Yet Another Value Podcast - Brian Finn from Findell Capital on his letter to Oportun Financial $OPRT

Episode Date: April 13, 2023

Brian Finn, CIO of Findell Capital Management, discusses the letter he sent to Oportun Financial's board (NASDAQ: OPRT). Since Oportun's September 2019 IPO, shares have fallen -85%, falling well behind competitor, OneMain Holdings (OMF). In addition, costs have exploded higher and acquisitions have proved disastrous. Findell Capital Management Letter to the Oportun (Nasdaq: OPRT) Board of Directors (3/29/2023): https://static1.squarespace.com/static/5e17f2a118561f6339437f24/t/64240b4f0cf8705352d472b7/1680083791192/Findell+letter+to+OPRT.pdf Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:50] Oportun Financial overview and why Findell Capital sent a letter to OPRT's board of directors [9:20] What is the $OPRT Board of Directors doing? What is the incentive structure? [11:45] Understanding $OPRT's subprime lending business for underbanked folks [15:32] Comparing $OPRT to competitors like OneMain [24:20] Unpacking $OPRT valuation [28:29] How Oportun's corporate strategy is wrong [30:38] $OPRT valuation cont'd - what is the fair value of the loans + cost of financing [34:29] $OPRT Q4 2022 earnings call [38:54] Next steps following Findell's sending of the letter [43:01] Why $OPRT should be private or run by PE [44:51] Closing thoughts on $OPRT Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by side analysts conduct the calls for you. But that's not all. Stream also provides the ability to

engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls in a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. Hello and welcome to yet another value podcast. I'm your host, Andrew Walker. If like this podcast. It would mean a lot if you could follow, rate, subscribe, review it wherever you're watching or listening to it. With me today, I'm happy to have Brian Finn. Brian is the founder of Findale Capital. Brian, how's it going? Doing good. You know, back from the long

weekend, excited to start off the week with the podcast. But let me start the podcast with a quick disclaimer. Remind everyone that nothing on this podcast is investing advice. That's always true, but particularly true today. We're going to be discussing a company that has rapidly become a kind of microcap company. you know, if we were talking 18 months ago, this would have been a $2 billion plus market cap company. Say it's just over $100 million. Fendale Capital sent a letter to the company, which we're going to be talking about.

They disclose that you own about 4% of the company, so people should certainly keep all of those kind of extra added risks and things in mind when they're thinking about this. Remember, not investing in that advice, not financial advice. So anyway, the company we're going to talk about is opportune financial. The ticker is OPRT. You guys sent a letter to the company about two weeks ago now, which I'll be sure to include in the show notes if people want to review it.

And I'll just turn it over to you. What is Opportunine Financial and why did you send a letter to them? Cool. So, I mean, just to step back here. So Opportunine was a company that was started back in 2005 by a Stanford School, a Stanford Business School student, actually is a research project. And the idea was to try to find a way to get unbanked folks. And these are typically kind of Latin immigrants access to to, to,

to lending and to credit. And so, you know, this is an alternative to call it payday lending. Payday lender is charged 400% interest rates and it's, it's, you know, a practice that's under a lot of political and regulatory backlash. Yep. But this is different than that. This is basically a personal loan and there's a cap to how much they can charge on the interest there.

So it's typically most states is about 36%. Most of their loans are, you know, somewhere in the low 30s as far as the interest rate charged. And they're short duration, so, you know, less than five years, typically, typically like one to two years, maybe three years. And they pay these loans back in sort of like an installment scheme. And so what this is really is it's a way for underbanked people to get access to credit and to build a credit score. And it's a really important service in that respect. And Opportune is really the only game in town doing.

So they've created this great specialty lending business where they've got all these retail locations spread throughout the country, you know, in the neighborhoods where these people are. And, you know, they've got access to the most amount of data as far as the full performance of these different vintages because, you know, these aren't loans that remain outstanding forever. They typically get paid off, you know, within a couple of years. And they're the only folks at scale targeting this customer base. their main competitor is a company called one main financial, and these guys are doing

similar personal loans, but their customer base is typically a little bit more assimilated and higher up on the credit spectrum. So they don't really overlap with opportune. The guys that are getting opportune loans are really guys that don't really have a lot of other avenues for getting these loans, and this is a service that's important from sort of a financial inclusion perspective. So, you know, they're targeting a great market. They're the only game in town.

