WTF!

[OracleofCarolina]

http://www.sec.gov/Archives/edgar/data/800286/000114420413056448/v357937_8k.htm

 

A little house cleaning by Sham, interesting to watch and see how this plays out.

 

Cheers,

 

jason

[OracleofCarolina]

Sham certainly has his work cut out for him, the SED story just got uglier.

 

 

"After assuming control of the Company’s Board of Directors on October 17, 2013, the new Board was informed that employees of the Company may have been providing false information to a significant vendor of the Company to obtain rebates from the vendor for a period of at least two years. The new Board has been undertaking an investigation of this matter with the assistance of outside legal counsel and a forensic accounting firm. The Company’s investigation is ongoing, and it has not yet determined all of the Company employees and officers who may have been involved in or may have directed the false reporting or whether the Company will be required to restate its historical financial statements. Currently, the Company believes that the amount of the rebates received by the Company but not earned totals approximately $2.16 million"

 

 

[DCG]

Sham Gad used to be a writer on Cramer's thestreet.com/realmoney.com, along with Lenny Dystra. Great bunch they hire over there.

[NeverLoseMoney]

Indeed, WTF: http://www.sec.gov/Archives/edgar/data/1363357/000091228213000678/0000912282-13-000678-index.htm

[Guest longinvestor]

I'd prefer that too, but if a company's story, business, and management are all perfect, it is far less likely to be bought at a bargain price....

 

Obviously I understand your point, and completely agree that its a huge red flag, but it is worth looking at the board that PGNT is proposing on their slate for SED:

 

Jack H. Jacobs – Mr. Jacobs is an NBC military analyst and holds the McDermott Chair of Politics at West Point. He was among the most highly decorated soldiers in the Vietnam War, earning three Bronze Stars, two Silver Stars and the Medal of Honor. Mr. Jacobs serves on the Board of Directors of Paragon. If Paragon’s slate is elected at the annual meeting, Paragon currently anticipates that Mr. Jacobs will serve as the new Chairman of the Board of SED.

 

Dennis L. Chandler – Mr. Chandler is currently an independent advisor to private equity firms for acquiring and turning-around underperforming businesses. Mr. Chandler serves as a director of FiberMark, a fully integrated manufacturer and global distributor of fiber-based covering solutions. Mr. Chandler was previously the Chief Operating Officer of ACCO Brands, a multi-billion dollar manufacturer and distributor of consumer and commercial office products.

 

Hesham M. Gad – Mr. Gad is the Chairman of the Board of Directors of Paragon. He is also the Managing Partner of Gad Capital Management LLC, which is the General Partner of Gad Partners Fund LP. Gad Partners Fund LP is a value-focused investment partnership and the largest shareholder of Paragon.

 

Samuel S. Weiser – Mr. Weiser is the Chief Executive Officer of Premier Exhibitions, Inc., an international provider of museum quality exhibitions. Mr. Weiser serves on the Board of Directors of Paragon and is the Chairman of its Audit Committee. He was a managing director for the Hedge Fund Consulting Group at Citigroup and is a former partner of Ernst and Young. Mr. Weiser is a licensed CPA.

 

Klaus-Dieter Wurm – Mr. Wurm is an Executive Vice President of Schaefer Systems International, the largest provider of logistics systems and supply chain solutions in the world. Previously, Mr. Wurm was Vice President, Sales & Marketing for Krones, Inc., the world’s largest manufacturer of packing machinery and engineering services to the food and beverage, pharmaceutical, chemical and automotive industries.

 

Heres the deal:

 

The companies story is marketing. The target market is young value investors that are looking for the next buffett.  Gad's track record in capital allocation is below average look at his returns. Young buffett had an amazing track record. Track record matters and results matter.  Also add questionable ethics in stealing money. Learn from buffet be your own version of buffett. Start a business invest the excess cash in whatever you want property/investments. Use buffetts philosophy to build your own mini brk. What did Gandhi say " be the change in the world". I would say " access your own inner buffett don't look for it you already have it in you". Sorry for the rant. My pet pleeve are young investors marketing themselves as the next coming using IV and buffett terminology.

