This is not a post about what I think the online chat translator, Ortsbo.com, is worth. While I do not believe that it is worth very much at all, that is not what this post is about. This is a post about what Intertainment Media’s management believes Ortsbo is worth, something which they provide insight on in their latest quarterly report.
In our first look through the Intertainment Media looking-glass, I made note of the company’s “veritable onslaught” of stupid press releases: an astounding 50 of them in only four months! You see, most companies only send out press releases to announce their quarterly results and perhaps a material business development or two that occurred during the quarter. Intertainment Media, on the other hand, has averaged a staggering three press releases per week! On May 30th after the market close, however, while the company quietly submitted their quarterly results filings to SEDAR, the newswire suddenly went silent. It was a silence that spoke volumes.
The only thing more unprecedented than a company that sends out 50 press releases in four months, is one with a $350 M market cap — its approximate size at the time — that doesn’t send out a press release to announce its quarterly results.
Perhaps not surprisingly, the operating results for the quarter ended March 31st, 2011 were horrendous. Operating expenses increased markedly, putting the company on an annual EBITDA loss run-rate that now exceeds $10 M. Revenues actually declined, but more importantly the company’s core “new media” business — which would ostensibly include Ortsbo — actually had revenue declines of a whopping 59%! Please remember that a year ago Ortsbo didn’t even exist, which should have made it particularly easy for the company to generate year over year revenue growth. It’s hard to fathom that the company could see such staggering declines in revenues considering their claims of Ortsbo being so widely used due to its allegedly viral growth.
Those new media revenues aren’t just declining, they’re shockingly low: an annual run-rate of $110k. Why, on that date, the stock market would be valuing the company’s new media business at over 3000x revenues is certainly a good question. But this post is not about what the stock market thinks Ortsbo is worth either. It is about what Intertainment Media’s management thinks it is worth. And this quarterly filing has a few nuggets of information to help us answer that question.
The filing discloses that the company was loaned $2.9 M on February 28th, 2011. The loan bore an 8% annual interest rate plus gave the loan holders a call option on the value of Ortsbo: 12.79% of the proceeds over 20 M from the sale of Ortsbo. If Ortsbo was really worth over $500 M, would management really be willing to effectively give away 13% of it (in excess of the low strike price of $20 M) as part of a loan agreement for a mere $2.9M?
If you do the math, it basically suggests that on February 28th — just 3 months ago –management felt Ortsbo was worth around $25 M. That would give the option around $640k in intrinsic value ($25 M value less a $20 M strike price times 12.79%), which is a pretty reasonable equity kicker for a $2.9 M loan. Now, it should be noted that the option is only exercised if Ortsbo is actually sold before loan maturity, but the loan holders are also getting a lot more than just potentially $640k in intrinsic value. There would also obviously be significant time value in the option considering that management could possibly increase the value of Ortsbo over the next two years, before the loan agreement matures. The bottom line is that the option implies that management felt that Ortsbo was only worth around $25 M, just three months ago. If they really felt it was worth substantially more they would have insisted on either a much higher strike price than $20 M, or a lower percentage of Ortsbo ownership than 12.79%.
But that is not the only instance in which Intertainment Media’s management has given an indication of what they feel Ortsbo is worth.
Further down in the regulatory filing, it is disclosed that during the last quarter they issued 2% of all Ortsbo shares to a consultant in exchange for marketing and advertising consulting. As the filing states: “the fair value of these shares was determined to be $500k.” I think we can all agree that $500k is pretty generous compensation for a little marketing and advertising consulting, and so it doesn’t seem that management is low-balling the value of Ortsbo either — if anything, it’s actually the exact opposite and management may think Ortsbo is worth even less than the value implied by these figures. If 2% of Ortsbo has a fair value of $500k, that means that Ortsbo as a whole has a fair value of $25 M. This is not surprisingly the same figure that was implied by the option included in the $2.9 M loan agreement.
So while the stock market seems to think that Intertainment Media’s Ortsbo is worth hundreds of millions of dollars, how much does its management think that its worth? Well, as of a few months ago, around $25 M — which is about $0.08 per diluted share of Intertainment Media.
Disclosure: Short INT