Obviously, a number of immigrants in this country has grown a lot. And the folks that are doing these loans, they're doing these loans, not just to get the money for, you know, whatever emergency it is or particular need, but they're doing this to build up a credit score. And they typically will do about, you know, three loans. And that kind of gets you to a 660 FICO score, which is. enough to go out and get a credit card. But the interesting thing is the renewal rate typically increase with each subsequent loan.

And the deeper these guys get into their relationship with opportunity, the more loyal they are. And they'll often kind of later on as they build up their credit score, they'll still do loans with opportunity, even if that doesn't make as much economic sense. So you have a great base business here. Now, what's happened here is management's kind of come in and and screw it up. And that, so take a step back. So the founder left in, I think, 2012, somewhere in that time frame.

Raul Vasquez was the CEO who was brought in, and he comes from Walmart.com, where he led those efforts. He basically came in and he, he's got sort of a techie background. And he's decided to kind of run this business like it's a fintech company rather than a specialty subprime lender. And what he's done is he's gone out and he's made a bunch of acquisitions and he's layered on all these operating expenditures. You know, gone on and hired a bunch of middle management people, really expensive corporate officers in California, which is obviously an expensive place to hire people. hire people. And so by doing all this, he's essentially imploded the business here. You know, one of the big mistakes he made was he bought this company digit for 200 million, and that's been written down, basically. And they've added all these sort of operating expenditures

from there. And if you go through sort of each of these decisions to try to kind of become a more all-encompassing consumer bank, there's really no evidence. And we've talked to sell set analysts who've confirmed this to show that any of these efforts are really borne any fruit have led to any new revenue streams or cost energies and whatnot. All they've done is created this gigantic kind of Frankenstein cost structure that is obscuring what is an amazing base business here of lending to underbanked folks who need to get access to credit. So, you know, he's done everything possible to basically screw this up and, you know, the board hasn't been all that attentive to this. And so, you know, we wrote this letter to call, you know, to basically call the question his conduct as CEO.

And, you know, we've asked that he be removed. And we wrote the letter knowing that the board slate, it's too late to nominate a board slate for this year. So we wrote the letter to bring, I guess, public awareness to his tenure here and his track record as a capital allocator and as a manager of this organization. organization and to begin, you know, a public dialogue about how this company is being run. And since we put out the letter, we've had about 25% of the flow, which is a huge amount, reach out to us and essentially the voice there, there's their strong support for what we've, what we put out there. We have not yet begun a campaign of reaching out to other shareholders, although we imagine that, you know, most, most, it's just hard to disagree with anything we pointed out

because it's just such a blatant, you know, blatant reality. You know, this is a company that went IPOed in 2019 is down almost 90% versus their their main competitor, OMF, which is up 50%. You can include dividends since then. So there's been a stark difference in performance here. As far as where things are right now, you know, we will start reaching out to other shareholders. What we're going to do is we're waiting. So we were going to do a call with them, and that call basically got delayed until this coming quarter gets released.

And then we plan on seeing, you know, if they take any of our considerations into account. And if they don't, then I think we begin a more aggressive campaign of talking to other shareholders. But, you know, we'll wait and see if they, you know, what the reaction is here in the near term. Perfect. So let's dive into some of those points because, as you said, like, I can't imagine anyone reading this letter and reading the letter you sent and looking at the results and everything and finding like really anything to criticize in it or anything. But I guess you mentioned the board.

What is the board kind of doing here, right? Because I see a stock that's down, call it 85%. You know, we can discuss the funding and everything, but I look at the Q4 call, I look at the results, I look at how long it took them to start cutting pause, the results of that acquisition and like what is the board doing that they're letting management like go on this crazy spree it seems crazy that they they're taking so long to make changes here yeah no it's not clear what the incentive structure is for these these board members um to just keep this going and that's there needs to be some pressure applied here uh yeah you've got you've got two board members who've

been there for a long time um Dave Strom who comes from Greylock partners and Carl Vascarella who who's the lead director. You know, I don't know where those guys are. I mean, you know, Dave has clearly lost a lot of money on this investment. But, I mean, my guess, if I had a guess, is that, you know, this is part of some, some vintage within his ZC fund that has already done probably pretty well on other investments. And this is just some remaining piece that, you know, is floundering.