 

+1!  It's not that you can't or won't make money from these guys...but it's what you can live with.  Part of me is intrigued by their abilities, brashness and ego, but at the same time, do you really want to partner with them?  It's a personal decision. 

 

I can say without a doubt, that I've made far more money for my partners since selling our stake in Steak'n Shake, then they would have made if we held on to the stock.  So, you can still make money without compromises to your ethics!  Cheers!

 

Right. His investment track record is below average. Their  are many investors like yourself that have a better track record than Gad. So if you ever decide to move into a holding company structure I will gladly partner up with you ( many board members will).  I might have been a bit too harash on Gad. He has proven competent in turning around operating business's. He has a dream and is pursing it. He is playing the game instead of looking from the outside. I give him much credit in taking action.

 

Their is no evidence that he can allocate capital. His track record is below average and writing buffett like letters is straight marketing.  You can talk about IV and all the buffett stuff but, if you cant produce you cant produce. What other profession can you talk about performing surgery. Getting paid to perform surgery and your track record shows you are unable to perform surgery.  Either you have " the right stuff" or you don't.  I can talk about baseball strategy. But I most definitely cant hit a 90 mile per hour fastball!!

 

The next brk blueprint:

 

1.) Show at least 7 years of excellent performance allocating capital

2.) Clean background no felonies and popping bottles at a vip las vegas club with 5 strippers or like Mr. Chow from the hangover 3 movie. ( nothing wrong with that but a position like ceo it doesn't fly)

3.) Take control of operating business that needs little capex. Hire proven managers and give great incentives

4.) Repeat step 3

5.) Market website like buffett

 

Anyone doing this pm me. I will invest if you have at least a 7 year track record of excellent capital allocation.

 

+1

 

I'd like to see 25 years myself. Especially the last 25 featuring seemingly unending irrational exuberance, the tech boom and bust, all that financial chicanery and of course the big crisis. My money is with someone whose capital allocation methods did not budge an inch thru all this.

[OracleofCarolina]

This will be interesting to watch, can this thing be turned around?

 

The good:

-all new board and CEO/CFO/VP, seems like very experienced folks in restructurings

- more cost savings from delisting, firing auditor, new board compensation in addition to the restucturing costs initiated by previous management

-MSFT announcement as supplier in Colombia

- they did have 3.6 million in cash on 9/30

-MPIC owns 6%

-forced selling by Gam partner redemptions late nov may have dropped price

 

The bad

-Accounting sheniagans being investigated, so far 2.1 million in false rebates(+ the cost of paying accounting firm to investigate and probably extra legal fees)

- lost 16 million last fiscal year(5 million was restructuring costs though)

- Wells Fargo says they are in default and charging higher interest on $16 million bank line

-is this a good business with the right management?

 

 

[valueinvestor82]

I'm a little late to this discussion, but I wanted to contribute an alternative view to the criticism that has been levied on Mr. Gad. First off, I totally understand and share the concern that arises when confronted by questionable past decisions and the resulting consequences. I think the qualitative difference and right of each person is to decide  if they are or are not willing to do business with someone who made bad choices with money in the past. My own opinion is to trust if the person demonstrates sincerity, and can be vouched for by others, but verify and watch closely.

 

As a shareholder of Paragon (PGNT) I looked into these matters thoroughly before making a significant investment, and I was somewhat surprised by the shocked reactions demonstrated on this board, only because numerous public documents and articles already existed about Sham's legal woes for those serious about doing research. I also would point out the following:

1) this is a question- someone threw out the $40,000 number. Where did this come from?

2) as a first time felony, Sham was eligible and received exoneration/dismissal of the conviction once it was demonstrated that he should not have plead guilty in the first place. Without getting into the weeds, the felony was thrown out and so he is not technically a convicted felon. I see this focus by the now dismissed SED board as deceiving at best.

3) getting back to my first paragraph, look at the PGNT board members and look at the reputable and great leadership team implemented at SI Systems. Also note that PGNT will complete it's first year of decent eps in quite some time. To me, this passes the smell test on acting in the interests of shareholders.

