When I first reviewed ECOM four and a half years ago, it would have been hard to imagine then that I’d basically get caught up in what has amounted to a public bet with the CEO about the health of their balance sheet.
That’s where we are.
During covid I was a customer of one of their brands, truLOCAL. I honestly can’t remember if my interest in the stock then turned into being a customer or vice-versa. Either way, by the end of December 2022, I was neither a customer or very interested in covering their stock any longer. Those decisions were not related. The truLOCAL brand is a good one. My needs and circumstances changed. But the overall company was in my mind, un-investable. The market agreed.
The company made some big bets during that “covid era” in acquiring multiple e-commerce businesses. In late 2021, they acquired BattlBox Group and WholesalePet for a combined $44M USD. That included about $16M in potential earnouts with the balance in upfront cash or shares. Ultimately they took significant capital losses when sold and/or goodwill impairments. Those proceeds were used to significantly pay down their debt. Even two of their current brands, truLOCAL and UnderPar experienced a combined $8M in asset impairments in 2023. In short they significantly overpaid for those acquisitions. In fairness, you could lump them in with many other companies who were doing the same during that timeframe.
In the last year to eighteen months, Emerge Commerce has had a bit of a resurgence - re-emerged if you will. With a focus on core businesses of online golf and truLOCAL along with some debt reduction, they have garnered more interest from the microcap community. The TSA discord (co-founded but no longer a part of) even made them a 2026 Top Pick at a dime back in late November.
Things have cooled off since the company’s 52 week high of 15.5 cents around Christmas of last year, and it has traded between 7 and 9 cents for the past few months, most recently closing at $0.08.
When I last reviewed ECOM after the first quarter, I cited some balance sheet and liquidity worries and strongly suggested I felt the company would need to raise capital in the not to distance future, likely by the time they delivered their annual results next April.
This caused a lot of back and forth in that previously mentioned discord which ultimately had the CEO stating this:
Interestingly (to me anyways), is it is a bit of a similar situation as we had one year ago. In my relatively positive review one year ago, I said this:
In March, Emerge commerce acquired Viral Loops, a B2B marketing referral platform for $2.3M. While it didn’t seem to be a natural fit with their core business, you could see the potential for some synergies and was reportedly a nice little add on business that did a little over $100k a month in revenue with high cash flow conversion.
I did not love the company’s usage of an AEBITDA 2.9x multiple as the only profitability metric used in the press release. I publicly questioned that usage:
In response, this revised news release came out a few days later:
While not perfect, I appreciated the additional colour and it’s always a good day when I can play part in getting more clarity and disclosure for retail investors.
At the same time as the Viral Loops deal, a private placement was announced to fund the acquisition. It was originally announced as a $1.8M raise, then later upsized by 50% to $2.7M.
Now, I went into this level of detail in large part due to the CEO recently saying this:
But, ya kind of did though. The purchase price was $2.1M with a $200k earn out one year down the road. You didn’t upsize it to $2.1M or $2.3M, but $2.7M. I don’t fault Ghassan for doing it, there was a lot of interest in the stock. The additional $600k above the initial cash outlay immediately helped your working capital. Feels like a marginally dishonest statement to make. At best.
I certainly did not anticipate spending this much of my Sunday morning on this introduction. Again, here we are, and I will forever be committed to reviews of the stock as a result.
About five weeks ago, Emerge reported some preliminary numbers for these financials. They really didn’t have much impact on the share price and in my recent August What’s Wolf Watching earnings preview, I told readers to fade the company until after these results and re-evaluate.
It’s time for that re-evaluation. Let’s get into it.
If you didn’t get the title reference, it’s the 1991 movie, “He Said, She Said”, starring Kevin Bacon and Elizabeth Perkins.
Balance Sheet:
We already had a handle on revenue from their preliminary numbers, so I was most interested in seeing their balance sheet and cash flow statements.