But, you know, what does he care? Yeah, it's not clear where the board is sitting on all of this. We have yet to obviously have a dialogue with them. You know, it's not clear how captured they are by, by Raul Vasquez. You know, Raul, from what we can gather, you know, he's sort of well liked by certain people in the industry. But he's not, you know, he's one of these guys who's great at sort of getting public PR done. He appears to be good at sort of the political games here because he's been able to last in the seat while delivering just completely disastrous results. But he's one of these guys who, you know, you search them.

there's like 50 magazine articles talking about what a great executive leader he is. So he's really, really good at PR, and he gets all these diversity, equity, and inclusion awards and, you know, that kind of a thing. But he obviously, the track record speaks for itself, the hugely bloated cost structure, the disastrous acquisitions that he's done, and the stock price. And you've got a lot of shareholders who are upset. So let's let's talk about the business and a little bit upside and then we can come back to some of the comments you made in the remarks. So I guess the first thing, you know, you said, hey, this is a pretty good business, you know, lending subprime to people without credit scores.

Like, it's not a huge niche, but I think a lot of people would look at that and say, hey, you're lending to people without credit scores. Like lending is kind of a commodity business. I do think that that can be a decent business because there are some returns to scale. Again, there aren't going to be a lot of people there. you're competing against like kind of payday loans but can you just break down the business a little further like what makes it such a a good business to do this yeah look this is a great business because you've got they've really they've got two things they've got like they've got their tentacles into these different communities got they've got all this sort of retail presence so they're they're spread

throughout you know the right neighborhoods where these sorts of underbank people live and work and so they're in the community you know which is a barrier to entry i guess to establish that presence but more importantly it's data they have all sorts of data that no one else has on this particular customer segment and you know data is obviously is key to to developing algorithms and the like and so they've they've developed great algorithms they have all the data and they've got a huge lead over anyone else in that respect and when you think about the structure of this business you're doing these loans at you know call it low to mid-30s, the cost of financing is like five, six, so it's a pretty fat, that interest

margin. But, you know, what matters is obviously the cost of customer acquisition and driving that lower, which is where they've, which is where they failed. Now, with, you know, the needs that they have, they, you know, it would be hard for someone else to kind of come in there quickly because they have the data to show kind of how these loans do over time, which I think, you know, if OMF wanted to come in, it would just take them a while to kind of develop, you know, how a vintage does over time and to know who the good repeat customers are and whatnot. So I think there's a lead there. And the other great thing about this is that these loans, you know, it's a book that they can turn over quickly.

So they're not stuck with a big loan portfolio of loans that are going to last for 30 years. These are loans that are short duration loans. So they can change things quickly, which they did, they did do that last July when they noticed deterioration in the credit quality of their current portfolio. So they tightened up the lending standards. And so that will obviously affect loss rates going forward.

So they can pivot on a dime here, which is great. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you.

But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. I guess, you know, just looking at, like, it does seem like lending to subprime people, like you probably should be able to get a little bit of return above your cost of capital just because there should be some skill benefits, there should be some data benefits.

But, you know, I guess maybe investors might be biased because just in the small cap space, like over the past year or two years, we've seen, you know, Op5 went public through, Opi had a very similar business model, and they went public through a SPAC and that's been a disaster bureau group, there were lots of moving parts there and everything, but that's been really poor. You know, each of them, it's not just the base business that kind of deteriorated away and resulted in the poor returns there. Both of them tried to do kind of similar to what Opportunity did.

They tried to get more into a fintechy lending as a service, whatever you want to call it thing and catch a tech multiple, and both them sunk tons of money into that and ended up blowing up. But I guess just like as investor you look at, it just seems like all of them blow up. And it seems like how much of it was, hey, when interest rates were going down and the economy was good and maybe like 2020, everyone was getting PPP and stuff, these loans were paying off better than you expect versus, you know, in 2023, 2004, interest rates rising, maybe a little bit rocky economy. Like you start seeing that the write-offs are kind of a little bit higher than maybe these guys had been modeling. Obviously, they changed that a little bit by changing the lending standards in July 2022, but you just worry about that. you know, the money out the door and it says, ooh, as soon as the economy takes a zip down,

you just see right-offs left and right. Yeah, and there's a couple ways to think about this. You know, for one, when you think about who they're lending to, these are folks that are actually, their jobs are in demand. They're probably not getting laid off. You know, if you look at kind of what's happened with unemployment here, it's the white-collar workers that are seeing layoffs, whereas, I mean, there's a great Wall Street Journal headline talking about how it's really hard to find

