Winland Holdings Corporation (WELX)

Formerly named Winland Electronics, Winland Holdings Corporation, is a small Minnesota based company that is OTC-traded under the ticker symbol WELX. The company sells sensors that monitor environmental conditions such as moisture, humidity and temperature.

Over a period of time, the management team of Winland Electronics had provided unsatisfactory results as they invested heavily in developing a software solution that would complement the sensor products. In the process, the company accumulated operating losses that ate up much of their equity and eventually “went dark“.

In 2012, Two investment managers, Thomas Braziel and Matthew Houk (a fund manager at Horizon Kinetics) identified Winland as an investment opportunity and started accumulating shares. In 2013 they both got elected on the board and in 2014 they effectively gained control and replaced the incumbent management.

FRMO invests in Winland

After the management change, FRMO Corp followed suit and bought 15% of the outstanding shares for $460,000 at around $0.81 a share. FRMO is a public holding company controlled by Horizon Kinetics directors Murray Stahl and Steve Bregman. This brought the ownership of the Braziel, Houk and FRMO Corp to about 48% of the outstanding share.

Winland Electronics

As described above, Winland Electronics sells sensors that monitor environmental conditions such as moisture, humidity and temperature. Products such as EnviroAlert, WaterBug, and TempAlert are designed to monitor critical conditions for industries including health and medical, grocery and food services, commercial and industrial, as well as agriculture and residential. The products are compatible with any hardwired or wireless alarm system and are available through distributors worldwide.

In addition to the sensor product lines, Winland Electronics offers a critical environment remote monitoring solution called Insight. This automated, cloud-based platform provides early alerting, reporting, and logging services designed to ensure regulatory compliance. This is a SaaS product.

Strong Returns and Excess Cash

Despite its relatively tiny size, the operations of Winland Electronics have earned robust returns of deployed capital since the current management took over. Opportunities to profitably redeploy earnings into the electronics operations, however, are limited. Due to this, Winland has amassed capital in excess of its operating requirements. The company currently has over $1.5 million in excess cash and investments on its balance sheet.

Deferred Tax Assets

Due to the losses accumulated prior to the management change, Winland reported that it had net operating loss carryforwards of $6,3 million for federal purposes and $4,6 million for state income tax purposes at year end 2017. The Deferred Tax Assets are available to offset future taxable income and begin to expire in the year 2031 and 2023. As such, the realization of these assets is dependent on the ability of the company to create taxable earnings. Therefore, they are not directly visible in the stated book value.

Shareholders Rights Plan

Winland will lose its ability to use the net loss carry-forwards if a change of ownership occurs. An ownership change will occur if a shareholder of more than 5 per cent of equity has increased by more than 50 per cent over the lowest percentage owned by such shareholders at any time during the prior three years.

To protect the company from such an event, the management adopted a Shareholders Rights Plan in 2014. Shareholders Rights Plans are commonly referred to as Poison Pills and were originally designed as a defence mechanism for incumbent management teams of public companies, to defend against corporate raiders. The plan gives the board of directors a right to dilute the accumulating shareholder against the incumbent shareholders.

The Exhibits Development Group investment

In 2015, the first signs started to appear on how Winland would allocate its excess cash in the future. Quite surprisingly, Winland invested $200,000 along with a third party that invested another $1,000,000 in a museum exhibition project called The Magical History Tour operated by a company known as Exhibits Development Group. The exhibition is a Beatles memorabilia retrospective and will travel around different locations in the United States.

The most interesting part about the investment, however, was not the fact that this is a museum project, but rather the structure of the investment. Winland bought a preferred stock with a 10% coupon, with certain repayment guarantees. Additionally, once the preferred is redeemed, the investment converts into a right to 30% of the revenue generated by project until after its last tour venue in 2019. According to Murray Stahl, Winland is entitled to roughly 83% of the 30% revenue share.

Winland Capital Corporation

On January 1, 2018, the Winland established a holding company structure with the creation of four wholly-owned subsidiaries:

  • Winland Electronics,
  • Winland Capital Corporation,
  • Winland Credit Partners LLC, and
  • Winland Capital Management LLC.

According to the Winland 2017 Annual Report, Winland’s investment operations will be operated out of Winland Capital Corp. and its various subsidiaries, which currently include Winland Credit Partners and Winland Capital Management. These investments may include establishing new ventures, acquiring existing businesses, and other investment opportunities, including investments in private credit and marketable securities.

If the Exhibits Development Group is any indication of what is to come, Winland will deploy cash to funding small businesses that have limited access to liquidity at favourable terms. In the first quarter of 2018, Winland Credit invested $50 in various Rights to Payment during the and  Winland Capital invested $42 in a secured promissory note secured by real property.

Winland Holdings Valuation

At first glance, with an income of $221 thousand in 2017, a market cap of $5.3 million seems a bit excessive. Currently trading at $1.2 per share, the stock trades at 2x multiple of its book value per share:

Winland Book Value Per Share
Winland Book Value Per Share

However, to measure the Return of Operating Assets, you must back out the excess cash not used in the operating activities:

Winland Excess Cash
Winland Excess Cash

Once the excess cash has been backed out, only $662 thousand of working capital remains. With Operating Income of $221 thousand in 2017, the Winland Electronics operations earned a Return on Operating Assets in excess of 33%:

Winland ROA

No included on the Balance Sheet, are the Deferred Tax Assets. The realized value of these Tax Deductions will be a function of how fast Winland will be able to generate earnings. After the Trump tax cuts, Winland’s corporate tax rate is 21%. This means that Winland at the current tax rate, the potential tax asset is $2.3 million. It will, however, take time for the company to earn its way through the DTA. Therefore, the value of the asset must be discounted to reflect the duration. Using an arbitrary 50% discount results in a value of $1.14 million:

Winland DTA
Winland Deferred Tax Assets

 

 

 

 

 

 

Sum of Parts

Assuming that Winland could sell the operating business for a 10x multiple of Operating Income, the current value would be in excess of $2.2 million. The Cash and investments on the Balance Sheet are valued at $1.5 million, in addition to DTA’s of $1.14 million. With 3,789,522 shares outstanding, this corresponds to a value per share of $1.31.

Winland VPS
Winland Value Per Share

The current value of Winland Electronics seems fair. However,  it does not fully reflect the opportunity for current management to create value through resource conversion, i.e. by using excess capital to acquire income generating assets to increase the utilization of the DTA.

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