4) SEDs verdict is still out as far as the soundness of the investment. We can whine about the size of the investment and the board/CEO structure etc but it's nothing but opinion at this point until quantitative outcomes give us the ability to judge. Not to compare Sham to Biglari, only peoples perceptions of the two, but BH has made shareholders money, despite the criticism mounted at him. In summary, my attitude is give the guy more time and look at his limited track record as a steward of a public business, he's been an improvement at PGNT and I see no reason to doubt the same at SED.

[valueyoda]

What worries me - in addition to Gad's poor character and past conduct - is that his fund, according to an investor letter previously floating around on the internet, is highly concentrated in Paragon Technologies and Sed International.  Normally, this would be a good thing and shows convinction. However, his fund's poor performance and the shrinkage of his fund at the time of the letter would suggest that his ownership position is highly insecure. I applaud him for instituting a holding company structure and the willingess to redeploy corporate funds in publicly traded securities that are undervalued. Based on the few investments (the main one being SED international), he has convinced me that he is the wrong man for the job. At a time when better companies with an economic moat were available in the marketplace that could have provided asymmetric after-tax results over the investment period, he thought that SED International - a turnaround candidate with poor corporate governance, no economic moat whatsoever and a terrible balance sheet - was the ultimate candidate to take advantage of. The perverse consequence of his control of both Paragon Technologies and SED International is that he is able to extract a sizeable annual compensation at both companies, far in excess of what he is able to earn as fund manager. Therefore, he is unwilling to part with his current position. It should never be the ambition of a fund manager to earn more from governing portfolio companies - which should be part of the active investing process to earn good net returns - than from managing the fund. I am very interested in taking a sizeable personal stake in Paragon Technologies and for my fund, but not with Mr. Gad at the helm and in charge of the capital allocation process. I feel sorry for longer term shareholders in Paragon that have suffered and probably will continue to suffer a probable permanent loss due to Mr. Gad's allocation to SED international.

[Orange]

What worries me - in addition to Gad's poor character and past conduct - is that his fund, according to an investor letter previously floating around on the internet, is highly concentrated in Paragon Technologies and Sed International.  Normally, this would be a good thing and shows convinction. However, his fund's poor performance and the shrinkage of his fund at the time of the letter would suggest that his ownership position is highly insecure.

 

That is literally the only reason I (loosely) follow this stock. I would never let my money get near Sham Gad's hands, but this situation has the potential for a short term bloodbath if Gad is forced to liquidate somehow. Especially if a market correction comes, and Gad is forced to sell on top of that, this stock would be the buying opportunity of the century.

[valueyoda]

The only reason why I haven't harpooned that Moby Dick is the fear that by the time I have successfully replaced Sham Gad from the board all the residual value is gone, which isn't hard given the fact that the company's cash position at the holding company outside of its SED International holding is practically limited.

[OracleofCarolina]

It does seem kind if unique that Mr. Gad is CEO of SEDN and chairman of PGNT at the same time, right? I wonder if they will find a way to merge the two companies?

[valueyoda]

If Sham Gad wants to maximize his annual compensation within the boundaries of his fund, then he should take control of more small crappy publicly traded companies and receive compensation as chairman or CEO. I am puzzled how SED International could be turned around. It is virtually impossible with the current cost structure and balance sheet. Even if Gad resolves many governance issues and reduces SG&A by a meaningful amount, he still has to deal with a declining company with no moat that deals in the wrong product categories and has a balance sheet that is about to collapse. Dealing with such turnaround requires a 24/7 dedication from its CEO, and I don't see how he can manage to pull that off given the fact that he is also actively involved with his fund, Paragon Technologies, writing and his rental properties.

[OracleofCarolina]

Well, looks like they reduced headcount from 327 to 234 within the past couple of months. It will be interesting to see if this company can be saved.

Info from 8-k

 

Between January 9 and 15, 2014, the Company has undertaken an additional reduction in force in its U.S. distribution business, as a result of which the U.S. business now employs a total of 49 employees, including 24 employees at its Miami export business, 20 employees at its Lawrenceville, Georgia facility, and five employees at its California locations. The Company and its subsidiaries employ an additional 185 employees as part of its Latin America distribution business.