a truck driver to pay $90,000 a year, but really hard, really easy to find an MBA that you can pay $60,000 a year. So you're not going to see their unemployment rate, or at least right now, isn't spiking. You're still seeing strong growth and demand for these types of jobs. You know, inflation obviously caused some issues with their losses, which went up from, call it like 7%-ish to 10% but they're forecasting at least right now to see those loss rates come back down as they've changed out the the credit quality since July of last year and so most of the loan portfolio you know by the second half of this year will be sort of the post post-july of last year lending standards so they've tightened up the credit quality I think

their the folks they lend to um are in a better position from an employment perspective and inflation the thing that kind of throws all these variables um out out the window uh has at least come down a little bit um inflation obviously hits poorer people more than it hits wealthier people but oil prices are you know in a more stable uh trading range than where they were uh you know last year around this time uh and some other metrics have come down as well so I definitely, I mean, the macro is something to consider and worry about here. But the reality is these guys have such a fat margin. What screwed them up is, is not the quality of the loan portfolio.

It's how this guy has operated the business. I mean, to give you some stats here, opportune back in 2016, if you look at their OPEX per number of loans, so roughly kind of the cost of customer acquisition, it was in like a $300 to $400 range, you know, like $350-ish. Today, it's $1,000. Now, where's all that OPEC's going? It's not going to, it's not additive to their loss rates or it's not additive to their lending algorithm or anything like that. It's going to support this mass of corporate bloat. They've raised the headcount of their corporate officers by 70% since 2019. You know, these are all guys making $300, $400,000, $500,000 a year who are, you know, just a cost center. They're not adding the revenue creating employees who are the folks in the retail centers, creating the loans or in the call centers, helping service these loans.

That's not where this guy's added employees. He's added employees at the corporate headquarters, you know, and you see it. You can just look at their website. They've got 27 vice presidents, essentially, 27 executives. listed on there. And a lot of them have overlapping titles. They literally have like three or four people that are head of global HR, you know, four risk officers. They have all these different people that are essentially doing the same job. And these are folks making mid to high six figures. So the issue with opportune is really not, I mean, in credit environment matters and could become

a problem. But that, it looks like they've managed that fine. And the loan portfolio does turn over quickly. So that's a risk that I think is more manageable here versus other specialty lenders. The issue really is just how this guy's operated to business, how many costs he's layered on, and how, you know, this is really like Tel-DAR paper 2.0. If you ever watched the movie Wall Street, when Gordon Gecko gets up and talks about Tel-Dar paper, how they have, you know, all these vice presidents all doing the same thing, you know, that's what this is. This is an organization that got massively bloated because you had a CEO who was pursuing all these sort of imperialistic fintech dreams, wasting a ton of money in acquisitions, wasting a ton of money

on personnel. And it's caught up to them. They've got a market cap of 150 million now. So the company's, the stock's been destroyed, but he still has not gotten the message. He still hasn't pivoted. They've made these sort of token pivots on the cost side, but nothing that really constitutes the gravity of the situation here. This letter's a wake-up call to him, and he has to pivot and he has to change. If you look at their competitor, one main, one main's done fine over the last since 2019. If you caught them on a, you know, stock performance basis, when Maine has not added a bunch of employees, they've actually, their employee had counts gone down from 10,000 to 9,000. Their cost per loan has stayed flat. So they're getting operating leverage every year

as they grow the business. So one main, you know, it's managed, Apollo's on the board, it's managed, you know, soundly. These guys have been managed disastrously, and that's why they are where they are, and it really falls on, at the end of the day, it falls on the CEO, it falls on Raul Vasquez, who is great at, you know, getting accolades and managing his PR

and probably managing the internal politics at this company, but it's been a complete and utter disaster for shareholders, and the shareholders are waking up to this and they're upset, and they need to see either him be removed or they need to see a massive, cost initiative here to address these issues. If I could just add some things on there, like, look, this is coming, I could not believe

it when I was looking at, you know, just the 10K and everything flipping through it, making sure I was prep for this podcast, they capitalized $50 million of software last year. This is a $120, $150 million market cap company that is, you know, they're a lender and they capitalize 50 million of market cap, like, of software expense. It seems pretty clear to me. And the other thing I'd add is you mentioned one main as a. competitor several time. Go look at one main's earnings releases. You know, they, they treat themselves like a finance company. They mentioned, hey, here's our tangible book value. Here's our

