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Bottom Fishing in Freshii – $FRII

I’ve been following Freshii for a few years. It’s a good example of busted IPO. It may provide an opportunity for investors with a strong stomach.

Share Performance

Freshii went public at $11.50 in late 2016. Below is how shares have performed since then.

Look out below. It’s easy with hindsight to criticize those early investors. There was a lots of hype for the business. The CEO is the founder of the company who started the first few stores and grew the franchise quickly. Growth was fast and the establishment was popular. Needless to say there were many positives.

Initial capital was brought in to grow store count rapidly. The inital goal was between 810 and 840 stores with EBITDA of 20-22mil by end of 2019. They ended 2019 with 470 stores. If you purchased shares at $11.50 and everything went according to plan, you were paying 15x ebitda 3 years out. Doesn’t seem that expensive for a franchise with low capital requirements, good growth prospects, incentivized management and a decent economy. Perhaps paying up for growth when it doesn’t materialize can be damaging.

The company invested in talent to source and assist franchise partners in store operations. They had 9 to support 240 stores in 2016. It became evident in early 2018 that they weren’t on track to to have as many stores open as the initial offering documents mentioned. The SSS started to break the previous positive trends and the app was subpar. Eventually in Q3 2018 the company pulled it’s guidance and shares tanked from $4 to about $2.50. The SSS underperformance continued in 2019 and shares continued to languish. Then covid.

Right now shares are not much above the March 2020 lows and trades at market cap of 30-35mil USD and EV of 0-5mil USD. If you purchase shares today, you are getting the business that does 18-22 mil in revenue with low capital requirements for essentially nothing. This of course is assuming that the cash isn’t squandered.

Their franchise fee is 6% of gross store sales. They require franchise partners 1.5% that must be spent on advertising. They use a Master Franchise Agreement for International locations. They have 70 locations internationally.

Part of the value proposition to franchise partners is that the upfront captial required is lower than other potential choices due to lower kitchen equipment required.

Looking Back at Income and Cash Flow

Below is the income statement since they have reported numbers.

Like most franschise companies, FRII has high gross margins. They have been bumping around operating break even since going public.

CFFO (before working capital invesment) has been positive every quarter except Q1 2020.


It’s important to understand the risks with FRII. The share price wouldn’t be where it is without some hair. All you have to do it enter the cashtag into the search bar on twitter and get a sentiment check on how negative things are.

  • The company’s brand does not carry the same brand value as competitors like Subway, Chipotle, etc
  • The food is quite expensive given it’s simplicity. They have minimal kitchen equipment which means that the food is not cooked fresh and can lead to a poor user experience. The company averages 3.5-4/5 on google reviews.
  • The cash could be spent on things that don’t add value to stakeholders.
  • They may have little or no interest in new franchise partners or existing partners opening new stores.
  • covid
  • The management team is young and has limited capital market experience.
  • There are dual class shares and the CEO owns the voting shares.
  • There are some change in control measures to make it costlier to do a takeover.


  • The CEO started the company from the first store and knows how to operate a store.
  • If there is a take over initiated, the voting shares only carry the same weight as the common store.
  • The have some CPG partnerships that can move the needle in revenue and customer reach. These include Shell and Air Canada.
  • Expectations are very low and it won’t take much news to move the share price.
  • Despite the challenges, the company has maintained the level of cash on the balance sheet. The company is debt free.


Despite the negativity, I think FRII presents an interesting opportunity. Expectations are low, the business is captial light and management has skin in the game.

Anyone else crazy enough to own this one?



*the author is long (a very small amount) of FRII


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Friedman Industries – $FRD

Net-net investing is not in fashion right now and hasn’t been for a long time. It’s quite interesting how things seem to go in cycles. 12 years ago when I started there were many more investors in net-nets. I’ve been poking around a few names and finding some things of interest.

Friedman has already been mentioned by Saj here and Ben here. I don’t have much to add, but nevertheless I like the sound of my voice so here we go.


The industry has not gone through a bunch of change over the last decade. Below is the income statement.