As of June 30, 2012, the Company reported that it had 425 full time employees and, as of June 30, 2013, the Company reported that it had 327 full time employees.

 

When the current board of directors assumed control of the Company on October 17, 2013, it inherited a U.S. business that was in a state of rapid decline, in terms of sales volume, profitability and sustainability.

 

 

The Company has significantly reduced the size of its U.S. operations and sales in an effort to restore the U.S. business to break-even profitability. The Company currently hopes to stabilize the U.S. business and grow its sales on the basis of higher margin product sales. The Company also currently plans to maintain the size of the Miami export business and Latin American distribution business, with the goal of improving the profitability of each of these businesses.

 

 

The Company has incurred significant financial losses in its most recent fiscal year, as previously reported, and in recent fiscal quarters and has significantly reduced its employee headcount and sales volume in the United States during the same time period. Due to the significant changes in the Company’s business during the past 18 months, there can be no assurance that the Company’s efforts to stabilize its U.S. business and improve the profitability of each of its businesses will be successful.

 

 

[gg]

I spent a few hours looking through the filings, but decided to pass. It seems like a bet on the potential of their operating leverage; their market cap is under 5 million, and their revenue is in the 100's of millions, so any small positive margins would have a massive positive impact, but any more losses and the whole company seems like it can get wiped out.

 

I know that Parsad has the new policy to not disclose his fund's positions now, but since this one is already in the filings, I'd love to hear his take on it. Has anyone else spent any time on SED?

[gg]

I guess my point is that after looking into it, I wasn't able to see enough underlying value to indicate the stock was "cheap". It would only appear to be cheap, in retrospect, if the company was able to survive and begin having a profitable distribution business. So I'm curious if I'm missing something in terms of it being a value opportunity, or if its simply a bet that Gad will be able to reconfigure this company so that they will begin having positive margins on their enormous sales, or both...

 

Shalab - In terms of cheapness of the stock, unlike some other microcaps that sell for well under book value, it does not seem that if they wound down SED's operations that there would be anything left for equity holders. In terms of betting on Gad, Parsad explicitly stated on the board in the past that he's not a big fan, so I would assume that he seems some source of value that I am missing (or he believes there's a high likelihood of positive margins in the future)

 

[OracleofCarolina]

Somebody just picked up 334,000 shares today, about equivalent to MPIC's stake

[valueyoda]

SED International has been facing a revenue crisis for a while now, because the competition is eating their lunch and they're operating in the wrong product categories, so a recovering economy won't turn around this ship. A reduction in staff is necessary to cut operating expenses drastically, but it also hampers the company's ability to increase revenues. With all due respect to the bulls out there, there is such a minimal probability that Gad or anyone else can cut operating expenses fast enough to keep up with the decline in revenues before it runs out of cash or is in default. Operating a business like SED can often times be interesting in terms of cash flow generation on the way up, but can be disastrous when revenue declines set in. I think that Gad overestimated his turnaround abilities. I would herald him though, if he can pull it off. However, there is such an astronomical probability that this stock is going to the penny stock graveyard.

[OracleofCarolina]

http://www.sec.gov/Archives/edgar/data/800286/000114420414010120/v368976_8k.htm

 

another hire, Chief Restructuring Officer, $15,000 monthly...maybe this thing will turnaround

 

[gg]

http://www.sec.gov/Archives/edgar/data/800286/000114420414010120/v368976_8k.htm

 

another hire, Chief Restructuring Officer, $15,000 monthly...maybe this thing will turnaround

 

I assumed that when they ended up hiring on Sham Gad as a full time Pres/CEO in December, it was because he was going to lead the "restructuring". I don't understand why they would need an additional Chief Restructuring Officer as well, with an additional significant fixed cost. I haven't tallied it, and I realized the laid off a significant amount of sales people, but I feel like with just the announcements of high-salaried new hires in the past 3 months, they have added fixed costs close to 20% of the company's market cap...I realize you have to spend money to make money, but seems like they are very surprised with everything that they are finding now that they are on the inside.

 

Anyone have a position or view on this? Or possibly speaks with Sham Gad? I'd be curious what he's communicated with his investors about the situation so far...