In my last review, Emerge had a .84 current ratio and .48 quick ratio. Those improved modestly over the past three months to .88 and .59 respectively.
They ended Q2 with $4.8M in cash, $3M worth of inventory, $631k in A/R and $644 in prepaids over top of $10.3M in current liabilities (deferred revenue removed) due over their next twelve months.
Emerge doesn’t provide aging reports with their A/R, but with two thirds due from payment processors, everything appears to be fine.
The company has $5.5M of traditional debt which was recently amended in March to the higher of TD prime + 6.55% or 9%. With TD prime at 4.45%, their effective rate is closer to 11% currently. They further state in their MD&A that they are “making meaningful progress toward refinancing its senior debt, which remains one of management’s key priorities.”
With the maturity of the debt in October of next year, and considering they just amended this debt in March, that feels very optimistic. At least if the intention is to stay with their current bank. My guess is if they are successful in this endeavour, it will be through an alternate lender.
Potentially more interesting, but certainly more pressing is their $1.3M in convertible debt. Just around the time when we will see their Q3 results in late November, this $1.3M is scheduled to convert at 13.5/share. That feels like it would be a painful pill to swallow for debt holders. The company was able to negotiate an amendment in May of 2024 to settle half of this debt at 13.5 cents/share, but the scenario is quite different now. More on that later.
Cash Flow:
Emerge has generated $1.2M of operational cash flow (OCF) through their first six months. That figure is down by 21% to last year and Q2 came in at $1.59M, down 26% from the comparable period last year.
They utilized $2.1M for the acquisition of Viral Loops, another $200k related to Tee2Green and an additional $350k in deferred consideration. They made $441k of interest payments while reducing principal by $17k, and paid nearly $100k in issuance costs related to the re-financing of their debt.
On an incoming basis to the treasury, they received a net of $2.57M for their March private placement. Overall the company’s cash position has improved by 16% from the beginning of the year.
Share Capital:
179.4M shares outstanding, 20% dilution since the beginning of the year, 29% over the last eighteen months
13.5M warrants at 15 cents, 773k broker warrants at 10
273k options which I believe have an 11 cent exercise price
2.2M outstanding RSU’s. 2.9M RSU’s converted into shares YTD
15% insider ownership
CEO was buying in the open market about a year ago including exercising some out of the money options. One director particpated in the March raise for $50k
Potential of 10.3M of dilution in November with the convertible debt. But I doubt it will go down that way
Income Statement:
Revenues were up by 7.4% to $9.1M and gross margin also improved by 250 basis points to a very healthy 39%. That combination helped to improve their gross profit dollars by nearly 15% - excellent on just 7.4% more revenue.
Cash burning expenses (Marketing + SG&A) only rose by 1.7%, creating some excellent overall operational leverage in the quarter which translated to a 68% improvement in their operating income before other expenses.
The key word is “other” however as below the line due to additional debt costs, a lack of other income from last year and a 65% higher tax burden, net income was .flat to last year at $200k.
On a YTD basis ECOM achieved revenues of $15M, up 11.1%, with gross margins slightly higher from 37.3% to 37.4%. Gross profit dollars increased by 11.4%.
Cash burning expenses rose by 2.6% and once again things look great on that operating income before other expenses growing by 76% to $888k. That doesn’t hold through to the net income line due to other income generated last year and $0 this year. Net income (continuing ops) at the midway point of 2026 is down 59% to $74k.
Summary:
Overall I think you would have to call it a decent, but likely not a needle moving quarter and that has translated to the market’s reaction. The stock is flat since the release of the financials on Thursday morning on relatively low volume.
First let’s look at the top line with a 7.4% quarterly improvement. That growth also includes a full month of the Viral Loops acquisition and technically 6 extra days of Tee2Green than last year. I think it’s safe to say that that growth can be approximately evenly split between organic and non-organic growth.