return on equity. Here's our charge of free shows. Tangible book value and book value is really the one I'm thinking of. Whereas go look at how opportunity talks about themselves. They never talk about book value. They do give some return metrics, but they never talk about book value. It's like, look, these guys, 50 million of software expenses, what they focused on, what they're putting out in their earnings release, it's pretty clear that they see themselves as a growthy tech company. And the results are in, right? They wrote down the acquisition. They're trading way, way below book value. They're writing everything off. Like, they need to readjust and remanage themselves, like what their core businesses, like where their earnings are. And that is as a kind of subprime lender, to put it

bluntly. Anything you want to add on that? No, totally agree. I mean, they're trading a fraction of their book value here, whereas their comps trade above book value. So that kind of says it all. I mean, let's build off book value and let's just quickly talk, you know, not pying this guy upside, but how do you look at value in the company? Because my first takes were, hey, let's look at tangible book value. As we discussed, they're trading below that. I'll let you calculate that or I can there are some numbers out.

Or the other way to look at this. And I don't look at tons of sell side research, but this is a pretty well covered company. You can go find it. Most sell side says, hey, here's 2024 earnings. So that probably like a five times multiple on it, which makes sense for a. what should be a low-growthy subprime business in my opinion, but both those would get to a number higher. You mentioned something similar in your letter, so I'll just kind of toss it over to you. How do you think about valuing this company if they do what's right here?

Look, I think you can go through their 10Ks and sort of see where they've added cost over the last couple of years. And it's, you know, it's been an area, you know, sort of these, these cost centers that aren't increasing revenue to any discernible degree that we can see. we think they could easily take out an additional, you know, 150 million in OPEX here. If you, there's different, obviously, there's different ways to slice and dice, you know, their, their overhead here. You could look at OPEX per loan originated, OPEX per total originations, OPEX, you know, per total loan value.

There's different ways to do it. It's, it's every single metric, it's clearly kind of gotten out of whack. if they were to go back to their operating expenditures in, you know, three or four years ago as a percentage of any one of those metrics, that, again, is, you know, $150 to $200 million less op-x in 24 than what they're kind of currently projected to do. But look, this is a company with, you know, someone in order of $35 million shares outstanding. you cut one expensive middle management guy that's called a million dollars that's uh you know that's three cents a share something to that effect so you know the simplest thing they can do

here is to go out and cut overhead and stop these different fintech initiatives uh if they got back to any of the op-x ratios from from 20 you know even close to what they were doing in 2019, you know, we have them doing more than $3 a share in earnings, like $3, $4 to share in $204, even with kind of an elevated loss ratio and whatnot. So really, we just, there's just tons of fat to cut here. They just, he just hasn't been willing to cut it because, you know, whatever, he's just full of pride or hubris and the board isn't really forcing his hand. In the meantime, he's paying his management team, something on the order of like almost 30% of the market cap, if you look at their comp, whereas the competitors are at like 1%.

So, you know, his hand needs to be forced. I think that there's enough angry shareholders out there that agree with this. And, you know, if you model it out, you can easily get to $3, $4 a share in earnings next year. And that, you know, sure, five times that it's probably reasonable. In the long run, though, if you've got a manager. team in place here that really focused on cost of acquisition, you know, per, per loan and really got down to the numbers that they were at, you know, five, six years ago. Then I think, you know, you'd look at a sort of the sky's the limit here. You know, this, this should be a multi-billion

dollar company because they're in a great market. It's an important service that they're providing. and they have an amazing sort of data advantage of everyone else, having been in this sector for longer and serviced, you know, way more loans to this particular customer segment than any other competitor. So, you know, if they had the right sort of specialty lending focused folks in charge versus someone who thinks they're fintech, CEO, they could get there. I have no disagreement there. One other worry, worry opportunity I have like, go, anybody who's interested, go look at the

Appertune website versus the one main financial website. Like, Appertune is always pushing you towards the Appertune app and talking about this tech focus that we're talking about where if you go to the one main website, they don't talk about the app. It's just, hey, do you want a loan? And like when you're dealing with subprime lenders, like these are the on generally people who are unbanked. I keep saying subprime, but it's actually unbanked here is what you're really dealing with.

Like an app might not make as much sense. Like, yeah, you get a recurring customer and it's on their phone and stuff. But if they're unbanked, they don't have a way to really get anything going through an app, right? Like you really do need to be dealing with them. It sounds silly. But like, I remember when I was talking to Al-Fi, they're like, yeah, it's silly. But our best way of getting customers is actually in the mail. It's not going to be digital.

