNA is real. And I'm of two mind with Godeckers where this is an online business. You know, online businesses are famously capital light, but their distribution, heavy appliances, they need to ship all those things and stuff. You know, distribution centers of shipping, it's not cheap. Look at how much Amazon spends every year on warehouses and stuff.

So when I say EBDA marginally, how much of that is actually going to translate into cash flow? Or you can just switch it and talk about like, why is this a capital like business, that type of thing? Oh, man. These are just too hard for me to answer, dude. I would assume that they would be decently asset light and that there really shouldn't be too much of a drag between EBITA and free cash flow. The DNA is real, of course, and as you grow, you have to consume working capital. And so I guess that's DNA, but maybe that's like growth capex, really. But the other thing I would say is, you know, they do, they're, I wouldn't say they're negative working capital, but it's actually quite interesting.

And their way their business model, you know, they're normally, they don't require as much working capital as you think to grow, which is what can be a problem within companies, you think like, oh, they're growing. this is great, but you know, when you grow, your working capital increases and you sort of are consuming cash. I don't know that I haven't really dug down or seen enough to be able to model and think about it, but I wouldn't be surprised if, I wouldn't say they have negative working capital. There's no like moat. There's no like, there's not like float, but I wouldn't say that's that far off. Most companies that buy from, you know, grocery stores are negative working capital. Anything that sells to consumers and buys from businesses because you get accounts payable 30 or 60 days and consumers generally pay you up front. In general, you will be pretty,

pretty at least working capital light or negative working capital. You know, Hertz switched everybody to 180. Anybody owns the stock. Hurds, you know, post-reargo equity Hertz. They switch every, they choose all their suppliers to 180 days. Do you remember not the second time we mentioned Tesla here, but Tesla, when they were really stressed, they just sent all their, they sent all their supplier's letter that said, hey, I know we've got contract terms, but we're going to be paying you 15 days later. And by the way, we're going to pay you 2% less than we agreed upon take it or leave it. And a lot of suppliers were mad, but all of them actually took it. So yeah, I mean, I would put, yeah, I think, I think companies can do things like that.

I don't know. They're transitory. So they only do it one time. But, um, yeah, Tesla. We should, we don't have another pot about Tesla. That's not really for, for your type of pot. That's like a, I don't know. I'll talk Tesla with anyone who wants to talk Tesla. But, you know, I find Elon Musk a fascinating character. I mean too. You know, you read his book. I've had a small short position on it off and on over the years. You read the Ashley Vance book on Elon Musk and you see the stuff in there and you're like,

there's no way this doesn't, this guy doesn't blow up at some point. But at the same time, you've got to admire the vision, SpaceX reusable. But it's absolutely incredible. But yeah, I'm of so many minds because there, you never want to use that for it, a fraud. But a lot of the stuff with Solar City, a lot of the stuff with, you know, all of it just streams. The autonomous stuff is really going to, I feel like that's where he's really, things are really going to fall apart on him.

Like, you know, overselling on the, like, the, I don't, I'm not an expert on the stuff, but like the levels of autonomy that they've reached and things like that. I was talking to someone yesterday. We were promised autonomous robo taxis from Tesla in 2019. And we're approaching then to 2021 and I still don't have my robot taxi. that Tesla semi-trucks were supposed to come out in, I think, 2020. I haven't even seen a working prototype yet, I don't believe. But neither here nor there.

And I actually do have a lot of stuff Tesla as a company. And I don't know a single person who's bought the car and hasn't enjoyed it. But Thomas, anything else you want to say on Goad? Anything else we kind of haven't covered this lingering in your mind? I mean, if somebody has a better way to play, the remod housing starts playing. And I know the guys in Lumber and things like that. I was about saying my buddy Mike Mitchell might think there's a better way to play. I'm long that one too.

I'm long that one too. I'm long. And I know people say, oh, it's a high cost producer, blah, blah, blah, blah. It's like, is it going to matter if lumber is at 1,500? And, you know, I'm not saying it's going there, but there's a real probability that it could. And I was able to get in cheap because of the warrant issue that was going on. I guess they're not warrants or rights, but the whole rights issue where people were having trouble subscribing. So I was able to scrape some up very cheaply.

I'll disclose I participated in the rights offering there. And the fact that Thomas said he was participating was one of the things that kind of spurred me to really dig into it. But that's another one, right? Like there's hair there. It is a weird structure, weird deal. The management team is a little bit controversial. But there is, as a risk adjusted play, there is a heck of a lot of upside to that deal. But everyone should remember, nothing on here is investing vice. Thomas, I've got two more things to say before we go. A, everybody can tell how much I enjoyed having you on. I'm not sure I've smiled and laughed as much in a podcast. So thank you so much for coming on. It was great having you. And B, before we started, you said, hey, an hour long podcast? I'm not sure if we're going

to be able to 30 minutes. How long is this podcast run, Thomas? I just like chatting with you, Andrew. It's been way too long, dude. It really has. It really has. And, you know, we'll have to catch up a little more frequently. And I know you're trying to lure me to Italy, but my wife got me to Spain for a little bit. So I don't think I'm coming to Europe anytime soon, but you've got a place in New York. So next time you're here, we're definitely going to meet in person. But Thomas, thank you so much for coming on. Everyone remember, this was a great podcast, but this is very risky.

So please do your own research. But Thomas is great. Have a good one, man. Yeah, same. Same to you, Andrew.