You can see they have bumped around profitability, but they have managed to keep opex fairly stable while business activity has been volatile.

The business has generated cash off and on through the last decade. You can see the large capex initiatives that have been made to drive efficiencies in operations. It’s hard to tell how much value the previous investment in capital equipment added in value.

The business is working capital heavy, primarily in inventory. It’s important to monitor turns and conversion on this business.

Current Assets

As mentioned previously FRD is heavy in working capital, but they do also have some cash on the balance sheet.

The good news is that the there is not much obsolescence risk with FRD as the finished products will likely be used and purchases will just be delayed and not eliminated permanently.

Net-Net pitfalls

There have been many critics of net-nets. They are notoriously hard to hold as they are usually bad businesses, poorly run businesses, have misaligned incentives or management that doesn’t understand the value of capital allocation (or all of the above). There are many back tests that demonstrate that having a solid net net strategy can produce above average returns. It’s a simple strategy but not easy. You need a black belt in patience to invest in net-nets. Holding onto some business that bumps along while all your fintwit friends are getting rich off crypto, SaaS, cannabis, etc. is so hard. I like to have a business where the management team is not just sitting on their hands from either an operational or capital allocation standpoint.

Friedman’s new CEO has shown a willingness to spend some excess cash on equipment to improve the business. Also, a share repurchase program for up to 15% of shares outstanding was initiated. Finally, they announced that they are going to try price hedging for the price of steel. I’m happy to see some action being taken rather than just sitting on excess cash.

Previous valuation

I took a stab at the valuation each quarter going back to fiscal 2009 for FRD. You can see that though NCAV has come down from over $8 to about $7.50, the price to NCAV has also dropped.

Purchasing at a discount to NCAV and waiting for some positive news (and a likely higher valuation) seems low risk to me. However, there is so much uncertainty with covid that things may get worse or not rebound as quickly as anticipated.

Anyone else hold FRD?



*the author does not have a position in FRD at time of posting, but may initiate one at any time.

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Sangoma Technologies Corp (STC.v) – Update

I am going through my current portfolio and sharing thoughts on my holdings in hope of getting some feedback from readers. At the very least, it’s a therapeutic exercise for me. Please don’t expect clear succinct thoughts from these posts, it’s more of a mental dumping ground for my brain.

I originally wrote up Sangoma way back here and briefly mentioned it here. Since writing Sangoma has made some acquisitions (and integrated them), invested new products and services, and is seeking a larger share of wallet from customers. Since coming onboard, the CEO has stated that he wants to grow top line and move away from one time product sales towards having recurring revenue to remove lumpiness in the business.

All this has led to a shift in the financials as the new services, acquisitions, and legacy products all have different margin profiles. As with many analysts on the conference calls, I was somewhat skeptical of the desire for top line growth given how much cash was sitting idle. Most of the high cash net-nets sit on cash and do nothing with it. At least with Sangoma, management was acting.

All the hard work has led to a higher top line, less lumpiness through the year, and still have the combined gross margins above 60%. Operating margins have been challenged as this work was integrated and more expenses were required to market to new verticals and geographies. All this was done while maintaining positive net income over the last two years in a corner of the market that is not booming.

The tone from management has been consistent stable growth in top line will translate into a stronger bottom line eventually. Around 40% of revenue is now coming from services and the legacy products now make up about 30% of revenue.

Below is a look at their product vs. service revenue mix. Quite a change. And you can see the working capital required as a % of revenue has declined as well.

STC rev mixstc-wc

Here is a look at the new IP phones that bundle several of their products together. Demand has been strong according to the last two conference calls.

Over the last two years there have been some angry investors attending the conference calls that were not supportive of management’s actions (I could only imagine how many emails and calls the company has gotten directly). From my vantage point, management has executed the plan that they have consistently communincated to investors.

Will 2017 be the year that we see the hard work bear fruit? I am betting on it.

STC.v was also mentioned on Investorfile.

Q1 2017 results should be out really soon.


*author is long shares at time of writing


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