It's not going to be over Instagram. Like, it's in the mail. It's people going into branches. And it just seems to be pretty clear that Opi is focused on something that, you know, if they were dealing with high network, worth individuals who they were looking to sell IRA products to or get trading commissions from. Yeah, it would be great for that, but they're not. They're dealing with much lower income people. They need to just focus on mail, cutting costs. Like the apps really not,

yeah, it might be nice and longer, but it's not what you want to be kind of leading off with. Just another example of corporate strategy gone wrong to me. No, that's a great point. And if you look at opportune, a lot of people do pay back their loans in the retail stores. They would have to line up or give cash. So if that's your customer base, you know, some 35-year-old immigrant with two kids who works, you know, 60 hours a week and kind of a some sort of blue collar type of job and they're coming into the retail branch and paying back the loan with cash. the fact that you're going to turn this person into some sort of millennial, you know, app person like doing, you know, these people are very, very far away from becoming kind of Robin Hood day traders. You know, they're folks that are trying to go.

Robin Hood was exactly what I was thinking when I mentioned the app. Yeah, exactly. So let me just quickly. So book value, right? Book value is if you look at December 31st, 2022, about 550 million. Of that, about 140 million is capitalized software. which I think both of us would probably just write off. So call it $400, $400, $410 million of Tangible Book.

There's 33 million shares outstanding. That'll be going up a little bit. They'll be going up a little bit after the warrants and stuff. And we might talk about finance a second. But that's over $10 per share of tangible book. It's trading today for less than $4 per share. I think people can see like the hard asset value. I guess the one thing to think about there would be, hey, we already wrote off all the

intangible. So there's nothing to worry about there. But what about the fair? value of the loans here, right? This is not a held to maturity Silicon Valley Bank situation, but they do have to fair value their loans. And I think people might look at the recent financing that we might discuss in a second everything, say, hey, you know, economy slowing down, they've had to rewrite.

They had some issues with the loan portfolio or, hey, can I really trust that there's a solid $10 per share and tangible book here? Yeah. I mean, that's, that's, that's fair to, to have concerns around, uh, the long performance going forward, especially if the macro environment changes more from here. I guess I would think that like the loss, the losses that you saw last year, you know, I mean, they went up from sort of 6, 7% to over 10, we're in an environment where inflation was spiking. So as inflation comes down here, while it's still maybe at elevated levels.

you know, I guess the questions, how does this, how do these loan cohorts do? And that, you know, and speaking to some of the cell site analysts, they had, they had questions around that. So I don't, you know, it's kind of all the more reason for them to, to focus on, on cutting costs and controlling the expenses they can control here. Because if the, if the credit environment takes a much more dramatically worse turn, then, you know, perhaps the loan performance that they thought they were going to have as far as the loss ratios just gets, gets, gets worse. But for now, they're forecasting a decline in losses and sort of more normalization of their loss ratios. The other thing I worry about, so you don't have to follow along, but page 51 of

their 10K has how they kind of fair value their loans. And they've got, hey, like, they've got the discount rate at 11.5% of their loans. And this will bleed nicely into the refinancing and everything they just did, but they just refied their credit agreement to LIBOR plus 9% and they had to do and they had to do issue about 10% of the company and penny warrants to get this thing done. And I look at that refinance to say, hey, their cost of capital seems a heck of a lot higher than 11.5% right now. Like that seems like a pretty distressed financing. Hey, you know, it's either signaling distress financing or cost.

I'm not sure, but 11.5%, it's actually 11.48%. But it seems a little too low versus kind of what I'm seeing in their financing, if that makes sense. Yeah, no, that's a fair point. Their cost of financing is going to, I mean, essentially the bottom line, you're going to get more dilution here as a shareholder unless they get, get, you know, get religion on costs here. Which is all the more reason to cut the cost aggressively right now and get the,

that you don't have to do this refinances that the cash flow pours in and you can kind of finance yourself. Yeah, I mean, it's the cheapest form of capital is to just cut your cost. Perfect. So let's talk. Yeah, those are. The recent refinance is I just kind of want to harp on the Q4 call because I thought, I think for somebody sending a letter, if you're a shareholder who's interested in this situation, I'd go listen to Q4 call. And if you listen to it, I mean, this is my word. it's not yours, but I'd kind of be like, hey, if somebody didn't send a letter to the company, I would wonder what the heck is going on. You know, they talk about the banking acquisition they did in late 2021, where they're saying,

hey, we're just starting to see the synergies coming in here after we've basically wrote off all the goodwill, you know, I don't believe they'll ever be synergies. They talk about the refinancing they did, which they did alongside earnings. They kind of buried it in the 8K. And, you know, they had analysts coming on and be like, hey, I need you to explain this recent refinancing. It comes with some warrants. I need to get some details on the warrants until basically, you know, they get.