Viral Loops has already seemingly had an impact to the gross margin line which grew by 250 basis points in the quarter. The company also anticipates margin improvement within Tee2Green to hopefully offset some of the margin challenges in TruLOCAL due to cost of beef and increased oil prices.
While Emerge has looked very good on the total operating expense line, the reasons for that are less costs on consultants and professional fees. The impact of the Viral Loops transaction and investments in HQ staff have increased their payroll slightly and G&A quite dramatically.
Now let’s get back to the two statements I thought were of more importance, their balance sheet, and their cash flow.
Bottom line is I haven’t changed my stance on my belief that the company will likely need to raise capital by the time they present their year end financials next April.
If you remove deferred revenues from their current liabilities, they have about $10.3M in liability commitments over the next twelve months. In terms of liquid assets (removing inventory), they have $6.1M, and that creates a shortfall of a little over $4M, similar to what it was three months ago.
To avoid the need to raise capital, they could make up that working capital deficit through operational cash flow. But on a TTM basis, they have produced less than half of that shortfall, and this past quarter is historically their best performing OCF quarter. While this past quarter was down to last year, part of the reason why was the shrewd inventory payment plan as part of their Tee2Green acquisition last year, so last years number was slightly inflated. While I expect them to improve their OCF to last year over the next couple of quarters, I don’t think they can come close to making up that $4M or so deficit.
Ghassan was pretty adamant in his discord comments when he claimed, ”No, we do not need to raise capital for working capital, in 2026.”
That makes this comment within the recent MD&A even more interesting. Well, financing activities would include a capital raise. The alternative would be through adding debt.
I did not listen to the earnings call, but I did download the transcript. Based on everything I’ve said up until now makes this question coming from an analyst quite remarkable. They do not have EXCESS cash to do anything with. This guy/gal should quite frankly remain unknown.
Lastly are these $1.3M in convertible debentures which expire in three months. These notes date back to 2022 and were originally priced at a conversion price of $.20. The total then was for $2.8M with 10% interest. They were originally set to expire last November.
In April of last year, the debenture holders and the company agreed to amend them. Approximately half of the amount including accrued interest was converted into shares at 13.5 cents, and the balance was extended for a year until this November.
For the remaining $1.3M, the debenture holders have the leverage here. The default payment obligation is in cash. The holder can indeed select to convert those into shares at 13.5 cents, but how likely is that when the share price is currently at 8?
I can’t see the debenture holders demanding the cash as that would make the company’s liquidity situation worse than it currently is. My guess is we will see another amendment.
There are alternatives too. Refinancing of that debt could include an increase to it at more favourable terms. That would allow them to pay off these debentures, and if they increased it enough, eliminate that working capital deficiency to avoid a raise of capital through a private placement.
If that’s how it went down, would that make Ghassan and I both right? Or both wrong?
Emerge is currently is valued at a $14.3M market cap. That’s roughly a P/S ratio of under .50. But if that is solely how you make your investment decisions, you probably make a lot of poor ones.
They are about breakeven on a net income basis and are priced around 15 on an EV/EBITDA basis. Not expensive per se, but at that ratio I’m going to want to see more than just 3-4% organic growth and a liquidity situation I’d be more comfortable with.
Three stars.
Disclaimer:
My intent is for my reviews to be a bolt on to due diligence that you have already completed. I receive dozens of review requests a week, therefore my own DD may be great or none whatsoever. Unless otherwise stated or implied, my opinions are on the financial performance of the company based on their most recent filings. I conduct these reviews to assist other retail investors whose research skills are limited when it comes to reviewing financial statements. I do not accept compensation of any kind from company’s I review.
Wolf FINS Reviews are intended to be informational and are based on personal opinion. They are not intended to be financial advice, and all readers are encouraged to perform their own due diligence prior to their investment decisions, including discussions with their investment advisor.
Nice job on this one. I’ve been disappointed a couple times with this co and how some things have been communicated.