[WideMoat]

From my seat, it looks like the hire is all about raising money.

 

"The Company transitioned to a new Chief Restructuring Officer in an effort to reduce costs and increase its focus on obtaining new financing for the Company." [Emphasis added.]

[gg]

I would love to hear Parsad's thesis on this company, or anyone else who is long. If this can be turned around, it will be a huge winner -- the operating leverage will just be enormous. I just have no insight into whether they can or will turn things around. Anyone here communicate with anyone at the company or any of Sham Gad's investors?

[gg]

PGNT's 10-K is out, and gives some interesting information. SEDN was delisted, and this would has an interesting impact on PGNT's financials.

 

"As of December 31, 2013 the Company had 1,430,860 shares in SED International Holdings, Inc.

(SED) representing 27.7% of the outstanding share capital of SED. At December 31, 2012, SED was

traded on the NYSE and the Company accounted for its shares in SED as a marketable equity security.

Effective on or about November 26, 2013, SED voluntarily delisted its common stock on from the NYSE

and began trading on the grey market of the OTC markets under ticker symbol SEDN, which is not

considered an active market as defined by ASC 320, Investments – Debt and Equity Securities. As a

result, the Company adopted the equity method of accounting for its investment in SED. Under this

method, the Company’s equity in the earnings or losses of the investee is reported currently in the

Company’s earnings. Upon adoption, the investment, results of operations and retained earnings were

adjusted retroactively on a step-by-step basis as if the equity method had been in effect during all

previous periods in which the investment was held. The financial statements for 2012 have been restated

on a comparable basis, which resulted in a change in total equity at December 31, 2012 of $289. SED’s

last available published financial statement is for period ending June 2013. No further quarterly reports

are publicly available. The latest closing price of SED is $0.70 as of March 31, 2014. "

 

This means that the massive loss in value of the the SEDN investment is not only no longer required to appear in PGNT's financial statements, but now PGNT will actually appear to have much higher revenue by including the SEDN numbers in their financials.

[Guest deepValue]

If this whole turnaround thing doesn't work out, Sham can just buy a pot plant and pump this baby up to $50/share.

[gg]

If this whole turnaround thing doesn't work out, Sham can just buy a pot plant and pump this baby up to $50/share.

 

Actually buying the plants would be overly capital intensive. This is my favorite SEC filing ever, in which a company figures out a way to get on the marijuana stock hype wagon with minimal working capital requirements...

 

From: http://www.sec.gov/Archives/edgar/data/1360442/000144586614000008/form8k01072014.htm

"2.  Kush will grant the Company an exclusive license to a pending patent application for what the Company believes to be a unique strain of cannabis known as the CTA strain (the “CTA Strain”) for a period of 50 years in consideration for the issuance of shares of the Company’s common stock having a value of $1,000,000 (valued at $1.25 per share).  In addition the Company shall have the option to acquire 100% of Kush in exchange for additional shares of the Company’s common stock having a value of $1,000,000 (based on the value of the stock at the last trade at closing on the date Kush supplies audited financial statements to the Company)."

[Guest deepValue]

If this whole turnaround thing doesn't work out, Sham can just buy a pot plant and pump this baby up to $50/share.

 

Actually buying the plants would be overly capital intensive. This is my favorite SEC filing ever, in which a company figures out a way to get on the marijuana stock hype wagon with minimal working capital requirements...

 

From: http://www.sec.gov/Archives/edgar/data/1360442/000144586614000008/form8k01072014.htm

"2.  Kush will grant the Company an exclusive license to a pending patent application for what the Company believes to be a unique strain of cannabis known as the CTA strain (the “CTA Strain”) for a period of 50 years in consideration for the issuance of shares of the Company’s common stock having a value of $1,000,000 (valued at $1.25 per share).  In addition the Company shall have the option to acquire 100% of Kush in exchange for additional shares of the Company’s common stock having a value of $1,000,000 (based on the value of the stock at the last trade at closing on the date Kush supplies audited financial statements to the Company)."

 

Sometimes I wonder what it's like to be the people who buy a stock like that. They must lead frustrating lives; confused at every turn, no grasp of how the world works. I wonder if they're the exception or the norm.