and management gets asked enough questions and they finally say, hey, guys, these are penny warrants, you know, they're free to exercise. We just gave away 10% of the company to get this done. Like, you know, if I was listening to this, I would have been just like terribly, terribly concerned as a shareholder. So I don't let you comment on, I kind of ramble on that a little bit, but I want to let you comment on anything in the Q4 results. You know, they talk about the July restructuring where they said, hey, we tightened the credit box there. Guess what? They probably should have done it a lot earlier. They did say they're cutting some costs, but I don't think it's enough. So just anything that happened there, I kind of wanted

to give you a chance to address. Yeah, no, I think I think the point is you need to see a big pivot here. You know, I give them some credit for tightening the credit box, you know, in July. But to your point, they should done that earlier. And if you look at OMF, like OMF wasn't as aggressive with their lending growth during the last two years. And so they haven't had to pivot as strong as much as opportunities. I mean, opportunity just over and over again is trying to kind of grow unnecessarily in ways that aren't accretive for shareholders. and just you know it was just constantly getting whacked for for doing so um but yeah on the cost

side you know they've made these sort of token gestures to to decrease costs by um i remember the amount but i had it i had in my letter but you know not nearly what they could do and what they should do uh they did 50 million and i think in your letter if i remember from i think you called for over 150 million but uh it could be more than that Yeah, let me just pull up the letter. Yeah, because they're at 550 and you said bring it back to 381, so about 150. Yeah. So, yeah, this is a management team that still thinks that they've got all these avenues for growth in the fintech space.

It's still saying, hey, wait and see. They talk about the digit acquisition and generalities. They don't point out to anything specific about what's happened there, any revenue synergies or cost synergies. So they're talking about these things kind of in generalities and saying, hey, you should just wait and, you know, we're going to grow a ton in the future via these different initiatives. But to your point, you know, none of these make sense for, none of these seem synergistic to their base business here and the type of customers that they have. You know, these are, you know, I guess Silicon Valley people thinking that they understand a community that they apparently don't seem to understand because they're providing them with products that this community doesn't want or need rather than focusing on the. on the product that they're good at and have grown a real base business around. And if they go back to focusing on that product and cutting out some of these costs here,

they've just, they've got a huge, you know, a huge advantage there from a retail location perspective, from loan data, and just a lot of customers that are already recurring. So you could just cut all those costs and have a great base business here that spits off a lot of earnings, even in a more distressed credit environment. where loss, you know, loss rates go up to, you know, stay at an elevated level. They, you know, just on the products, I just had their 10K, it was open behind this, and I just saw underneath it. They mentioned the digit deal and they talk about, hey, you know, we're selling our customers

low-cost ETFs and tax-advantaged IRAs. Hey, like your core business is lending to the unbanked. Like, you know, it's the alternative to them getting payday loans to cover short-term needs. Like, these guys do not. want tax advantage. I mean, everybody wants tax advantage IRAs and low cost ETS, but that is not what they're looking for. They're coming to you to cover a life emergency to cover something for your short term cap. It's just crazy that you would think there's synergies between those two products. It's just absolutely wild. So let's talk next steps. You sent the letter a couple

weeks ago. You mentioned that the company and you are probably going to talk on the heels of their Q1 earnings, which will be out in the next few weeks. It's two, you know, nomination windows closed. there's not going to be a proxy fight here company is only 120 million so proxy fights at that level are a little crazy but we need to stop i need to stop mentioning proxified actually but what's kind of the next steps here right you'll talk to them in a few weeks like what are you looking for what are the tangible next steps that people who might be interested in this or following along should kind of be looking for here yeah i mean like look let's uh was it bestomer capital wrote wrote meta letters saying hey like you guys got to stop pivoting to to this metaverse thing and and and

costs. And Zuckerberg, who's obviously a great entrepreneur who actually built a multi-billion dollar business, to his credit, he got the letter and he pivoted. They started cutting costs and doing some of the things that Bessemer asked. You know, Raoul's not Mark Zuckerberg. I hope that he has the humility to do what Zuckerberg did and to recognize here that if he doesn't do it, you know, shareholders in the end will have their voices heard and he won't have a job. He either won't have a job because he'll get fired or he won't have a job because the company will, you know, won't be a going concern. So he will lose his job no matter what if he continues to do what he's doing. Hopefully he has a humility to realize he's got to pivot

here and announce some sort of strategic cost review and go out there and say, hey, look, we can take out $150 million or pick your number in operating expenditures and go out and make those cuts. You know, I think that's the only thing that he can do in the next two months without the pressure from myself and from other shareholders just ratcheting up. I mean, it's not going to, the pressure isn't going to stop after the letter. Now, to your point, you know, the board domination deadline has passed, so there's nothing to do for now in that respect.

But that doesn't mean that down the line, there won't be other, you know, moves in that respect that can be made. But I imagine that, you know, other shareholders can write letters. This will just turn into more of a public relations nightmare for him and for his board. because it's like the the first shot was fired and now more people are going to look to shoot their shot at him and that is his managing style and at his approach to capital allocation. So, you know, he's under, he's got to do something here. I think if he just has another quarter and, you know, talks about his different fintech

initiatives, it's just going to be a much broader mutiny. I'm not original or brilliant for pointing any of this out. I was just the first one to do it, and there's a lot of other people who feel exactly the same way, who will, I think, come forward and write letters and, you know, start a campaign here to pressure these guys to pivot. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform.

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Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. You know, I think people a lot of times get hung up on, hey, is this guy like, is he always going activist on something? He's he a first time activist that, like, I think you can speak to your history with your history or lack thereof with activism. But to me, it's just like, hey, does what the person saying in this letter makes sense? It's like, here's a guy who owns 4% of the company.

Like everything he's saying makes sense. The management team, you know, they've, again, share price down 85, 90% over the past 18 months. They just had to issue penny warrants for 10% of the company to get financing done at, you know, 10% plus all in interest rates, excluding the penny warrants. Like they've run this company to the ground. And to me, it seems like, as you said, the 50 million cost cuts are a nice first step. But it's so clear to me, you cannot invest 50 million into, you know, capitalizing software anymore. It's been tried.

It blew up. The company is on the brink. They need to get back to basics. And that involves cutting all of these finance costs, focusing on the core business, which can be a good one and running this thing for cash. And, you know, probably the end game here is do all that. And this is not a company. I think this is one of the reasons some of these kind of unbanked companies get in trouble.

It's not really a company that should be public, right? It should be run for cash without tons of growth because the scariest thing. finance is a fast going financial like you're not going to take over the world they should probably just be run for cash by a small private equity shop it shouldn't be public they shouldn't have the added cost burden in a public company seems pretty clear to me yeah and i mean this is a company that should be on my private equity that's probably the bottom line yeah and maybe that's maybe that's where all this ends up kind of going uh but yeah in private hands this company could be run you know way more effectively um on all sorts of levels i mean take out again 100

$25 million, $150 million market cap company probably cost $3 million to be public these days. So take that out. That's a pretty nice synergy from the get-go. Anything else you wanted to talk about on? I think we covered just about everything in your letter. I think we covered everything in my question notes. Anything else we should be talking about or people should be thinking about? No.

I mean, I think, you know, the synopsis here is that this is a great business. And it would be a shame if it was running to the ground by this corporate, by this leadership team and by by Ruel Vasquez. I hope, I think he'll pivot if he's, you know, got a head on his shoulders and isn't totally full of pride and ego. You know, and if he does, that's, you know, that really will change things from our perspective. But that remains to be seen over the next month or so. You know, so we'll probably know a lot more after this quarter, and that's where we'll probably

make our next decision about how to engage. Perfect. Well, look, I'm going to include a link to the letter that you guys sent. Again, anybody who's interested in the situation can go read that letter, get a little bit more familiar with the company. Brian's contact info is also at the bottom of that letter. So anybody who's interested in reaching out, you know, if you're a shareholder and you kind want to swap thoughts or potential shareholder and you want to swap thoughts, find his contact

info there and kind of reach out to him from that. But Brian, thanks so much for coming on. And I know that we've got one other portfolio company in common that we didn't talk about today liquidity, but because of that, I'll say, thanks for coming on and I'm looking forward to having you on again in the future. All right. Take care, man. Bye. Later, Brad. A quick disclaimer, nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.